Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

62K characters. Original on sec.gov · Markdown

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements: This document contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “view,” “target” or “estimate,” “may,” “will,” “should,” “predict,” “possible,” “potential,” “continue,” “strategy,” and similar expressions. For example, our forward-looking statements include, without limitation, statements regarding:

Our expectations regarding the impact of continued supply chain challenges on our product availability, product mix, sales and merchandise margin, including uncertainties associated with delays in receiving imported merchandise from Asia and expected increases in our costs due to inventory levels exceeding the storage capacity of our distribution centers;
Our expectations regarding oceanic shipping and domestic freight and fuel costs;
Our expectations regarding consumer spending behavior and inflation-related cost increases, including the impact on our gross margins;
Our expectations regarding increased expenses for higher wages and bonuses paid to associates, including increases in the minimum wage by States and localities and potential federal legislation increasing the minimum wage;
Our expectations regarding the effect of general business or economic conditions on our business and results of operations, including the effects of inflation and labor shortages in our markets;
The uncertainty of the impact of the COVID-19 pandemic and public health measures on our business, results of operations, customers and suppliers, including any future impact on our supply chain or sources of supply;
The reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China and higher cost domestic goods;
The expected impact of labor disagreements and potential work disruptions or strikes, including at ports located in California, Oregon, and Washington, on shipping delays and the availability and cost of merchandise;
The expected and possible outcome, costs, and impact of pending or potential litigation, arbitrations, other legal proceedings or governmental investigations (including U.S. Food and Drug Administration matters), including with respect to the availability of indemnification or insurance;
Our plans to renovate existing Family Dollar stores and build new stores in the H2 store format, and the performance of that format on our results of operations;
Our plans and expectations relating to the introduction of additional price points above $1 in our Dollar Tree stores and our investments in new products, including the impact on our gross margins;
Our plans and expectations relating to new store openings and new store concepts such as Dollar Tree Plus and our Combo Store format;
Our plans and expectations regarding our current initiatives and future strategic investments and the uncertainty with respect to the amount, timing and impact of those initiatives and investments on our business and results of operations; and
Our expectations regarding higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores, limitations on the availability of certain fixtures and equipment and construction, permitting and inspection delays related to new store openings.

A forward-looking statement is neither a prediction nor a guarantee of future results, events or circumstances. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Our forward-looking statements are all based on currently available operating, financial and business information. The outcome of the events described in these forward-looking statements is subject to a variety of factors, including, but not limited to, the risks and uncertainties summarized below and the more detailed discussions in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and in this Quarterly Report on Form 10-Q. The following risks could have a material adverse impact on our sales, costs, profitability, financial performance or implementation of strategic initiatives:

Our profitability is vulnerable to increases in oceanic shipping costs, domestic freight and fuel costs, wage and benefit costs and other operating costs.
We are experiencing higher costs and disruptions in our distribution network, which have had and could have an adverse impact on our sales, margins and profitability.
We may stop selling or recall certain products for safety-related or other issues.
Our business and results of operations could be materially harmed if we experience a decline in consumer confidence and spending as a result of consumer concerns about the quality and safety of our products.
Inflation or other adverse change or downturn in economic conditions could impact our sales or profitability.
If the COVID-19 pandemic and associated disruptions worsen or continue longer than expected, there could be a material adverse impact on our business and results of operations.
Risks associated with our domestic and foreign suppliers could adversely affect our financial performance.
Our supply chain may be disrupted by changes in United States trade policy with China.
Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.
Our profitability is affected by the mix of products we sell.
Pressure from competitors may reduce our sales and profits.
Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.
We may not be successful in implementing or in anticipating the impact of important strategic initiatives, and our plans for implementing such initiatives may be altered or delayed due to various factors, which may have an adverse impact on our business and financial results.
We could incur losses due to impairment of long-lived assets, goodwill and intangible assets.
We rely on computer and technology systems in our operations, and any material failure, inadequacy, interruption or security failure of those systems, including because of a cyber-attack, could harm our ability to effectively operate and grow our business and could adversely affect our financial results.
The potential unauthorized access to customer information may violate privacy laws and could damage our business reputation, subject us to negative publicity, litigation and costs, and adversely affect our results of operations or business.
Litigation, arbitration and government proceedings may adversely affect our business, financial condition and/or results of operations.
Changes in laws and government regulations, or our failure to adequately estimate the impact of such changes, could increase our expenses, expose us to legal risks or otherwise adversely affect us.
Our substantial indebtedness could adversely affect our financial condition, limit our ability to obtain additional financing, restrict our operations and make us more vulnerable to economic downturns and competitive pressures.
The terms of the agreements governing our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity.
Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
Our business or the value of our common stock could be negatively affected as a result of actions by shareholders.
The price of our common stock is subject to market and other conditions and may be volatile.
Certain provisions in our Articles of Incorporation and By-Laws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.

