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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 30, 2020

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number: 001-11421

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

TENNESSEE

    

61-0502302

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

100 MISSION RIDGE

GOODLETTSVILLE, TN 37072

(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (615) 855-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.875 per share

DG

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes  No 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

The Registrant had 245,000,903 shares of common stock outstanding on November 27, 2020.

TABLE OF CONTENTS

Part I

Financial Information

Item 1. Financial Statements

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Income

3

Condensed Consolidated Statements of Comprehensive Income

4

Condensed Consolidated Statements of Shareholders’ Equity

5

Condensed Consolidated Statement of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

Report of Independent Registered Public Accounting Firm

14

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

15

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

Item 4. Controls and Procedures

26

Part II

Other Information

Item 1. Legal Proceedings

27

Item 1A. Risk Factors

27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6. Exhibits

29

Cautionary Disclosure Regarding Forward Looking Statements

30

Exhibit Index

33

Signature

34

1

PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

    

October 30,

    

January 31,

 

2020

2020

 

(Unaudited)

(See Note 1)

ASSETS

Current assets:

Cash and cash equivalents

$

2,199,443

$

240,320

Merchandise inventories

 

5,025,810

 

4,676,848

Income taxes receivable

111,139

76,537

Prepaid expenses and other current assets

 

197,040

 

184,163

Total current assets

 

7,533,432

 

5,177,868

Net property and equipment

 

3,701,782

 

3,278,359

Operating lease assets

9,343,375

8,796,183

Goodwill

 

4,338,589

 

4,338,589

Other intangible assets, net

 

1,199,900

 

1,200,006

Other assets, net

 

36,364

 

34,079

Total assets

$

26,153,442

$

22,825,084

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of operating lease liabilities

1,044,368

964,805

Accounts payable

 

3,770,528

 

2,860,682

Accrued expenses and other

 

1,060,602

 

709,156

Income taxes payable

 

10,713

 

8,362

Total current liabilities

 

5,886,211

 

4,543,005

Long-term obligations

 

4,131,573

 

2,911,993

Long-term operating lease liabilities

8,285,027

7,819,683

Deferred income taxes

 

686,694

 

675,227

Other liabilities

 

178,418

 

172,676

Commitments and contingencies

Shareholders’ equity:

Preferred stock

 

Common stock

 

214,375

 

220,444

Additional paid-in capital

 

3,426,729

 

3,322,531

Retained earnings

 

3,346,821

 

3,162,660

Accumulated other comprehensive loss

 

(2,406)

 

(3,135)

Total shareholders’ equity

 

6,985,519

 

6,702,500

Total liabilities and shareholders' equity

$

26,153,442

$

22,825,084

See notes to condensed consolidated financial statements.

2

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

For the 13 weeks ended

For the 39 weeks ended

    

October 30,

    

November 1,

    

October 30,

    

November 1,

 

2020

2019

2020

2019

Net sales

$

8,199,625

$

6,991,393

$

25,332,315

$

20,596,331

Cost of goods sold

 

5,631,385

 

4,926,307

 

17,350,148

 

14,380,033

Gross profit

 

2,568,240

 

2,065,086

 

7,982,167

 

6,216,298

Selling, general and administrative expenses

 

1,795,110

 

1,573,669

 

5,299,626

 

4,634,869

Operating profit

 

773,130

 

491,417

 

2,682,541

 

1,581,429

Interest expense

 

40,298

 

24,264

 

110,117

 

75,007

Income before income taxes

 

732,832

 

467,153

 

2,572,424

 

1,506,422

Income tax expense

 

158,572

 

101,603

 

560,117

 

329,304

Net income

$

574,260

$

365,550

$

2,012,307

$

1,177,118

Earnings per share:

Basic

$

2.32

$

1.43

$

8.06

$

4.57

Diluted

$

2.31

$

1.42

$

8.00

$

4.54

Weighted average shares outstanding:

Basic

 

247,131

 

256,041

 

249,731

 

257,618

Diluted

249,063

257,699

251,627

259,022

Dividends per share

$

0.36

$

0.32

$

1.08

$

0.96

See notes to condensed consolidated financial statements.

3

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

For the 13 weeks ended

For the 39 weeks ended

October 30,

November 1,

October 30,

November 1,

    

2020

    

2019

    

2020

    

2019

Net income

$

574,260

$

365,550

    

$

2,012,307

$

1,177,118

Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $87, $86, $260 and $258, respectively

 

243

 

243

    

 

729

 

730

Comprehensive income

$

574,503

$

365,793

    

$

2,013,036

$

1,177,848

See notes to condensed consolidated financial statements.

4

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)

    

    

    

    

    

Accumulated

    

Common

Additional

Other

Stock

Common

Paid-in

Retained

Comprehensive

Shares

Stock

Capital

Earnings

Loss

Total

Balances, July 31, 2020

 

249,033

$

217,906

$

3,381,819

$

3,758,995

$

(2,649)

$

7,356,071

Net income

 

 

 

 

574,260

 

 

574,260

Dividends paid, $0.36 per common share

(88,362)

(88,362)

Unrealized net gain (loss) on hedged transactions

 

 

 

 

 

243

 

243

Share-based compensation expense

 

 

 

16,889

 

 

 

16,889

Repurchases of common stock

 

(4,408)

 

(3,858)

 

 

(898,072)

 

 

(901,930)

Other equity and related transactions

 

375

 

327

 

28,021

 

 

 

28,348

Balances, October 30, 2020

 

245,000

$

214,375

$

3,426,729

$

3,346,821

$

(2,406)

