DOLLAR TREE, INC. (DLTR) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section of Form 10-K generally discusses fiscal 2023 and fiscal 2022 events and results, and year-to-year comparisons between fiscal 2023 and fiscal 2022. Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

In Management’s Discussion and Analysis, we explain the general financial condition and the results of operations for our company, including, factors that affect our business, analysis of annual changes in certain line items in the consolidated financial statements, performance of each of our operating segments, expenditures incurred for capital projects and sources of funding for future expenditures. As you read Management’s Discussion and Analysis, please refer to our consolidated financial statements and related notes, included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Overview

We are a leading operator of more than 16,700 retail discount stores and we conduct our operations through two reporting segments. Our Dollar Tree segment is the leading operator of discount variety stores offering merchandise predominantly at the opening price point of $1.25, with additional offerings at $3, $4 and $5 price points. 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 which can be impacted by a number of factors including operational performance, competition, inflation and changes in the product assortment, pricing, or quality. 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, relocated or remodeled during the year in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales. Stores that have been re-bannered (i.e., Family Dollar stores converted to Dollar Tree stores, or vice versa) 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. Sales that are excluded from the calculation of comparable store net sales are referred to as non-comparable store sales and consist of sales from new stores open fifteen months or less and stores that are closed permanently or expected to be closed for more than 90 days.

Annual Results

Financial highlights for the fiscal year ended February 3, 2024, as compared to the fiscal year ended January 28, 2023, include:

•Net sales increased 8.0% to $30,581.6 million, due to a 4.6% enterprise-wide comparable store net sales increase and net sales of $1,184.5 million at non-comparable stores. The 53rd week in fiscal 2023 accounted for $559.3 million of the total net sales increase.

•Gross profit increased 4.3% to $9,309.6 million as a result of our net store growth and the 53rd week. Gross profit, as a percentage of net sales, decreased 110 basis points to 30.4%, primarily due to higher shrink, distribution and markdown costs, partially offset by lower freight costs and occupancy costs. Excluding $86.2 million of distribution and markdown costs related to the store portfolio optimization review, gross profit, as a percentage of net sales, decreased 80 basis points.

•Selling, general and administrative expenses increased $3,514.5 million or 52.5%, primarily due to a $1,069.0 million non-cash goodwill impairment charge, a $950.0 million non-cash trade name impairment charge, a $503.9 million non-cash store asset impairment charge, and $56.7 million in DC 202-related litigation charges. Selling, general and administrative expenses, as a percentage of total revenues, increased 980 basis points to 33.4%. Excluding the impairment and litigation charges noted above, selling, general and administrative expenses, as a percentage of total revenues, increased 125 basis points primarily due to higher store-based payroll expenses, unfavorable development of general liability claims, and higher repairs and maintenance expenses.

•Operating income (loss) was ($881.8) million and as a percentage of total revenues, decreased 1,080 basis points to (2.9)% primarily due to the current year impairments and litigation charges noted above. Excluding the impairments and litigation charges, the operating income (loss), as a percentage of total revenues, decreased 210 basis points.

•The effective tax rate decreased to (1.0)% compared to 23.5% in the prior year primarily due to the current year goodwill impairment charge which is not tax deductible.

•Net income (loss) was ($998.4) million, or ($4.55) per diluted share, compared to $1,615.4 million, or $7.21 per diluted share.

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At February 3, 2024, we operated stores in 48 states and the District of Columbia, as well as stores in five Canadian provinces. The average size of stores opened in fiscal 2023 was approximately 9,300 selling square feet for the Dollar Tree segment and 9,360 selling square feet for the Family Dollar segment. A breakdown of store counts and square footage by segment for the years ended February 3, 2024 and January 28, 2023 is as follows:

Stores are included as re-banners when they close or open, respectively. During the fourth quarter of fiscal 2023, we initiated a comprehensive store portfolio optimization review, including identifying stores as candidates for closure, re-bannering, or relocation. See the “Strategic Initiatives and Recent Developments” section below and Note 16 to our consolidated financial statements for additional detail.