We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on our forward-looking statements.

We do not undertake to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events, or otherwise.

Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to disclose to them any material, nonpublic information or other confidential commercial information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any securities analyst regardless of the content of the statement or report. Furthermore, we have a policy against confirming projections, forecasts or opinions issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Overview

We are a leading operator of more than 16,200 retail discount stores and we conduct our operations in two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the fixed price of $1.25. Our Family Dollar segment operates general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores.

Our net sales are derived from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores. Second is the performance of stores once they are open. Sales vary at our existing stores from one year to the next. We refer to this as a change in comparable store net sales, because we include only those stores that are open throughout both of the periods being compared, beginning after the first fifteen months of operation. We include sales from stores expanded or remodeled during the period in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. The term ‘expanded’ also includes stores that are relocated. Stores that have been re-bannered are considered to be new stores and are not included in the calculation of the comparable store net sales change until after the first fifteen months of operation under the new brand.

At October 29, 2022, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces. A breakdown of store counts and square footage by segment for the 39 weeks ended October 29, 2022 and October 30, 2021 is as follows:


	39 Weeks Ended
	October 29, 2022			October 30, 2021
	Dollar Tree	Family Dollar	Total	Dollar Tree	Family Dollar	Total
Store Count:
Beginning	8,061	8,016	16,077	7,805	7,880	15,685
New stores	97	244	341	214	148	362
Re-bannered stores	(5)	8	3	(1)	(1)	(2)
Closings	(39)	(89)	(128)	(34)	(45)	(79)
Ending	8,114	8,179	16,293	7,984	7,982	15,966
Relocations	21	61	82	45	55	100

Selling Square Feet (in millions):
Beginning	69.7	59.2	128.9	67.4	57.7	125.1
New stores	0.8	2.2	3.0	1.9	1.3	3.2
Re-bannered stores	—	0.1	0.1	—	—	—
Closings	(0.3)	(0.6)	(0.9)	(0.3)	(0.3)	(0.6)
Relocations	0.1	0.2	0.3	0.1	0.1	0.2
Ending	70.3	61.1	131.4	69.1	58.8	127.9

Stores are included as re-banners when they close or open, respectively.

The average size of stores opened during the 39 weeks ended October 29, 2022 was approximately 8,590 selling square feet for the Dollar Tree segment and 8,970 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 39 weeks ended October 29, 2022, as compared with the preceding year, is as follows:


	13 Weeks Ended October 29, 2022						39 Weeks Ended October 29, 2022
	Sales Growth		Change in Customer Traffic		Change in Average Ticket		Sales Growth		Change in Customer Traffic		Change in Average Ticket
Consolidated	6.5	%	(3.2)	%	10.0	%	5.4	%	(3.5)	%	9.2	%
Dollar Tree Segment	8.6	%	(5.2)	%	14.6	%	9.2	%	(4.9)	%	14.8	%
Family Dollar Segment	4.1	%	0.1	%	4.1	%	1.2	%	(1.5)	%	2.7	%

Constant currency basis refers to the calculation excluding the impact of currency exchange rate fluctuations. We calculated the constant currency basis change by translating the current year’s comparable store net sales in Canada using the prior year’s currency exchange rates. We believe that the constant currency basis provides a more accurate measure of comparable store net sales performance. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and are negatively affected when we open new stores, re-banner stores or expand stores near existing stores.

Dollar Tree Initiatives

In September 2021, we announced our new $1.25 price point initiative and we completed the rollout of this initiative to all Dollar Tree stores during the first quarter of fiscal 2022, increasing the price point on a majority of our $1 merchandise to $1.25. To date, the increase in the price point has more than offset the decline in the number of units sold. During fiscal 2022, we have begun investing in new products and modifying existing products to provide greater value for our customers and increase customer traffic and store productivity. While we expect our gross margin to be higher in the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, because of the investments in new products, we do not expect the increase to be as high as it was in the first three quarters of fiscal 2022.