$

6,985,519

Balances, August 2, 2019

 

257,068

$

224,935

$

3,292,902

$

3,234,944

$

(3,621)

$

6,749,160

Net income

 

 

 

 

365,550

 

 

365,550

Dividends paid, $0.32 per common share

(81,640)

(81,640)

Unrealized net gain (loss) on hedged transactions

 

 

 

 

 

243

 

243

Share-based compensation expense

 

 

 

11,100

 

 

 

11,100

Repurchases of common stock

 

(2,527)

 

(2,211)

 

 

(398,116)

 

 

(400,327)

Other equity and related transactions

 

59

 

51

 

4,158

 

 

 

4,209

Balances, November 1, 2019

 

254,600

$

222,775

$

3,308,160

$

3,120,738

$

(3,378)

$

6,648,295

Balances, January 31, 2020

 

251,936

$

220,444

$

3,322,531

$

3,162,660

$

(3,135)

$

6,702,500

Net income

 

 

 

 

2,012,307

 

 

2,012,307

Dividends paid, $1.08 per common share

(268,638)

(268,638)

Unrealized net gain (loss) on hedged transactions

 

 

 

 

 

729

 

729

Share-based compensation expense

 

 

 

51,366

 

 

 

51,366

Repurchases of common stock

 

(8,043)

 

(7,038)

 

 

(1,559,508)

 

 

(1,566,546)

Other equity and related transactions

 

1,107

 

969

 

52,832

 

 

 

53,801

Balances, October 30, 2020

 

245,000

$

214,375

$

3,426,729

$

3,346,821

$

(2,406)

$

6,985,519

Balances, February 1, 2019

 

259,511

$

227,072

$

3,252,421

$

2,941,107

$

(3,207)

$

6,417,393

Net income

 

 

 

 

1,177,118

 

 

1,177,118

Dividends paid, $0.96 per common share

(246,787)

(246,787)

Unrealized net gain (loss) on hedged transactions

 

 

 

 

 

730

 

730

Share-based compensation expense

 

 

 

35,605

 

 

 

35,605

Repurchases of common stock

 

(5,566)

 

(4,870)

 

 

(780,431)

 

 

(785,301)

Transition adjustment upon adoption of leases accounting standard (see Note 1)

 

 

 

28,830

 

 

28,830

Other equity and related transactions

 

655

 

573

 

20,134

 

901

 

(901)

 

20,707

Balances, November 1, 2019

 

254,600

$

222,775

$

3,308,160

$

3,120,738

$

(3,378)

$

6,648,295

See notes to condensed consolidated financial statements.

5

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

For the 39 weeks ended

 

    

October 30,

    

November 1,

 

2020

2019

 

Cash flows from operating activities:

Net income

$

2,012,307

$

1,177,118

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization

 

424,466

 

372,378

Deferred income taxes

 

11,207

 

14,308

Noncash share-based compensation

 

51,366

 

35,605

Other noncash (gains) and losses

 

9,266

 

10,531

Change in operating assets and liabilities:

Merchandise inventories

 

(352,261)

 

(401,006)

Prepaid expenses and other current assets

 

(13,525)

 

(24,345)

Accounts payable

 

919,806

 

425,414

Accrued expenses and other liabilities

 

357,320

 

108,906

Income taxes

 

(32,251)

 

(52,076)

Other

 

(4,161)

 

(5,723)

Net cash provided by (used in) operating activities

 

3,383,540

 

1,661,110

Cash flows from investing activities:

Purchases of property and equipment

 

(697,598)

 

(518,051)

Proceeds from sales of property and equipment

 

1,587

 

1,910

Net cash provided by (used in) investing activities

 

(696,011)

 

(516,141)

Cash flows from financing activities:

Issuance of long-term obligations

 

1,494,315

 

Repayments of long-term obligations

 

(2,564)

 

(525)

Net increase (decrease) in commercial paper outstanding

(425,200)

(90,800)

Borrowings under revolving credit facilities

 

300,000

 

Repayments of borrowings under revolving credit facilities

 

(300,000)

 

Costs associated with issuance of debt

 

(13,574)

 

(1,675)

Repurchases of common stock

 

(1,566,546)

 

(785,301)

Payments of cash dividends

(268,630)

(246,776)

Other equity and related transactions

 

53,793

 

20,697

Net cash provided by (used in) financing activities

 

(728,406)

 

(1,104,380)

Net increase (decrease) in cash and cash equivalents

 

1,959,123

 

40,589

Cash and cash equivalents, beginning of period

 

240,320

 

235,487

Cash and cash equivalents, end of period

$

2,199,443

$

276,076

Supplemental noncash investing and financing activities:

Right of use assets obtained in exchange for new operating lease liabilities

$

1,319,711

$

1,311,734

Purchases of property and equipment awaiting processing for payment, included in Accounts payable

$

100,288

$

96,950

See notes to condensed consolidated financial statements.

6

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Such financial statements consequently do not include all of the disclosures normally required by U.S. GAAP for annual financial statements or those normally made in the Company’s Annual Report on Form 10-K, including the condensed consolidated balance sheet as of January 31, 2020 which was derived from the audited consolidated financial statements at that date. Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 for additional information.

The Company’s fiscal year ends on the Friday closest to January 31. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2020 fiscal year is scheduled to be a 52-week accounting period ending on January 29, 2021, and the 2019 fiscal year was a 52-week accounting period that ended on January 31, 2020.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position as of October 30, 2020 and results of operations for the 13-week and 39-week accounting periods ended October 30, 2020 and November 1, 2019 have been made.