Fiscal 2023 ended on February 3, 2024 and included 53 weeks, commensurate with the retail calendar. The 53rd week in fiscal 2023 added approximately $559.3 million in sales. Fiscal 2022 and fiscal 2021 which ended on January 28, 2023 and January 29, 2022, respectively, each included 52 weeks.

The percentage change in comparable store net sales for the fiscal year ended February 3, 2024, as compared with the preceding year, is as follows, based on a 53-week comparison for both years:

Comparable store net sales are positively affected by our expanded, relocated and remodeled 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.

Net sales per selling square foot is calculated based on total net sales for the preceding 12 months as of the end of the reporting period divided by the average selling square footage during the period. Selling square footage excludes the storage, receiving and office space that generally occupies approximately 20% of the total square footage of our stores. We believe that net sales per selling square foot more accurately depicts the productivity and operating performance of our stores as it reflects the portion of our footprint that is dedicated to selling merchandise. Net sales per selling square foot for the 53 weeks ended February 3, 2024 and the 52 weeks ended January 28, 2023 and January 29, 2022 is as follows:

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The 53rd week in fiscal 2023 contributed $4 to the total net sales per selling square foot. See our “Strategic Initiatives and Recent Developments” below for more information on the initiatives that are driving our comparable store net sales growth and net sales per selling square foot growth.

Strategic Initiatives and Recent Developments

We continue to execute on a number of strategic initiatives across the Dollar Tree and Family Dollar banners to drive productive sales growth, improve operating efficiency, invest in technology, and expand our culture of service to our associates. These initiatives include, among others, the following:

Dollar Tree Merchandising. We continue to expand our brand assortment at the $1.25 price point to provide greater value to our customers and increase customer traffic and store productivity. We are continuing to expand our multi-price product assortment, which began with the introduction of $3 and $5 Dollar Tree Plus product in select discretionary categories, expanded into $3, $4 and $5 frozen and refrigerated product, and now comprises a wide assortment of other consumable and discretionary product. We are currently taking actions to improve operating efficiencies and prepare for expanded multi-price products within our stores, including raising shelf heights, implementing space productivity, and rightsizing assortments.

Family Dollar Merchandising and Store Portfolio Optimization Review. Our store design initiatives at Family Dollar provide significantly improved merchandise offerings and establish a minimum number of cooler doors. We tailor space and assortment to local demographics with emerging formats including H2.5, our primary store format with optimized layout and expanded frozen and refrigerated doors; larger rural stores where assortments may include Dollar Tree product; and XSB (Extra Small Box), which adds elements of H2.5 optimized to our smaller stores, particularly in urban markets. As of February 3, 2024, we have more than 1,890 stores across these three formats.

Across all of Family Dollar’s formats we are expanding our SKUs, continuing to add cooler doors, increasing our standard shelf profile, and implementing planogram and category resets. We continue to introduce new private brands at Family Dollar, convert control brands to private brands and align our “Family” brand message across key categories.

Additionally, during the fourth quarter of fiscal 2023, we announced that we had initiated a comprehensive store portfolio optimization review which involved identifying stores for closure, relocation or re-bannering based on an evaluation of current market conditions and individual store performance, among other factors. As a result of this portfolio optimization review, we plan to close approximately 970 underperforming Family Dollar stores, including approximately 600 stores to be closed in the first half of fiscal 2024, and approximately 370 stores to be closed at the end of each store's current lease term. Additionally, we identified approximately 30 underperforming Dollar Tree stores for closure and plan to close each store at the end of the store's current lease term.