We are also continuing to implement our Dollar Tree Plus initiative which introduces products priced at the $3 and $5 price points and provides our customers with extraordinary value in discretionary categories. As of October 29, 2022, we have approximately 2,350 Dollar Tree Plus stores.

We began testing the Instacart online delivery service at Dollar Tree stores in the third quarter of fiscal 2021 and began rolling it out in the fourth quarter of fiscal 2021. As of October 29, 2022, the Instacart platform covers more than 7,500 Dollar Tree stores. This enables our customers to shop online and receive same-day delivery without having to visit a store.

We believe that our Dollar Tree initiatives have and will continue to positively affect our comparable store net sales and earnings.

Family Dollar Initiatives

We are executing several initiatives in our Family Dollar stores to increase sales. In March 2021, we announced the development of a new combination store format, which we refer to as a Combo Store, that leverages the strengths of the Dollar Tree and Family Dollar brands under one roof to serve small towns across the country. We are taking Family Dollar’s great value and assortment and blending in select Dollar Tree merchandise categories, creating a new store format targeted for small towns and rural communities with populations of 3,000 to 4,000 residents. As of October 29, 2022, we operated approximately 700 Combo Stores.

We are also continuing to execute our store optimization programs. Our H2 stores have significantly improved merchandise offerings throughout the store, including the addition of Dollar Tree $1.25 merchandise items and establishing a minimum number of freezer and cooler doors. These stores have higher customer traffic and provide a higher average comparable store net sales lift, when compared to non-renovated stores, in the first year following renovation. H2 stores perform well in a variety of locations and especially in locations where our Family Dollar stores have been most challenged in the past. As of October 29, 2022, we have approximately 4,300 H2 stores.

Based on the success of the Combo Store and H2 store formats, in fiscal 2022 we anticipate adding 400 new or relocated Combo Stores in total and completing a total of 700 renovations into either the Combo Store format or the H2 store format.

After a successful pilot program in 2020, we entered into a partnership with Instacart in February 2021, which covers more than 7,200 Family Dollar stores across the United States as of October 29, 2022.

In addition, we added adult beverage to more than 440 stores in the first three quarters of fiscal 2022. We believe the addition of adult beverage to our assortment will drive traffic to our stores. As of October 29, 2022, there were more than 3,180 stores selling adult beverage products.

Additional Considerations

The following trends or uncertainties have already impacted or could impact our business or results of operations during 2022 or in the future:

Anticipated Expense Pressures. Our financial performance is impacted by numerous factors, including changes in consumer spending behavior and increased costs due to inflation. We are currently experiencing a material shift in consumer purchasing from higher-margin discretionary merchandise to lower-margin consumable goods which has negatively impacted our product mix and margins. We also are experiencing inflationary price pressures relating to, among other things, merchandise costs, freight costs, wages, utility costs, and repair and maintenance expenses. In addition, we continue to improve Family Dollar’s value proposition and drive store traffic and productivity. We expect that the consumer’s shift to lower-margin consumable goods and any inflation-related cost increases, coupled with our planned investments in product pricing and our value proposition, will continue to pressure gross margins in the fourth quarter of fiscal 2022.
Supply Chain and Inventory. We rely heavily on Trans-Pacific shipping and domestic trucking and rail freight to acquire and distribute merchandise to our distribution centers and retail stores. Significant disruptions in our supply chain, such as the shipping delays resulting from the COVID-19 pandemic, have negatively impacted our sales and the cost and availability of product in the stores. Although we may continue to experience oceanic shipping delays in the future as a result of shipping capacity shortages, port congestion or closings, or the imposition of additional lockdowns in certain Chinese localities to address COVID-19 outbreaks, our ability to ship products from overseas on a timely basis has improved in the second and third quarters of fiscal 2022. In the third quarter, this improvement led to an increase in inventory levels that exceeded the storage capacity of some of our distribution centers. As a result, we arranged for temporary offsite warehouse storage facilities and incurred detention costs and incremental drayage costs that increased our cost of goods sold and is expected to do so for the fourth quarter. In addition, the union collective bargaining agreement that governs the wages and benefits of a large number of longshoremen at ports in California, Oregon, and Washington expired on July 1, 2022. If the parties are unable to agree on a new or extended collective bargaining agreement, there could be work slowdowns or strikes, diversions of shipments to other U.S. ports, or other disruptions in our supply chain which could cause delays or otherwise adversely affect the availability of merchandise and increase our costs. We could also experience higher markdowns as a result of these supply chain challenges. Sales could be negatively impacted if we are not able to deliver inventory timely to stock our stores.
Freight Costs. We have experienced significantly higher international and domestic freight costs as a result of disruptions in the global supply chain. This trend, which accelerated in the second half of fiscal 2021, has continued during fiscal 2022. The combination of increased demand and limited availability of Trans-Pacific shipping capacity caused spot market prices to increase substantially. Although Trans-Pacific shipping continues to be pressured, spot market prices have moderated recently as availability of containers and shipping capacity has improved. Domestically, diesel fuel prices are and are expected to remain significantly higher in fiscal 2022 and may increase further because of international tensions. We are a large importer of merchandise from Asia and rely heavily on domestic freight to transport goods to our distribution centers and stores, which makes us particularly sensitive to freight costs. Due to these trends, in the first three quarters of fiscal 2022, import and domestic freight costs were higher compared to the first three quarters of fiscal 2021.
Labor Shortage and Wage Increases. We are experiencing a shortage of associates and applicants to fill staffing requirements at our stores and distribution centers due to the current labor shortage affecting businesses. This has adversely affected our stores operations, the operating efficiency of our distribution centers and our ability to transport merchandise from our distribution centers to our stores. The steps we have taken to address the labor shortage include hosting national hiring events, offering enhanced wages in select competitive markets, and paying tuition reimbursement. In 2022, the minimum wage has increased in certain States and localities, and proposals to increase the federal minimum wage have been introduced in Congress. Minimum wage increases in States and localities and wage investments in certain markets are expected to increase our costs by more than $195.0 million in 2022.
Build-out and Construction Costs and Delays. We have experienced higher commodity and other costs associated with the build-out of new stores and the renovation of existing stores. In addition, we have experienced delays in new store openings due to limitations on the availability of certain fixtures and equipment and inspection, permitting and contractor delays. We anticipate these increased costs and delays may continue for the foreseeable future. Sales will be negatively impacted if we are not able to complete these projects on time.
Impact of COVID-19. The future course of the COVID-19 pandemic, the timing and impact of any governmental responses to future outbreaks and the effectiveness of health measures such as vaccines remains uncertain. As a result, it is challenging for us to predict the future impact of COVID-19 on our business, financial results, customers, suppliers and the broader economies in the locations that we operate as well as the future impact on our supply chain and the global supply chain.
West Memphis Distribution Center. On February 11, 2022, the Food and Drug Administration issued Form 483 observations primarily regarding rodent infestation at our West Memphis, Arkansas distribution center (“DC 202”), as well as other items that require remediation. During fiscal 2022, we have incurred costs related to the product recall, remediation efforts and asset impairment. We expect to incur additional costs in the fourth quarter of fiscal 2022 for freight, merchandise disposal, payroll and legal costs associated with the remediation.
Strategic Investments. Building on our current initiatives, we are currently developing plans to make additional multi-year strategic investments across both banners to further position the company for long-term sustained growth. We anticipate that these investments will relate to four key areas of our business: our associates, our distribution center network and supply chain, our product pricing and value proposition, and our technology infrastructure. Within these areas, the focus of these investments is expected to be on associate wages, improved store execution, enhanced safety and working conditions, increased supply chain efficiencies, competitive pricing at Family Dollar, and enhancements to our systems infrastructure.

Results of Operations

Our results of operations and period-over-period changes are discussed in the following section. Note that gross profit margin is calculated as gross profit (i.e., net sales less cost of sales) divided by net sales. The selling, general and administrative expense rate and operating income margin are calculated by dividing the applicable amount by total revenue.

Net Sales


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Net sales	$	6,936.6		$	6,415.4		8.1	%		$	20,602.0			$	19,232.4		7.1	%
Comparable store net sales change, on a constant currency basis	6.5		%	1.6		%				5.4		%		0.4		%

The increase in net sales in the 13 weeks ended October 29, 2022 was a result of sales of $183.2 million at new stores and comparable store net sales increases in the Dollar Tree and Family Dollar segments.

Enterprise comparable store net sales increased 6.5% on a constant currency basis in the 13 weeks ended October 29, 2022, as a result of a 10.0% increase in average ticket, partially offset by a 3.2% decrease in customer traffic. Comparable store net sales increased the same 6.5% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 8.6% in the Dollar Tree segment and increased 4.1% in the Family Dollar segment.

The increase in net sales in the 39 weeks ended October 29, 2022 was a result of sales of $547.5 million at new stores and comparable store net sales increases in the Dollar Tree and Family Dollar segments.