The preparation of financial statements and related disclosures in conformity with U.S. GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Because the Company’s business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year. In addition, the effect of the COVID-19 pandemic on consumer behavior in the quarterly and year to date periods ended May 1, 2020, July 31, 2020, and October 30, 2020 resulted in a departure from seasonal norms experienced in recent years and may continue to disrupt the historical quarterly cadence of the Company’s results of operations for an unknown period of time.

The Company uses the last-in, first-out (“LIFO”) method of valuing inventory. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation. The Company recorded a LIFO provision of $1.6 million and $3.2 million in the respective 13-week periods, and $3.3 million and $9.7 million in the respective 39-week periods, ended October 30, 2020 and November 1, 2019. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation.

The Company adopted new accounting guidance related to leases as of February 2, 2019. The cumulative effect of applying the standard resulted in an adjustment to retained earnings of $28.8 million at February 2, 2019, primarily for the elimination of deferred gain on a 2013 sale-leaseback transaction. Because the standard was adopted under the modified retrospective approach, it did not impact the Company’s historical consolidated net income or cash flows.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance related to the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, as well as hosting arrangements that include an internal use software license. 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

7

permitted. The Company adopted this guidance on a prospective basis and such adoption had an immaterial effect on the Company’s consolidated financial position and results of operations.

In August 2018, the FASB also issued guidance related to the disclosure requirements for fair value measurement. This guidance added, modified, and removed certain disclosure requirements related to assets and liabilities recorded at fair value. The majority of this guidance pertains to assets and liabilities classified in Level 3 of the fair value hierarchy, and the Company has no such assets or liabilities. 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. The adoption of this guidance did not affect the Company’s consolidated results of operations, financial position or cash flows.

In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill. Subsequent to adoption, the Company 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 are being applied on a prospective basis. The adoption of this guidance did not affect the Company’s consolidated results of operations, financial position or cash flows.

In June 2016, the FASB issued guidance related to measurement requirements for credit losses on financial instruments. These amendments require a financial asset or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The guidance requires measurement of expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. 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. The adoption of this guidance did not affect the Company’s consolidated results of operations, financial position or cash flows.

2.

Earnings per share

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

13 Weeks Ended October 30, 2020

13 Weeks Ended November 1, 2019

   

    

Weighted

   

  

  

   

Weighted

   

 

Net

Average

Per Share

Net

Average

Per Share

Income

Shares

Amount

Income

Shares

Amount

Basic earnings per share

$

574,260

 

247,131

$

2.32

$

365,550

 

256,041

$

1.43

Effect of dilutive share-based awards

 

1,932

 

1,658

Diluted earnings per share

$

574,260

 

249,063

$

2.31

$

365,550

 

257,699

$

1.42

39 Weeks Ended October 30, 2020

39 Weeks Ended November 1, 2019

   

    

Weighted

   

  

  

   

Weighted

   

 

Net

Average

Per Share

Net

Average

Per Share

Income

Shares

Amount

Income

Shares

Amount

Basic earnings per share

$

2,012,307

 

249,731

$

8.06

$

1,177,118

 

257,618

$

4.57

Effect of dilutive share-based awards

 

1,896

 

1,404

Diluted earnings per share

$

2,012,307

 

251,627

$

8.00

$

1,177,118

 

259,022

$

4.54

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. 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 awards would be antidilutive, were less than 0.1 million and 0.1 million in the respective 13-week periods, and 0.2 million and 0.4 million in the respective 39-week periods, ended October 30, 2020 and November 1, 2019.

8

3.

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.

Income tax reserves are determined using the methodology established by accounting standards for income taxes which require companies to assess each income tax position taken using the following two-step approach. 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.

The Company’s 2016 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 2017 through 2019 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 2017 and later tax years remain open for examination by the various state taxing authorities.

As of October 30, 2020, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $5.6 million, $0.3 million and $0.0 million, respectively, for a total of $5.9 million. This total amount is reflected in noncurrent other liabilities in the condensed consolidated balance sheet.

The Company’s reserve for uncertain tax positions is not expected to be reduced in the coming twelve months as a result of expiring statutes of limitations. As of October 30, 2020, approximately $5.6 million of the reserve for 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 effective income tax rates for the 13-week and 39-week periods ended October 30, 2020 were 21.6% and 21.8% respectively, compared to rates of 21.7% and 21.9% for the 13-week and 39-week periods ended November 1, 2019. The income tax rates for the 13-week and 39-week periods in 2020 were lower than the comparable 13-week and 39-week periods in 2019 primarily due to increased income tax benefits associated with share-based compensation and a greater income tax rate benefit from state taxes, partially offset by a lower income tax rate benefit from federal income tax credits due to higher pre-tax earnings in the 2020 periods compared to the 2019 periods.

4.Leases

As of October 30, 2020, the Company’s primary leasing activities were real estate leases for most of its retail store locations and certain of its distribution facilities. Substantially all of the Company’s leases are classified as operating leases and the associated assets and liabilities are presented as separate captions in the condensed consolidated balance sheets. Finance lease assets are included in net property and equipment, and finance lease liabilities are included in long-term obligations, in the condensed consolidated balance sheet. At October 30, 2020, the weighted-average remaining lease term for the Company’s operating leases is 9.9 years, and the weighted average discount rate for such leases is 4.0%. Operating lease costs are reflected as selling, general and administrative costs in the condensed consolidated statements of income. For the 39-week periods ended October 30, 2020 and November 1, 2019, such costs were $1.03 billion and $0.94 billion, respectively. Cash paid for amounts included in the measurement of operating lease liabilities of $1.03 billion and $0.95 billion, respectively, were reflected in cash flows from operating activities in the condensed consolidated statements of cash flows for the 39-week periods ended October 30, 2020 and November 1, 2019.