In connection with the store portfolio optimization review, we incurred $503.9 million of non-cash impairment charges which are included in “Selling, general and administrative expenses” within the accompanying Consolidated Statements of Operations, comprised of $152.2 million of property, plant and equipment impairment charges and $351.7 million of operating lease right-of-use asset impairment charges. In addition, we recorded $80.6 million of inventory markdowns and $5.6 million of capitalized distribution cost impairment within “Cost of sales” in the accompanying Consolidated Statements of Operations for the stores expected to close in the first half of fiscal 2024. We also incurred $4.3 million in third party consulting fees related to the portfolio optimization review which are included in “Selling, general and administrative expenses” within the accompanying Consolidated Statements of Operations. See Note 16 to our consolidated financial statements for more information.

Our Workforce & Our Workplace. Across both of our banners, we are investing in our talent, including initiatives to provide competitive pay and benefits, enhanced training, and attractive career opportunities to deliver an enhanced associate experience, reduce turnover, and improve our store standards and efficiencies and ultimately the customer experience. Additional initiatives include projects to optimize and modernize our stores, with a focus on improving store appearance, delivering consistent experiences across all stores, and driving positive sales trends.

Supply Chain Optimization. Our supply chain initiatives include enhancing our distribution and transportation network, including investments in our trucking fleet, transportation management systems, a new distribution center with enhanced automation to improve efficiency, and a new RotaCart delivery process to streamline the truck unloading and store delivery process. Significant investments are also underway to improve climate control conditions in our distribution centers.

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Technology Investment. We continue our multi-year plan for significant investment in our technology across our business, including our store network and point-of-sale, merchandising and supply chain. We believe these improvements can promote operational efficiencies and deliver an elevated customer experience.

Results of Operations

Our results of operations and year-over-year 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, operating income (loss) margin and net income (loss) margin are calculated by dividing the applicable amount by total revenue. Basis points, as referred to below, are a percentage of net sales for expense categories within gross profit, and are a percentage of total revenue for all other expense categories. A 100 basis point increase equals 1.00% and a 1 basis point increase equals 0.01%.

The following table contains results of operations data for the years ended February 3, 2024, January 28, 2023 and January 29, 2022:

Net Sales

The increase in net sales from fiscal 2022 to fiscal 2023 was a result of the comparable store net sales increases in the Dollar Tree and Family Dollar segments, and net sales of $1,184.5 million at non-comparable stores. The 53rd week in fiscal 2023 accounted for $559.3 million of the total net sales increase.

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Enterprise comparable store net sales increased 4.6% in fiscal 2023, as a result of a 5.4% increase in customer traffic, partially offset by a 0.8% decrease in average ticket. This increase is based on a 53-week comparison for both periods. Comparable store net sales increased 5.8% in the Dollar Tree segment and increased 3.2% in the Family Dollar segment.

Gross Profit

The decrease in gross profit margin from fiscal 2022 to fiscal 2023 was a result of the net of the following:

•Shrink costs increased approximately 55 basis points primarily due to unfavorable physical inventory results.

•Distribution costs increased approximately 40 basis points primarily due to a higher amount of costs capitalized during the prior year resulting from increasing inventory levels in both the Dollar Tree and Family Dollar segments during that period, and higher distribution center payroll costs recognized during the current year in the Dollar Tree segment.

•Merchandise cost, which includes freight, increased approximately 30 basis points primarily due to re-investment in value-product assortments during the current year after transitioning to the $1.25 price point during the prior year at Dollar Tree, and cost increases due to inflation; as well as higher sales of lower margin consumable merchandise, partially offset by lower freight costs.

•Markdowns increased approximately 15 basis points primarily due to $80.6 million of inventory reserves for the approximately 600 Family Dollar stores that are projected to close in the first half of fiscal 2024 as a result of the store portfolio optimization review. This increase was partially offset by increased markdown allowances on the Family Dollar segment and higher clearance markdowns during the prior year on the Dollar Tree segment in connection with the transition to a higher value assortment at the $1.25 price point.

•Occupancy costs decreased approximately 30 basis points primarily due to leverage from the comparable store net sales increase and leverage from the 53rd week of sales in the current year.

We expect continued pressure on gross profit margin due to unfavorable shrink results in the near term.