Enterprise comparable store net sales increased 5.4% on a constant currency basis in the 39 weeks ended October 29, 2022, as a result of a 9.2% increase in average ticket, partially offset by a 3.5% decrease in customer traffic. Comparable store net sales increased 5.3% when including the impact of Canadian currency fluctuations. On a constant currency basis, comparable store net sales increased 9.2% in the Dollar Tree segment and increased 1.2% in the Family Dollar segment.

Gross Profit


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Gross profit	$	2,071.5		$	1,763.7		17.5	%		$	6,536.4			$	5,588.8		17.0	%
Gross profit margin	29.9		%	27.5		%	2.4	%		31.7		%		29.1		%	2.6	%

The increase in gross profit margin in the 13 weeks ended October 29, 2022 was a result of the net of the following:

Merchandise cost, which includes freight, decreased 285 basis points resulting primarily from higher initial mark-on and lower freight costs, partially offset by increased sales of lower margin consumable merchandise.
Occupancy costs decreased 40 basis points due to leverage from the comparable store net sales increase.
Distribution costs decreased 15 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts due to increases in inventory levels partially offset by higher hourly wages.
Markdown costs increased 50 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher dated product markdowns on the Dollar Tree segment.
Shrink costs increased 60 basis points in the current year quarter resulting from unfavorable inventory results in relation to accruals.

The increase in gross profit margin in the 39 weeks ended October 29, 2022 was a result of the net of the following:

Merchandise cost, which includes freight, decreased 300 basis points resulting primarily from higher initial mark-on, partially offset by higher freight costs and increased sales of lower margin consumable merchandise on the Family Dollar segment.
Occupancy costs decreased 25 basis points due to leverage from the comparable store net sales increase.
Distribution costs decreased 20 basis points due to leverage from the comparable store net sales increase and higher capitalized amounts resulting from increases in inventory levels, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.
Shrink costs increased 30 basis points in the current year resulting from unfavorable inventory results in relation to accruals.
Markdown costs increased 45 basis points primarily due to higher promotional and clearance markdowns on the Family Dollar segment and higher clearance markdowns resulting from a move to a higher value assortment at the $1.25 price point on the Dollar Tree segment.

Selling, General and Administrative Expenses


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Selling, general and administrative expenses	$	1,693.5		$	1,455.5		16.4	%		$	4,927.2			$	4,364.4		12.9	%
Selling, general and administrative expense rate	24.4		%	22.7		%	1.7	%		23.9		%		22.7		%	1.2	%

The increase in the selling, general and administrative expense rate in the 13 weeks ended October 29, 2022 was the result of the following:

Other selling, general and administrative expenses increased 75 basis points primarily due to higher legal fees and consulting fees as well as inflationary pressure across several expense categories. The prior year quarter also included a benefit associated with the settlement of a contractual dispute.
Store facility costs increased 60 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs.
Payroll expenses increased 40 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock and incentive compensation expenses, partially offset by leverage from the comparable store net sales increase.
Depreciation and amortization expense was flat as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase.

The increase in the selling, general and administrative expense rate in the 39 weeks ended October 29, 2022 was the result of the following:

Other selling, general and administrative expenses increased 65 basis points primarily due to higher legal fees, including costs related to the reconstitution of the Board of Directors, long-lived asset impairments at the Family Dollar West Memphis, Arkansas distribution center and inflationary pressure across several expense categories.
Store facility costs increased 35 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates, higher utility costs and costs associated with the removal of product from certain Family Dollar stores in connection with the voluntary retail-level product recall.
Payroll expenses increased 20 basis points primarily due to minimum wage increases and other investments in store payroll and higher stock and incentive compensation expenses, partially offset by leverage from the comparable store net sales increase.
Depreciation and amortization expense increased 5 basis points primarily due to capital expenditures related to store renovations and improvements, partially offset by leverage from the comparable store net sales increase.

Operating Income


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Operating income	$	381.3		$	310.5		22.8	%		$	1,618.2			$	1,232.6		31.3	%
Operating income margin	5.5		%	4.8		%	0.7	%		7.9		%		6.4		%	1.5	%

Operating income margin increased to 5.5% for the 13 weeks ended October 29, 2022 compared to 4.8% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

Operating income margin increased to 7.9% for the 39 weeks ended October 29, 2022 compared to 6.4% for the same period last year resulting from the increase in gross profit margin, partially offset by the increase in the selling, general and administrative expense rate, as described above.