9

5.

Current and long-term obligations

Current and long-term obligations consist of the following:

    

October 30,

    

January 31,

 

(In thousands)

2020

2020

 

Revolving Facility

$

$

3.250% Senior Notes due April 15, 2023 (net of discount of $647 and $837)

 

899,353

 

899,163

4.150% Senior Notes due November 1, 2025 (net of discount of $431 and $489)

499,569

499,511

3.875% Senior Notes due April 15, 2027 (net of discount of $305 and $336)

599,695

599,664

4.125% Senior Notes due May 1, 2028 (net of discount of $394 and $428)

499,606

499,572

3.500% Senior Notes due April 3, 2030 (net of discount of $637)

999,363

4.125% Senior Notes due April 3, 2050 (net of discount of $4,966)

495,034

Unsecured commercial paper notes

425,200

Other

165,996

4,895

Debt issuance costs, net

 

(27,043)

 

(16,012)

$

4,131,573

$

2,911,993

On September 10, 2019, the Company entered into an amended and restated credit agreement, providing for a $1.25 billion unsecured five-year revolving credit facility (the “Revolving Facility”) of which up to $175.0 million is available for letters of credit.

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 October 30, 2020 was 1.015% for LIBOR borrowings and 0.015% for base-rate borrowings. The Company is also required to pay a facility fee, payable on any used and unused commitment amounts of the Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility. As of October 30, 2020, the facility fee rate was 0.11%. 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 October 30, 2020, the Company was in compliance with all such covenants. The Revolving Facility also contains customary events of default.

As of October 30, 2020, the Company had no outstanding borrowings, outstanding letters of credit of $4.8 million, and borrowing availability of approximately $1.25 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 $1.06 billion. In addition, as of October 30, 2020, the Company had outstanding letters of credit of $75.5 million which were issued pursuant to separate agreements.

As of October 30, 2020, 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 may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness. The Company intends to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time. As of October 30, 2020, the Company’s condensed consolidated balance sheet reflected no outstanding unsecured CP Notes. CP Notes totaling $181.0 million were held by a wholly-owned subsidiary of the Company and are therefore not reflected on the condensed consolidated balance sheet.

On April 3, 2020, the Company issued $1.0 billion aggregate principal amount of 3.5% senior notes due 2030 (the “2030 Senior Notes”), net of discount of $0.7 million, and $500.0 million aggregate principal amount of 4.125% senior notes due 2050 (the “2050 Senior Notes”), net of discount of $5.0 million. The 2030 Senior Notes are scheduled to mature on April 3, 2030 and the 2050 Senior Notes are scheduled to mature on April 3, 2050. Interest on the 2030

10

Senior Notes and the 2050 Senior Notes is payable in cash on April 3 and October 3 of each year, and commenced on October 3, 2020. The Company incurred $13.6 million of debt issuance costs associated with the issuance of the 2030 Senior Notes and the 2050 Senior Notes.

6.

Assets and liabilities measured at fair value

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). The Company does not have any fair value measurements categorized within Level 3 as of October 30, 2020.

The following table presents the Company’s liabilities required to be measured at fair value as of October 30, 2020, 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

October 30,

(In thousands)

(Level 1)

(Level 2)

(Level 3)

2020

Liabilities:

Long-term obligations (a)

$

4,525,226

$

165,996

$

$

4,691,222

Deferred compensation (b)

 

31,248

 

 

 

31,248

(a) Included in the condensed consolidated balance sheet at book value as Long-term obligations of $4,131,573.
(b) Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $1,776 and noncurrent Other liabilities of $29,472.

7.Commitments and contingencies

Legal proceedings

From time to time, the Company is a party to various legal matters in the ordinary course of its business, including actions by employees, consumers, suppliers, government agencies, or others. The Company has recorded accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. For some matters, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made. In 2019, the Company recorded an accrual of $31.0 million for losses the Company believes are both probable and reasonably estimable relating to certified class actions and associated matters including the matters discussed below under Consumer/Product Litigation.

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

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 “Motor Oil Lawsuits”).

11

On June 2, 2016, the Motor Oil Lawsuits were centralized 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”). In their consolidated amended complaint, the plaintiffs in the Motor Oil MDL sought 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 on August 3, 2017. 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). On May 4, 2020, the Company’s motion to dismiss the action was denied. Trial is scheduled for March 8, 2021.

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 alleging 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). On May 7, 2019, the Mississippi AG renewed its motion to remand. 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 (the “Louisiana AG”) requesting information concerning the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil (the “Louisiana Motor Oil Matter”). In response to the CID, the Company filed a petition for a protective order on February 20, 2018 in the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana seeking to set aside the CID. (In re Dollar General Corp. and Dolgencorp, LLC, Case No. 666499). On February 7, 2020, the Company reached an agreement with the Louisiana AG to resolve this matter for an amount that is immaterial to the Company’s consolidated financial statements as a whole.

On August 20, 2018, plaintiffs in the MDL 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 alleged unfair trade practices/consumer fraud, unjust enrichment and breach of implied warranty claims. 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. Subsequently, the court certified an additional class, bringing the total to 17 statewide classes. The court denied plaintiffs’ certification motion in all other respects. On June 25, 2019, the United States Court of Appeals for the Eighth Circuit granted the Company’s Petition to Appeal the lower court’s certification rulings. The Company’s appeal remains pending.