Selling, General and Administrative Expenses

The increase in the selling, general and administrative expense rate from fiscal 2022 to fiscal 2023 was primarily due to a $1,069.0 million non-cash goodwill impairment charge, a $950.0 million non-cash trade name impairment charge, and a $503.9 million non-cash store asset impairment charge recorded in fiscal 2023 as further discussed in Note 15 and Note 16 to our consolidated financial statements. All of the impairment charges were in the Family Dollar reporting unit with the exception of $10.8 million of store asset impairment charges in the Dollar Tree reporting unit. In addition, there were $56.7 million in DC 202-related litigation charges in the Family Dollar reporting unit during fiscal 2023. Excluding the goodwill, trade name, and store asset impairment charges and the DC 202-related litigation charges noted above, the selling, general and administrative expense rate increased 125 basis points in fiscal 2023 as a result of the following:

•Payroll expenses increased approximately 70 basis points primarily due to wage investments and minimum wage increases in store payroll, partially offset by leverage from the comparable store net sales increase.

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•Other selling, general and administrative expenses increased approximately 40 basis points primarily due to unfavorable development of general liability claims, increases in professional fees, and higher information technology system costs, partially offset by Family Dollars’ prior year long-lived asset impairments. During fiscal 2023, general liability claims began to develop and pay out at amounts significantly higher than anticipated. As a result, we increased our actuarially determined general liability accruals which led to an approximately 25 basis point increase in our general liability expenses. See the “Critical Accounting Estimates and Assumptions” later in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on the calculation of our Self-Insurance Liabilities.

•Store facility costs increased approximately 10 basis points primarily due to higher 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.

•Depreciation and amortization expense increased approximately 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 and leverage from the 53rd week of sales in the current year.

Operating Income (Loss)

Operating income (loss) margin decreased to (2.9)% in fiscal 2023 compared to 7.9% in fiscal 2022, resulting from the decrease in gross profit margin and the increase in the selling, general and administrative expense rate, as described above. Excluding the goodwill, trade name, and store asset impairment charges and the DC 202-related litigation charges, operating income margin decreased 210 basis points in fiscal 2023 compared to fiscal 2022.

Interest Expense, Net

Interest expense, net decreased $18.5 million in fiscal 2023 compared to the prior year, resulting from higher interest income on investments.

Provision for Income taxes

The effective tax rate for fiscal 2023 was (1.0)% compared to 23.5% for fiscal 2022, resulting primarily from the current year goodwill impairment charge which is not tax deductible.

Segment Information

We operate more than 16,700 retail discount stores in 48 states and five Canadian provinces. Our operations are conducted in two reporting business segments: Dollar Tree and Family Dollar. We define our segments as those operations whose results our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.

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We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income (loss). The CODM reviews these metrics for each of our reporting segments. We may revise the measurement of each segment’s operating income (loss), as determined by the information regularly reviewed by the CODM. If the measurement of a segment changes, prior period amounts and balances are reclassified to be comparable to the current period’s presentation. Corporate, support and other consists primarily of store support center costs and the results of operations for our Summit Pointe property in Chesapeake, Virginia that are considered shared services and therefore these selling, general and administrative costs are excluded from our two reporting business segments. The Family Dollar segment operating income (loss) includes advertising revenue, which is a component of “Other revenue” in the accompanying Consolidated Statements of Operations.

Dollar Tree

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

Net sales for the Dollar Tree segment increased $1,364.6 million, or 8.9%, in fiscal 2023 compared to fiscal 2022 due to an increase in comparable store net sales of 5.8%, and net sales of $467.1 million from non-comparable stores. The 53rd week in fiscal 2023 accounted for $307.0 million of the total net sales increase. Customer traffic increased 7.4% and average ticket decreased 1.5% in fiscal 2023 based on a 53-week comparison for both periods.