Interest Expense, Net


	13 Weeks Ended							39 Weeks Ended
	October 29,		October 30,		Percentage Change			October 29,			October 30,		Percentage Change
(dollars in millions)	2022		2021				2022			2021
Interest expense, net	$	32.7	$	33.4	(2.1)	%		$	97.3		$	99.4	(2.1)	%

Interest expense, net decreased $0.7 million in the 13 weeks ended October 29, 2022 compared to the same period last year, resulting from higher interest income on investments and capitalized interest on capital expenditures, partially offset by interest expense on credit facility borrowings.

Interest expense, net decreased $2.1 million in the 39 weeks ended October 29, 2022 compared to the same period last year, resulting from higher interest income on investments and capitalized interest on capital expenditures, partially offset by interest expense on credit facility borrowings.

Provision for Income Taxes


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Provision for income taxes	$	81.5		$	60.1		35.6	%		$	357.4			$	259.3		37.8	%
Effective tax rate	23.4		%	21.7		%	1.7	%		23.5		%		22.9		%	0.6	%

The effective tax rate was 23.4% for the 13 weeks ended October 29, 2022 compared to 21.7% for the comparable prior year period, resulting from higher net state taxes, higher non-deductible executive compensation and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year quarter.

The effective tax rate was 23.5% for the 39 weeks ended October 29, 2022 compared to 22.9% for the comparable prior year period. Higher state tax rates and lower Work Opportunity Tax credits as a percentage of pre-tax income in the current year were offset by higher tax deductions related to restricted stock vesting.

Segment Information

Our operating results for the Dollar Tree and Family Dollar segments and period-over-period changes are discussed in the following sections.

Dollar Tree

The following table summarizes the operating results of the Dollar Tree segment:


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Net sales	$	3,756.1		$	3,417.4		9.9	%		$	11,109.0			$	10,003.0		11.1	%
Gross profit	$	1,328.3		$	1,031.1		28.8	%		$	4,197.9			$	3,207.1		30.9	%
Gross profit margin	35.4		%	30.2		%	5.2	%		37.8		%		32.1		%	5.7	%
Operating income	$	499.7		$	290.5		72.0	%		$	1,814.7			$	1,019.2		78.1	%
Operating income margin	13.3		%	8.5		%	4.8	%		16.3		%		10.2		%	6.1	%

Net sales for the Dollar Tree segment increased $338.7 million, or 9.9%, for the 13 weeks ended October 29, 2022 compared to the same period last year. The increase was due to an increase in comparable store net sales of 8.6% and $81.8 million of new store sales. Average ticket increased 14.6% and customer traffic decreased 5.2%. The 13 weeks ended October 29, 2022 includes the impact of our $1.25 price point initiative which increased the selling price of the majority of our $1 merchandise to $1.25. The rollout of this initiative was completed during the first quarter of fiscal 2022. The increase in price point more than offset the decline in the number of units sold during the third quarter of fiscal 2022.

Net sales for the Dollar Tree segment increased $1,106.0 million, or 11.1%, for the 39 weeks ended October 29, 2022 compared to the same period last year. The increase was due to an increase in comparable store net sales of 9.2% and $284.7 million of new store sales. Average ticket increased 14.8% and customer traffic decreased 4.9%. The 39 weeks ended October 29, 2022 was impacted by our $1.25 price point initiative. The increase in price point more than offset the decline in the number of units sold during the first three quarters of fiscal 2022.

Gross profit margin for the Dollar Tree segment increased to 35.4% for the 13 weeks ended October 29, 2022 compared to 30.2% for the same period last year as a result of the net of the following:

Merchandise cost, which includes freight, decreased 485 basis points primarily due to higher initial mark-on and lower freight costs, partially offset by higher sales of lower margin consumable merchandise.
Occupancy costs decreased 60 basis points primarily due to leverage from the comparable store net sales increase.
Distribution costs decreased 20 basis points due to leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels in the current year partially offset by higher hourly wages.
Markdown costs increased 10 basis points resulting primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point.
Shrink costs increased 35 basis points in the current year resulting from unfavorable inventory results in relation to accruals.