The parties have reached an agreement in principle to resolve the Motor Oil MDL for an amount that is immaterial to the Company’s consolidated financial statements as a whole. The parties’ agreement must be formalized and submitted to the court for consideration and approval.

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, except as to the Louisiana Motor Oil Matter, it is not possible to predict whether these matters ultimately will be permitted to proceed as a class or in a similar fashion or the size of any putative class or classes. Likewise, except as to the Louisiana Motor Oil Matter, no assurances can be given that the Company will be successful in its defense of these matters on the merits

12

or otherwise. Based on its belief that a loss in these matters is both probable and reasonably estimable, as noted above, during 2019, the Company recorded an accrual for an amount that is immaterial to the Company’s consolidated financial statements as a whole.

8.

Segment reporting

The Company manages its business on the basis of one reportable operating segment. As of October 30, 2020, all of the Company’s operations were located within the United States with the exception of certain product sourcing operations, which collectively are not material with regard to assets, results of operations or otherwise to the condensed consolidated financial statements. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.

13 Weeks Ended

39 Weeks Ended

October 30,

November 1,

October 30,

November 1,

(in thousands)

    

2020

    

2019

    

2020

    

2019

 

Classes of similar products:

Consumables

$

6,385,315

$

5,523,157

$

19,585,114

$

16,164,317

Seasonal

 

906,623

 

750,843

 

2,986,146

 

2,341,914

Home products

 

517,147

 

400,934

 

1,601,450

 

1,151,715

Apparel

 

390,540

 

316,459

 

1,159,605

 

938,385

Net sales

$

8,199,625

$

6,991,393

$

25,332,315

$

20,596,331

9.

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. Most recently, on August 26, 2020, the Company’s Board of Directors authorized a $2.0 billion increase to the existing common stock repurchase program, bringing the cumulative total to $10.0 billion authorized under the program since its inception. The repurchase authorization has no expiration date and allows repurchases from time to time in open market transactions, including pursuant to trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions. The timing, manner and number of shares repurchased will depend on a variety of factors, including 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 5.

Pursuant to its common stock repurchase program, during the 39-week periods ended October 30, 2020 and November 1, 2019, the Company repurchased in the open market approximately 8.0 million shares of its common stock at a total cost of $1.57 billion and approximately 5.6 million shares of its common stock at a total cost of $0.79 billion, respectively.

The Company paid a cash dividend of $0.36 per share during each of the first three quarters of 2020. On December 2, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.36 per share, which is payable on or before January 19, 2021 to shareholders of record on January 5, 2021. 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.

13

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Dollar General Corporation

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of Dollar General Corporation and subsidiaries (the Company) as of October 30, 2020, the related condensed consolidated statements of income, comprehensive income, and shareholders’ equity for the thirteen and thirty-nine week periods ended October 30, 2020 and November 1, 2019, the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 30, 2020 and November 1, 2019, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 31, 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated March 19, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company's management. 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 SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Ernst & Young LLP

December 3, 2020

Nashville, Tennessee

14

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.

Impact of COVID-19

The COVID-19 (coronavirus) pandemic has resulted in widespread and continuing impacts on the global economy and has affected our business, as well as our customers, suppliers, and other business partners. We have been classified as an essential business in all locations where we operate, and as such, our stores have generally remained open to serve our customers. In responding to the pandemic and its effects, our priority has been the health and safety of our employees and customers. In order to serve our employees and customers during this time while prioritizing their well-being, we have taken a variety of actions across our stores, distribution centers and store support center, including (as applicable): enhancing cleaning protocols, designating one hour each day for our elderly customers to shop our stores with limited crowds, implementing social distancing measures, providing personal protective equipment (e.g., gloves, masks and hand sanitizer) for employees, providing employee temperature checks at our distribution facilities, installing plexiglass barriers at registers, and providing paid time off for those who received a COVID-19 diagnosis, or who were required to care for an immediate family or household member who received a COVID-19 diagnosis.

In early March, we began seeing heightened demand from customers, particularly for consumable products such as paper, food and cleaning products, which continued throughout the first, second, and third quarters, albeit with some variability as to the volume and product mix. Beginning in April, we also saw a significant increase in demand in many non-consumable products, including home, seasonal and apparel, resulting in an overall significant mix shift into non-consumable categories in the second and third quarters. Beginning in early March, many new customers began shopping with us for their everyday essential needs, and we are working to retain them going forward. We have also seen a shift in customer behavior toward trip consolidation, as customers are shopping our stores less frequently than in the same period in 2019, but purchasing a larger average basket amount. To address the increased demand, we increased our hiring of new store associates in March and April, and have worked and continue to work with suppliers to incorporate new items in stores to meet the essential needs of customers while addressing certain product shortages and vendor allocation limitations which we expect to persist for at least the remainder of the fiscal year in some cases. We believe that this increased customer demand significantly benefited our results of operations, and in particular, sales, gross profit, operating income and net income for each of the first three quarters of fiscal 2020. Although we incurred additional payroll related expenses in each of the first three quarters of fiscal 2020, including employee appreciation bonuses of approximately $99 million, increased distribution and transportation costs, as well as other costs to meet the significant customer demand and to protect the health and safety of our employees and customers, these costs were more than offset by the incremental sales.