Gross profit margin for the Dollar Tree segment decreased to 35.8% in fiscal 2023 from 37.5% in fiscal 2022. The decrease is due to the net of the following:

•Merchandise cost, which includes freight, increased approximately 85 basis points primarily due to re-investment in value-product assortments during the current year after transitioning to the $1.25 price point during the prior year and cost increases due to inflation; as well as higher sales of lower margin consumable merchandise, partially offset by lower freight costs.

•Distribution costs increased approximately 65 basis points primarily due to a higher amount of costs capitalized during the prior year resulting from increasing inventory levels during that period, and higher distribution center payroll costs recognized during the current year.

•Shrink costs increased approximately 55 basis points primarily due to unfavorable physical inventory results.

•Markdowns decreased approximately 5 basis points primarily due to higher clearance markdowns during the prior year in connection with the transition to a higher value assortment at the $1.25 price point.

•Occupancy costs decreased approximately 30 basis points primarily due to leverage from the comparable store net sales increase and leverage from the 53rd week of sales in the current year.

Operating income margin for the Dollar Tree segment decreased to 13.6% in fiscal 2023 from 16.5% in fiscal 2022 as a result of 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 22.2% in fiscal 2023 compared to 21.0% in fiscal 2022 as a result of the following:

•Payroll expenses increased approximately 65 basis points primarily due to wage investments and minimum wage increases in store payroll, partially offset by leverage from the comparable store net sales increase.

•Other selling, general and administrative expenses increased approximately 30 basis points primarily due to unfavorable development of general liability claims. During fiscal 2023, general liability claims began to develop and pay out at amounts significantly higher than anticipated. As a result, we increased our actuarially determined general liability accruals which led to an approximately 25 basis point increase in our general liability expenses. See the “Critical Accounting Estimates and Assumptions” later in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on the calculation of our Self-Insurance Liabilities.

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•Store facility costs increased approximately 25 basis points primarily due to higher 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.

•Depreciation and amortization expense was unchanged as a percentage of total revenue, as capital expenditures related to store renovations and improvements were offset by leverage from the comparable store net sales increase and leverage from the 53rd week of sales in the current year.

Family Dollar

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

Net sales for the Family Dollar segment increased $898.8 million, or 7.0%, in fiscal 2023 compared to fiscal 2022 due to a comparable store net sales increase of 3.2%, and net sales of $717.5 million at non-comparable stores. The 53rd week in fiscal 2023 accounted for $252.3 million of the total net sales increase. Customer traffic increased 2.5% and average ticket increased 0.7% in fiscal 2023 based on a 53-week comparison for both periods.

Gross profit margin for the Family Dollar segment decreased to 23.9% in fiscal 2023 compared to 24.4% in fiscal 2022. The decrease is due to the net of the following:

•Shrink costs increased approximately 60 basis points primarily due to unfavorable physical inventory results.

•Markdowns increased approximately 35 basis points primarily resulting from $80.6 million of inventory reserves for the approximately 600 Family Dollar stores that are projected to close in the first half of fiscal 2024 as a result of the store portfolio optimization review. This increase was partially offset by increased markdown allowances.

•Distribution costs increased approximately 10 basis points primarily due to a higher amount of costs capitalized in the prior year resulting from increasing inventory levels during that period.

•Occupancy costs decreased approximately 25 basis points primarily due to leverage from the comparable store net sales increase and leverage from the 53rd week of sales in the current year.

•Merchandise cost, which includes freight, decreased approximately 30 basis points primarily due to lower freight costs, partially offset by cost increases and higher sales of lower margin consumable merchandise.