Gross profit margin for the Dollar Tree segment increased to 37.8% for the 39 weeks ended October 29, 2022 compared to 32.1% for the same period last year as a result of the net of the following:

Merchandise cost, which includes freight, decreased 515 basis points primarily due to higher initial mark-on, partially offset by higher freight costs.
Occupancy costs decreased 65 basis points primarily due to leverage from the comparable store net sales increase.
Distribution costs decreased 30 basis points due to leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels partially offset by higher hourly wages.
Markdown costs increased 15 basis points resulting primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point.
Shrink costs increased 20 basis points in the current year resulting from unfavorable inventory results in relation to accruals.

Operating income margin for the Dollar Tree segment increased to 13.3% for the 13 weeks ended October 29, 2022 from 8.5% for the same period last year as a result of the gross profit margin increase noted above, partially offset by an increase in the selling, general and administrative expense rate. The selling, general and administrative expense rate increased to 22.1% in the 13 weeks ended October 29, 2022 compared to 21.7% for the same period last year as a result of the net of the following:

Other selling, general and administrative expenses increased 65 basis points primarily due to the benefit in the prior year quarter associated with the settlement of a contractual dispute and the realization of certain tax credits as well as inflationary pressure across several expense categories in the current year quarter.
Store facility costs increased 45 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs.
Depreciation and amortization expense was flat as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase.
Payroll expenses decreased 70 basis points primarily due to leverage from the comparable store net sales increase, partially offset by minimum wage increases and other investments in store payroll.

Operating income margin for the Dollar Tree segment increased to 16.3% for the 39 weeks ended October 29, 2022 from 10.2% for the same period last year as a result of the gross profit margin increase noted above and a decrease in the selling, general and administrative expense rate. The selling, general and administrative expense rate decreased to 21.5% in the 39 weeks ended October 29, 2022 compared to 21.9% for the same period last year as a result of the net of the following:

Payroll expenses decreased 85 basis points primarily due to leverage from the comparable store net sales increase, partially offset by minimum wage increases and other investments in store payroll.
Depreciation and amortization expense decreased 5 basis points primarily due to leverage from the comparable store net sales increase, partially offset by capital expenditures related to store renovations and improvements.
Store facility costs increased 10 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates, partially offset by leverage from the comparable store net sales increase.
Other selling, general and administrative expenses increased 35 basis points primarily due to the benefit in the prior year associated with the settlement of a contractual dispute and the realization of certain tax credits as well as inflationary pressure across several expense categories in the current year.

Family Dollar

The following table summarizes the operating results of the Family Dollar segment:


	13 Weeks Ended									39 Weeks Ended
	October 29,			October 30,			Percentage Change			October 29,				October 30,			Percentage Change
(dollars in millions)	2022			2021					2022				2021
Net sales	$	3,180.5		$	2,998.0		6.1	%		$	9,493.0			$	9,229.4		2.9	%
Gross profit	$	743.2		$	732.6		1.4	%		$	2,338.5			$	2,381.7		(1.8)	%
Gross profit margin	23.4		%	24.4		%	(1.0)	%		24.6		%		25.8		%	(1.2)	%
Operating income (loss)	$	(18.4)		$	88.6		(120.8)	%		$	126.1			$	456.3		(72.4)	%
Operating margin	(0.6)		%	3.0		%	(3.6)	%		1.3		%		4.9		%	(3.6)	%

Net sales for the Family Dollar segment increased $182.5 million, or 6.1%, for the 13 weeks ended October 29, 2022 compared to the same period last year. The increase was due to a comparable store net sales increase of 4.1% and $101.4 million of new store sales. For the 13 weeks ended October 29, 2022, average ticket increased 4.1% and customer traffic increased 0.1%.

Net sales for the Family Dollar segment increased $263.6 million, or 2.9%, for the 39 weeks ended October 29, 2022 compared to the same period last year. The increase was due to a comparable store net sales increase of 1.2% and $262.8 million of new store sales. For the 39 weeks ended October 29, 2022, average ticket increased 2.7% and customer traffic declined 1.5%. Customers received significant government stimulus dollars in the prior year period. In addition, during the 13 weeks ended April 30, 2022, approximately 400 stores serviced by the West Memphis, Arkansas distribution center were temporarily closed in connection with the voluntary retail-level product recall. The Family Dollar comparable store net sales increased 1.7% when excluding the effect of the store closures.