We expect to continue to be affected, although the extent and duration is unknown, by the COVID-19 pandemic and its effects on the economy in a variety of ways, potentially including changing consumer demand (whether higher or lower) in certain product categories, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs in an effort to maintain safe work and shopping environments. Additionally, the vast shutdown, and/or significant operating limitations imposed upon, of many businesses in the United States has resulted in high levels of unemployment, which, along with current and potential school closures and operating limitations, could have a significant adverse impact on our core customers for an unknown length of time. The potential for additional economic stabilization efforts, including additional government stimulus payments and enhanced unemployment benefits and the effects thereof, are uncertain. In addition to the items described above, we expect the current adverse global economic conditions caused by the COVID-19 pandemic to continue at least throughout 2020 and likely longer, potentially resulting in continued elevated unemployment, reduced economic activity, and capital markets volatility. We may experience adverse effects on our business, results of operations and cash flows from a recessionary

15

economic environment that may persist after the COVID-19 pandemic has moderated. As a result, the quarterly cadence of our results of operations is likely to vary from historical patterns.

Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, there may be consequences that we do not anticipate at this time or that develop in unexpected ways. We will continue to monitor the evolving situation, and we will continue to take actions as necessary to serve our employees, customers, communities and shareholders.

Executive Overview

We are the largest discount retailer in the United States by number of stores, with 16,979 stores located in 46 states as of October 30, 2020, with the greatest concentration of stores in the southern, southwestern, midwestern and eastern United States. We offer a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products and pet supplies, and non-consumable products such as seasonal merchandise, home decor and domestics, and basic apparel. Our merchandise includes national brands from leading manufacturers, as well as our own private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box locations.

We believe our convenient store formats, locations, and broad selection of high-quality products at compelling values have driven our substantial growth and financial success over the years and through a variety of economic cycles. We are mindful that the majority of our customers are value-conscious, and many have low and/or fixed incomes. As a result, we are intensely focused on helping our customers make the most of their spending dollars. Our core customers are often among the first to be affected by negative or uncertain economic conditions and among the last to feel the effects of improving economic conditions particularly when trends are inconsistent and of an uncertain duration. The primary macroeconomic factors that affect our core customers include the unemployment and underemployment rates, wage growth, changes in U.S. and global trade policy (including price increases resulting from the imposition of tariffs), and changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program. Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budget, such as rent, healthcare and fuel prices. Finally, significant unseasonable or unusual weather patterns can impact customer shopping behaviors.

We remain committed to our long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus. These priorities include: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our diverse teams through development, empowerment and inclusion. We recently fine-tuned our fourth operating priority, which previously was “investing in our people as a competitive advantage,” to more fully express our values and beliefs and to more closely align with the investments we continue to make in the development of our people.

We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount. As we work to provide everyday low prices and meet our customers’ affordability needs, we remain focused on enhancing our margins through effective category management, inventory shrink reduction initiatives, private brands penetration, distribution and transportation efficiencies, global sourcing, and pricing and markdown optimization. Several of our strategic and other sales-driving initiatives are also designed to capture growth opportunities and are discussed in more detail below.

Historically, our sales in our consumables category, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales in our non-consumables categories, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount. In recent years our sales mix has continued to shift slightly toward consumables, and, within consumables, slightly toward lower margin departments such as perishables. Although this trend did not occur in the first three quarters of 2020 (as discussed above under “Impact of COVID-19”), we continue to expect some sales mix challenges to persist over the long term. Several of our initiatives, including certain of those discussed below, are intended to address these mix challenges; however, there can be no assurances that these efforts will be successful.

We continue to make progress on and invest in certain strategic initiatives that we believe will help drive profitable sales growth and capture long-term growth opportunities. Such opportunities include leveraging existing and

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developing new digital tools and technology to provide our customers with additional shopping access points and even greater convenience. This technology includes our Dollar General app, which contains a variety of tools to enhance the in-store shopping experience. Additionally, DG Pickup, which is a buy online, pickup in-store initiative aimed at offering another convenient access point for customers, is now available in essentially all of our stores across the chain.

Our non-consumables initiative, or “NCI,” offers a new, differentiated and limited assortment that will change throughout the year. NCI is continuing to evolve and help shape our approach to non-consumables categories throughout the chain, and is contributing to improved sales and gross margin performance in the stores where it is offered. As we extend this initiative more broadly, as well as incorporate certain related merchandising efforts throughout our chain, our goal is to provide our customers with a broader, even more relevant non-consumables merchandise assortment, while continuing to deliver exceptional value within key areas of our non-consumables categories. Our updated goal is to have this offering in over 5,600 stores by the end of fiscal 2020.

Additionally, we have recently introduced pOpshelf, a unique retail concept that incorporates lessons learned from NCI in a differentiated format that is focused on categories such as seasonal and home décor, health and beauty, home cleaning supplies, and party and entertainment goods. Our goal is to open approximately 30 pOpshelf locations by the end of fiscal 2021.

We are continuing our rollout of the “DG Fresh” initiative, a self-distribution model for frozen and refrigerated products that is designed to reduce product costs, enhance item assortment, improve our in-stock position, and enhance sales. By the end of fiscal 2020, we plan to operate up to ten DG Fresh distribution facilities, which will serve more than 14,000 stores. DG Fresh has benefitted gross profit in 2020 through improved initial markups on inventory purchases, which have been partially offset by increased distribution and transportation costs. We expect this net benefit to continue in the near term as we continue the rollout.

As a result of positive early results, we accelerated our investment in and the rollout of DG Pickup, NCI, and DG Fresh.

Tariffs on products from China, as applied to both our direct imports and domestic purchases, have not had a net material impact on our financial results. We believe we can continue to mitigate the potential sales and margin impact of such increased tariffs on our financial results in 2020 through various sourcing, merchandising and pricing efforts. However, as noted above, changes in trade policy that result in higher prices for our customers may negatively impact their budgets, and consequently, their spending, and additional increases in tariff rates or expansion of products subject to tariffs may have a more significant impact on our future business. There can be no assurance we will be successful in our efforts to mitigate the impacts of existing or future tariffs in whole or in part, including but not limited to any impacts on customer spending.