Operating income (loss) margin for the Family Dollar segment decreased to (19.3)% in fiscal 2023 from 1.0% in fiscal 2022 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 43.2% in fiscal 2023 from 23.4% in fiscal 2022 primarily due to a $1,069.0 million non-cash goodwill impairment charge, a $950.0 million non-cash trade name impairment charge, and a $493.1 million non-cash store asset impairment charge recorded in fiscal 2023 as further discussed in Note 15 and Note 16 to our consolidated financial statements. In addition, there were $56.7 million in DC 202-related litigation charges in the Family Dollar reporting unit during fiscal 2023. Excluding the goodwill, trade name, and store asset impairment charges and the DC 202-related litigation charges noted above, the selling, general and administrative expense rate increased 120 basis points in fiscal 2023 as a result of the following:

•Payroll expenses increased approximately 75 basis points primarily due to wage investments and minimum wage increases in store payroll.

•Store facility costs increased approximately 30 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 higher costs in the prior year associated with a product recall related to issues at DC 202.

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•Other selling, general and administrative expenses increased approximately 10 basis points primarily due to unfavorable development of general liability claims, partially offset by prior year long-lived asset impairments. During fiscal 2023, general liability claims began to develop and pay out at amounts significantly higher than anticipated. As a result, we increased our actuarially determined general liability accruals which led to an approximately 20 basis point increase in our general liability expenses. See the “Critical Accounting Estimates and Assumptions” later in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on the calculation of our Self-Insurance Liabilities.

•Depreciation and amortization expense increased approximately 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 and leverage from the 53rd week of sales in the current year.

Liquidity and Capital Resources

We invest capital to build and open new stores, expand and renovate existing stores, enhance and grow our distribution network, operate our existing stores, maintain and upgrade our technology, and support our other strategic initiatives. Our working capital requirements for existing stores are seasonal in nature and typically reach their peak in the months of September and October. We have satisfied our seasonal working capital requirements for existing and new stores and have funded our distribution network programs and other capital projects from internally generated funds and borrowings under our credit facilities and commercial paper program.

The following table compares cash flow-related information for the years ended February 3, 2024, January 28, 2023 and January 29, 2022:

Operating Activities

Net cash provided by operating activities increased $1,069.7 million in fiscal 2023 compared to fiscal 2022 primarily due to improving inventory levels, partially offset by lower current year earnings, net of non-cash items. Inventory decreased $335.6 million during fiscal 2023 compared to an increase of $1,085.4 million during fiscal 2022.

Investing Activities

Net cash used in investing activities increased $853.8 million in fiscal 2023 compared with fiscal 2022 due to higher capital expenditures in the current year.

Financing Activities

Net cash used in financing activities decreased $156.8 million in fiscal 2023 compared to fiscal 2022 primarily due to lower payments for stock repurchases in the current year.

For detail on our long-term and short-term borrowings and other commitments, refer to the discussion of “Funding Requirements” below, as well as Note 5 and Note 6 to our consolidated financial statements.

Share Repurchases

We repurchased 3,905,599, 4,613,696 and 9,156,898 shares of common stock on the open market in fiscal 2023, fiscal 2022 and fiscal 2021, respectively, for $504.3 million, $647.5 million and $950.0 million, respectively. At February 3, 2024, we had $1.35 billion remaining under our existing $2.5 billion Board repurchase authorization.

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Funding Requirements

We expect our cash needs for opening new stores and expanding existing stores in fiscal 2024 to total approximately $650.0 million to $675.0 million, which includes capital expenditures, initial inventory and pre-opening costs. Our total estimated capital expenditures for fiscal 2024 are approximately $2.1 billion to $2.3 billion, including planned expenditures for our new and expanded stores, store renovations, supply chain and information technology investments, and other property improvements. We believe that we can adequately fund our working capital requirements and planned capital expenditures for the foreseeable future from net cash provided by operations, our commercial paper program and borrowings under our credit facilities.

Our material contractual obligations consist of long-term and short-term borrowings and related interest payments and operating lease obligations. Additionally, we have commitments related to ocean shipping contracts, software license and support agreements, telecommunication services and store technology assets and maintenance for our stores. Other commitments include letters of credit for imported merchandise, standby letters of credit that serve as collateral for our large-deductible insurance programs and surety bonds that serve as collateral for utility payments at our stores and self-insured insurance programs. For additional information regarding these obligations, including amounts outstanding at February 3, 2024, refer to Note 5, Note 6 and Note 7 to our consolidated financial statements.