Gross profit margin for the Family Dollar segment decreased to 23.4% for the 13 weeks ended October 29, 2022 compared to 24.4% for the same period last year. The decrease is due to the net of the following:

Markdown costs increased 105 basis points primarily due to higher promotional and clearance markdowns.
Shrink costs increased 85 basis points in the current year quarter resulting from unfavorable inventory results in relation to accruals.
Distribution costs decreased 15 basis points primarily due to the leverage from the comparable store net sales increase and higher capitalized balances resulting from increases in inventory levels in the current year partially offset by higher hourly wages.
Occupancy costs decreased 25 basis points primarily due to the leverage from the comparable store net sales increase.
Merchandise cost, which includes freight, decreased 45 basis points primarily due to higher initial mark-on.

Gross profit margin for the Family Dollar segment decreased to 24.6% for the 39 weeks ended October 29, 2022 compared to 25.8% for the same period last year. The decrease is due to the net of the following:

Markdown costs increased 85 basis points primarily due to higher promotional and clearance markdowns.
Shrink costs increased 50 basis points in the current year resulting from unfavorable inventory results in relation to accruals.
Occupancy costs increased 10 basis points primarily due to loss of leverage from the low comparable store net sales increase.
Distribution costs decreased 10 basis points due to higher capitalized balances resulting from increases in inventory levels in the current year, partially offset by higher hourly wages and higher maintenance and compliance costs in our distribution centers.
Merchandise cost, which includes freight, decreased 20 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and higher sales of lower margin consumable merchandise.

Operating margin for the Family Dollar segment decreased to (0.6)% for the 13 weeks ended October 29, 2022 from 3.0% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate. The selling, general and administrative expense rate increased to 24.0% in the 13 weeks ended October 29, 2022 compared to 21.4% for the same period last year as a result of the following:

Payroll expenses increased 95 basis points primarily due to minimum wage increases and other investments in store payroll.
Store facility costs increased 75 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates and higher utility costs.
Other selling, general and administrative expenses increased 70 basis points primarily due to higher legal fees and inflationary pressure across several expense categories.
Depreciation and amortization expense increased 5 basis points primarily due to capital expenditures related to store renovations and improvements, partially offset by leverage from the increase in comparable store net sales.

Operating margin for the Family Dollar segment decreased to 1.3% for the 39 weeks ended October 29, 2022 from 4.9% for the same period last year resulting from the gross profit margin decrease noted above and an increase in the selling, general and administrative expense rate. The selling, general and administrative expense rate increased to 23.3% in the 39 weeks ended October 29, 2022 compared to 20.9% for the same period last year as a result of the following:

Payroll expenses increased 85 basis points primarily due to minimum wage increases and other investments in store payroll.
Other selling, general and administrative expenses increased 70 basis points primarily due to long-lived asset impairments at the West Memphis, Arkansas distribution center, higher legal fees and inflationary pressure across several expense categories.
Store facility costs increased 65 basis points primarily due to an increase in repairs and maintenance expenses as we focus on store conditions for our customers and associates, higher utility costs and costs associated with the removal of product from certain Family Dollar stores in connection with the voluntary retail-level product recall.
Depreciation and amortization expense increased 25 basis points primarily due to capital expenditures related to store renovations and improvements.

Liquidity and Capital Resources

We invest 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 39 weeks ended October 29, 2022 and October 30, 2021:


	39 Weeks Ended
	October 29,		October 30,
(in millions)	2022		2021
Net cash provided by (used in):
Operating activities	$	734.1	$	1,018.7
Investing activities	(925.9)		(746.3)
Financing activities	(337.8)		(981.6)

Net cash provided by operating activities decreased $284.6 million primarily due to higher inventory levels and lower accounts payable, partially offset by higher current year earnings, net of non-cash items and higher accrued liability balances.

Net cash used in investing activities increased $179.6 million primarily due to higher capital expenditures in the current year.

Net cash used in financing activities decreased $643.8 million due to lower stock repurchases and net proceeds from borrowings under the Revolving Credit Facility in the current year.

At October 29, 2022, our long-term borrowings were $3.45 billion. Additionally, we had $350.0 million of loans outstanding under our $1.5 billion Revolving Credit Facility and $1.1 billion of availability, net of $44.3 million of outstanding standby letters of credit. We also have $425.0 million in trade letters of credit with various financial institutions, under which $178.0 million was committed to letters of credit issued for routine purchases of imported merchandise as of October 29, 2022.

We repurchased 4,613,696 and 9,156,898 shares of common stock on the open market during the 39 weeks ended October 29, 2022 and October 30, 2021, respectively, for $647.5 million and $950.0 million, respectively. At October 29, 2022, we had $1.85 billion remaining under our Board repurchase authorization.

Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.