To support our other operating priorities, we remain focused on capturing growth opportunities. In the first three quarters of 2020, we opened 780 new stores, remodeled 1,425 stores, and relocated 76 stores. Through the end of the third quarter of 2020, the COVID-19 pandemic has not resulted in delays that have materially impacted our real estate plans, and we do not currently expect any significant delays based on what is currently known to management. For 2020, we continue to plan to open 1,000 new stores, remodel 1,670 stores, and relocate 110 stores, for a total of 2,780 real estate projects. In our fiscal 2021 year, we plan to open approximately 1,050 new stores, remodel approximately 1,750 stores, and relocate approximately 100 stores, for a total of 2,900 real estate projects.

We continue to innovate within our channel and are able to utilize the most productive of our various store formats based on the specific market opportunity. We expect that our traditional 7,300 square foot store format will continue to be the primary store layout for new stores in the remainder of 2020. We expect approximately 75% of our planned remodels in both 2020 and 2021 to feature our higher-cooler-count store format that enables us to offer an increased selection of perishable items. Additionally, the majority of real estate projects in both 2020 and 2021 will incorporate higher-capacity coolers. The acceleration of remodels in 2020 and the increased usage of the higher-cooler-count formats is expected to allow us to capture additional growth opportunities within our existing markets. In addition, our smaller format store (less than 6,000 square feet) is expected to allow us to capture growth opportunities in urban areas. We continue to incorporate lessons learned from our various store formats and layouts into our existing store base. These lessons contribute to innovation in developing new formats, with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.

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We have established a position as a low-cost operator, always seeking ways to reduce or control costs that do not affect our customers’ shopping experiences. We plan to continue enhancing this position over time while employing ongoing cost discipline to reduce certain expenses as a percentage of sales. Nonetheless, we seek to maintain flexibility to invest in the business as necessary to enhance our long-term profitability. We have experienced incremental costs related to the COVID-19 pandemic as discussed above under “Impact of COVID-19” and below under “Results of Operations”.

We also have launched “Fast Track”, an initiative aimed at further enhancing our convenience proposition and in-stock position as well as increasing labor productivity within our stores. The first phase of Fast Track involved sorting process optimization within our distribution centers, as well as increased shelf-ready packaging, to allow for greater store-level stocking efficiencies, followed by the second-phase pilot of a self-checkout option in a limited number of stores. We completed the sorting process optimization at all of our non-refrigerated distribution centers in 2019. Additionally, we are continuing to add self-checkout capabilities in more stores each quarter. These and the other strategic initiatives discussed above will require us to incur upfront expenses for which, in some respects, there may not be an immediate return in terms of sales or enhanced profitability.

Certain of our operating expenses, such as wage rates and occupancy costs, have continued to increase in recent years, due primarily to market forces. While we expect these increases to persist, certain of our initiatives and plans are intended to help offset these challenges, although there can be no assurance we will be successful in mitigating them. We have also experienced incremental payroll, distribution and transportation costs related to the COVID-19 pandemic as discussed above under “Impact of COVID-19”.

Our diverse teams are a competitive advantage, and we proactively seek ways to continue investing in their development. Our goal is to create an environment that attracts and retains talented personnel, particularly at the store level, because employees who are promoted from within our company generally have longer tenures and are greater contributors to improvements in our financial performance. We believe our investments in compensation and training for our store managers have contributed to improved customer experience scores, higher sales and improved turnover metrics.

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends in each of the first three quarters of 2020. We expect to continue our share repurchase activity and to pay quarterly cash dividends throughout the remainder of 2020.

We utilize key performance indicators (“KPIs”) in the management of our business. Our KPIs include same-store sales, average sales per square foot, and inventory turnover. Same-store sales are calculated based upon stores that were open at least 13 full fiscal months and remain open at the end of the reporting period. We include stores that have been remodeled, expanded or relocated in our same-store sales calculation. Changes in same-store sales are calculated based on the comparable 52 calendar weeks in the current and prior years. Net sales per square foot is calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Inventory turnover is calculated based on total cost of goods sold for the preceding four quarters divided by the average inventory balance as of the ending date of the reporting period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Each of these measures is commonly used by investors in retail companies to measure the health of the business. We use these measures to maximize profitability and for decisions about the allocation of resources.

A continued focus on our four operating priorities as discussed above, coupled with pandemic-related sales and other impacts (additional discussion below), along with strong cash flow management resulted in strong overall operating and financial performance in the 2020 period as compared to the 2019 period, as set forth below.

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Highlights of our 2020 third quarter results of operations compared to the 2019 third quarter and our financial condition at October 30, 2020 are set forth below. Basis points amounts referred to below are equal to 0.01% as a percentage of net sales.

Net sales increased 17.3% to $8.20 billion. Sales in same-stores increased 12.2% primarily reflecting a substantial increase in items per transaction. Average sales per square foot for all stores over the 52-week period ended October 30, 2020 was $266.

Gross profit, as a percentage of net sales, was 31.3% in the 2020 period and 29.5% in the 2019 period, an increase of 178 basis points, primarily reflecting favorable markdowns, higher initial inventory markups, and an increase in sales of products in our non-consumable categories.

SG&A expense, as a percentage of net sales, was 21.9% in the 2020 period compared to 22.5% in the 2019 period, a decrease of 62 basis points, due in part to lower store occupancy, utilities, and retail labor costs as a percentage of net sales.