Critical Accounting Estimates and Assumptions

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Actual results could be significantly different from these estimates. Following is a discussion of the estimates that we consider critical.

Inventory Valuation

As discussed in Note 2 to our consolidated financial statements under the caption “Merchandise Inventories,” inventories at the distribution centers are stated at the lower of cost or net realizable value with cost determined on a weighted-average basis. Cost is assigned to store inventories using the retail inventory method on a weighted-average basis. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that is widely used in the retail industry and results in valuing inventories at lower of cost or market when markdowns are taken as a reduction of the retail value of inventories on a timely basis.

Inventory valuation methods require certain management estimates and judgments, including estimates of future merchandise markdowns and shrink, which significantly affect the ending inventory valuation at cost as well as the resulting gross margins. The averaging required in applying the retail inventory method and the estimates of shrink and markdowns could, under certain circumstances, result in costs not being recorded in the proper period.

We estimate our markdown reserve based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or seasonal carryover merchandise on hand, historical markdown statistics and future merchandising plans. The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends. Historically, we have not experienced significant differences in our estimated reserve for markdowns compared with actual results.

Our accrual for shrink is based on the shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions and business trends. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. Our physical inventory counts are generally taken between January and October of each year; therefore, the shrink accrual recorded at February 3, 2024 is based on estimated shrink for most of fiscal 2023, including the fourth quarter. We periodically adjust our shrink estimates to reflect our best estimates based on the factors described and, historically, these adjustments have not been material.

Our management believes that our application of the retail inventory method results in an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market each year on a consistent basis.

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Self-Insurance Liabilities

The liabilities related to our self-insurance programs for workers’ compensation, general liability and auto are estimates that require judgment and the use of assumptions. Semiannually, we obtain third-party actuarial valuations to aid in valuing these liabilities and in determining the amount to accrue during the year. These actuarial valuations are estimates based on our claims experience for current and prior periods, exposure and severity factors, historical loss development factors, and other actuarial assumptions and the related accruals are adjusted as management’s estimates change.

Management’s estimate for self-insurance liabilities could vary from the ultimate loss sustained given the difficulty in predicting future events; however, historically, the net total of these differences has not had a material effect on our financial condition or results of operations. Our self-insurance liabilities associated with workers’ compensation, general liability and auto are recorded within “Other current liabilities” and “Other liabilities” in the Consolidated Balance Sheets and amounted to $363.5 million and $318.2 million at February 3, 2024 and January 28, 2023, respectively. The increase was primarily due to general liability claims beginning to develop and pay out at amounts significantly higher than anticipated, resulting in higher actuarially determined accruals.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are initially recorded at their fair values. These assets are not amortized but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. Such events or circumstances could include, but are not limited to, significant negative industry or economic trends, unanticipated changes in the competitive environment and a significant sustained decline in the market price of our stock.

For purposes of our goodwill impairment evaluation, the reporting units are Family Dollar, Dollar Tree and Dollar Tree Canada. Goodwill has been assigned to the reporting units based on prior business combinations related to the brands. We have the option to initially perform a qualitative assessment to determine whether it is more likely than not that the fair value is less than the carrying amount. Alternatively, we may bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. In connection with the fiscal 2023 annual impairment evaluation, management’s qualitative assessment indicated that it was more likely than not that the fair value of the Family Dollar reporting unit was less than its carrying value. There were no indicators that the fair value of the Dollar Tree or Dollar Tree Canada reporting units were less than their carrying value. Therefore, management performed a quantitative assessment of both the Family Dollar goodwill and trade name.

We estimate the fair value using a combination of a market multiple method and a discounted cash flow method. Under the market multiple approach, we estimate a fair value based on comparable companies’ market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted for a control premium. Under the discounted cash flow approach, we project future cash flows which are discounted using a weighted-average cost of capital analysis that reflects current market conditions, adjusted for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows), in arriving at the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess.

The Family Dollar goodwill and trade name comprise a substantial portion of our goodwill and indefinite-lived intangible assets and management’s judgment utilized in the Family Dollar goodwill and trade name impairment evaluations is critical. The computations require management to make estimates and assumptions and actual results may differ significantly, particularly if there are significant adverse changes in the operating environment. Critical assumptions that are used as part of a quantitative Family Dollar goodwill evaluation include:

•The potential future revenue, EBITDA and cash flows of the reporting unit. The projections use management’s assumptions about economic and market conditions over the projected period as well as our estimates of future performance and reporting unit revenue, gross margin, expenses and other factors. The resulting revenue, EBITDA and cash flow estimates are based on our most recent business operating plans, and various growth rates are assumed for years beyond the current business plan period. These operating plans include anticipated investments in associate wages, improved store execution, enhanced safety and working conditions, increased supply chain efficiencies, competitive pricing, and enhancements to our technology infrastructure. We believe that the assumptions, estimates and rates used in our fiscal 2023 impairment evaluations are reasonable; however, variations in the assumptions, estimates and rates could result in significantly different estimates of fair value.

•Selection of an appropriate discount rate. Calculating the present value of future cash flows requires the selection of an appropriate discount rate, which is based on a weighted-average cost of capital analysis. The discount rate is affected by changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants. Given current economic conditions, it is possible that the discount rate will fluctuate in the near term. We engaged third party experts to assist in the determination of the weighted-average cost of capital used to discount the cash flows for our Family Dollar reporting unit. The weighted-average cost of capital used to discount the cash flows for our evaluation was 10.5% for our fiscal 2023 analysis.

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Our evaluation of goodwill resulted in an impairment charge of $1,069.0 million in fiscal 2023 related to the Family Dollar reporting unit. Our evaluation of goodwill did not result in impairment charges being recorded in fiscal 2022 or fiscal 2021. The fiscal 2023 goodwill impairment was driven primarily by the Family Dollar reporting unit’s below plan performance, management’s store portfolio optimization review and the continued refinement of our transformational strategies which impact long-term growth rates between the segments.

Indefinite-lived intangible assets, such as the Family Dollar trade name, are not subject to amortization but are reviewed at least annually for impairment. The indefinite-lived intangible asset impairment evaluations are performed by comparing the fair value of the indefinite-lived intangible assets to their carrying values. We estimate the fair value of our trade name intangible asset based on an income approach using the relief-from-royalty method. This approach is dependent upon a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are inherently uncertain. The discount rate includes a premium compared to the discount rate used for the Family Dollar goodwill impairment evaluation due to the inherently higher risk profile of intangible assets compared to the overall reporting unit.

Our evaluation of the Family Dollar trade name resulted in an impairment charge of $950.0 million in fiscal 2023. Our evaluation of the Family Dollar trade name did not result in impairment charges being recorded during fiscal 2022 or fiscal 2021. The fiscal 2023 trade name impairment was driven primarily by a decrease in the royalty rate assumption based on lower future growth rates and operating income margin assumptions for the Family Dollar reporting unit.

For additional information related to goodwill and indefinite-lived intangible assets, including the related impairment evaluations, refer to Note 2 to our consolidated financial statements under the caption “Goodwill and Nonamortizing Intangible Assets” and Note 15. For additional information related to uncertainties associated with the key assumptions and any potential events and/or circumstances that could have a negative effect on the key assumptions, please refer to “Item 1A. Risk Factors” and elsewhere within this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If our assumptions and related estimates change in the future, we may be required to record impairment charges against earnings in future periods. Any impairment charges that we may take in the future could be material to our results of operations and financial condition.

Summary of Significant Accounting Policies

Refer to Note 2 to our consolidated financial statements for a summary of our significant accounting policies and our assessment of recently issued accounting standards.