Operating profit increased 57.3% to $773.1 million in the 2020 period compared to $491.4 million in the 2019 period.

Interest expense increased by $16.0 million in the 2020 period primarily due to higher average outstanding debt balances in connection with the issuance of debt in the first quarter of 2020.

The effective income tax rate for the 2020 period was 21.6% compared to a rate of 21.7% for the 2019 period primarily due to income tax benefits associated with share-based compensation.

Net income was $574.3 million, or $2.31 per diluted share, in the 2020 period compared to net income of $365.6 million, or $1.42 per diluted share, in the 2019 period.

Highlights of the year-to-date period of 2020 include:

Cash generated from operating activities was $3.38 billion for the 2020 period, an increase of $1.72 billion, or 103.7%, over the comparable 2019 period.

Total cash dividends of $268.6 million, or $1.08 per share, were paid during the 2020 period, compared to $246.8 million, or $0.96 per share, in the comparable 2019 period.

Inventory turnover was 4.9 times on a rolling four-quarter basis. On a per store basis, inventories at October 30, 2020 increased by 5.9% compared to the balances at November 1, 2019.

The above discussion is a summary only. Readers should refer to the detailed discussion of our results of operations below in the current year periods as compared with the prior year periods as well as our financial condition at October 30, 2020.

Results of Operations

Accounting Periods. We utilize a 52-53 week fiscal year convention that ends on the Friday nearest to January 31. The following text contains references to years 2020 and 2019, which represent the 52-week fiscal years ending or ended January 29, 2021 and January 31, 2020, respectively. References to the third quarter accounting periods for 2020 and 2019 contained herein refer to the 13-week accounting periods ended October 30, 2020 and November 1, 2019, respectively.

Seasonality. The nature of our business is somewhat seasonal. Primarily because of sales of Christmas-related merchandise, operating profit in our fourth quarter (November, December and January) has historically been higher than operating profit in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods. Consumer behavior driven by

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the COVID-19 pandemic has resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time.

The following table contains results of operations data for the third 13-week periods and the 39-week periods of 2020 and 2019, and the dollar and percentage variances among those periods:

13 Weeks Ended

2020 vs. 2019

39 Weeks Ended

2020 vs. 2019

 

(amounts in millions, except

    

October 30,

    

November 1,

    

Amount

    

%

    

October 30,

    

November 1,

    

Amount

    

%

 

per share amounts)

2020

2019

Change

Change

2020

2019

Change

Change

 

Net sales by category:

Consumables

$

6,385.3

$

5,523.2

$

862.2

15.6

%  

$

19,585.1

 

$

16,164.3

 

$

3,420.8

 

21.2

%

% of net sales

 

77.87

%  

 

79.00

%  

 

77.31

%  

78.48

%  

Seasonal

 

906.6

 

750.8

 

155.8

20.7

 

2,986.1

2,341.9

 

644.2

 

27.5

% of net sales

 

11.06

%  

 

10.74

%  

 

11.79

%  

11.37

%  

Home products

 

517.1

 

400.9

 

116.2

29.0

 

1,601.5

1,151.7

 

449.7

 

39.0

% of net sales

 

6.31

%  

 

5.73

%  

 

6.32

%  

5.59

%  

Apparel

 

390.5

 

316.5

 

74.1

23.4

 

1,159.6

938.4

 

221.2

 

23.6

% of net sales

 

4.76

%  

 

4.53

%  

 

4.58

%  

4.56

%  

Net sales

$

8,199.6

$

6,991.4

$

1,208.2

17.3

%  

$

25,332.3

$

20,596.3

$

4,736.0

 

23.0

%

Cost of goods sold

 

5,631.4

 

4,926.3

 

705.1

14.3

 

17,350.1

14,380.0

 

2,970.1

 

20.7

% of net sales

 

68.68

%  

 

70.46

%  

 

68.49

%  

69.82

%  

Gross profit

 

2,568.2

 

2,065.1

 

503.2

24.4

 

7,982.2

6,216.3

 

1,765.9

 

28.4

% of net sales

 

31.32

%  

 

29.54

%  

 

31.51

%  

30.18

%  

Selling, general and administrative expenses

 

1,795.1

 

1,573.7

 

221.4

14.1

 

5,299.6

4,634.9

 

664.8

 

14.3

% of net sales

 

21.89

%  

 

22.51

%  

 

20.92

%  

22.50

%  

Operating profit

 

773.1

 

491.4

 

281.7

57.3

 

2,682.5

1,581.4

 

1,101.1

 

69.6

% of net sales

 

9.43

%  

 

7.03

%  

 

10.59

%  

7.68

%  

Interest expense

 

40.3

 

24.3

 

16.0

66.1

 

110.1

75.0

 

35.1

 

46.8

% of net sales

 

0.49

%  

 

0.35

%  

 

0.43

%  

0.36

%  

Income before income taxes

 

732.8

 

467.2

 

265.7

56.9

 

2,572.4

1,506.4

 

1,066.0

 

70.8

% of net sales

 

8.94

%  

 

6.68

%  

 

10.15

%  

7.31

%  

Income tax expense

 

158.6

 

101.6

 

57.0

56.1

 

560.1

329.3

 

230.8

 

70.1

% of net sales

 

1.93

%  

 

1.45

%  

 

2.21

%  

1.60

%  

Net income

$

574.3

$

365.6

$

208.7

57.1

%  

$

2,012.3

$

1,177.1

$

835.2

 

71.0

%

% of net sales

 

7.00

%  

 

5.23

%