0.9 million and 2.6 million in the 2018 and 2017 13-week periods, and 0.9 million and 2.6 million in the 2018 and 2017 26-week periods, respectively.
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 2013 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 2014 through 2016 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 2014 and later tax years remain open for examination by the various state taxing authorities.
As of August 3, 2018, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $1.1 million, $0.8 million and $0.9 million, respectively, for a total of $2.8 million. This total amount is reflected in noncurrent Other liabilities in the condensed consolidated balance sheet.
The Company’s reserve for uncertain tax positions will not be reduced in the coming twelve months as a result of expiring statutes of limitations. As of August 3, 2018, approximately $1.1 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.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The Company has not fully completed its accounting for the income tax effects of the TCJA. As discussed in SEC Staff Accounting Bulletin No. 118, the accounting for the TCJA should be completed within one year from enactment. During the 26-week period ended August 3, 2018, the Company made no adjustments to the provisional amounts recorded at February 2, 2018. Any adjustments to the provisional amounts recorded at February 2, 2018 will be reflected upon the completion of the Company’s accounting for the TCJA.
The effective income tax rates for the 13-week and 26-week periods ended August 3, 2018 were 21.5% and 21.6%, respectively, compared to rates of 37.2% and 37.2%, respectively, for the 13-week and 26-week periods ended August 4, 2017. The
tax rates for the 2018 13-week and 26-week periods were lower than the comparable 2017 13-week and 26-week periods primarily due to the federal tax law changes contained in the TCJA, including the change in the federal income tax rate to 21% in the 2018 periods compared to 35% in the 2017 periods.
4.
Current and long-term obligations
Current and long-term obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
August 3,
|
|
February 2,
|
|
(In thousands)
|
|
2018
|
|
2018
|
|
Senior unsecured credit facilities
|
|
|
|
|
|
|
|
Term Facility
|
|
$
|
—
|
|
$
|
175,000
|
|
Revolving Facility
|
|
|
—
|
|
|
—
|
|
1.875% Senior Notes due April 15, 2018 (net of discount of $16)
|
|
|
—
|
|
|
399,984
|
|
3.250% Senior Notes due April 15, 2023 (net of discount of $1,204 and $1,322)
|
|
|
898,796
|
|
|
898,678
|
|
4.150% Senior Notes due November 1, 2025 (net of discount of $598 and $632)
|
|
|
499,402
|
|
|
499,368
|
|
3.875% Senior Notes due April 15, 2027 (net of discount of $395 and $413)
|
|
|
599,605
|
|
|
599,587
|
|
4.125% Senior Notes due May 1, 2028 (net of discount of $491)
|
|
|
499,509
|
|
|
—
|
|
Unsecured commercial paper notes
|
|
|
280,800
|
|
|
430,200
|
|
Capital lease obligations
|
|
|
11,659
|
|
|
12,321
|
|
Tax increment financing due February 1, 2035
|
|
|
7,335
|
|
|
7,335
|
|
Debt issuance costs, net
|
|
|
(18,386)
|
|
|
(16,515)
|
|
|
|
|
2,778,720
|
|
|
3,005,958
|
|
Less: current portion
|
|
|
(1,909)
|
|
|
(401,345)
|
|
Long-term portion
|
|
$
|
2,776,811
|
|
$
|
2,604,613
|
|
At August 3, 2018, the Company maintained a $1.25 billion senior unsecured revolving credit facility (the “Revolving Facility”) that provides for the issuance of letters of credit up to $175.0 million and is scheduled to mature on February 22, 2022.
Borrowings under the Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at the Company’s option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable interest rate margin for borrowings as of August 3, 2018 was 1.10% for LIBOR borrowings and 0.10% for base-rate borrowings. The Company is also required to pay a facility fee, payable on any used and unused commitment amounts of the Revolving Facility, and customary fees on letters of credit issued under the Revolving Facility. As of August 3, 2018, the commitment fee rate was 0.15%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the Revolving Facility are subject to adjustment from time to time based on the Company’s long-term senior unsecured debt ratings.
The Revolving Facility contains a number of customary affirmative and negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional liens; sell all or substantially all of the Company’s assets; consummate certain fundamental changes or change in the Company’s lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of August 3, 2018, the Company was in compliance with all such covenants. The Revolving Facility also contains customary events of default.
On June 11, 2018, the Company voluntarily prepaid the entire $175.0 million outstanding balance of its senior unsecured term loan facility and recognized an associated loss of $1.0 million which is reflected in Other (gains) losses in the consolidated statement of income for the 13-week and 26-week periods ended August 3, 2018. As of August 3, 2018, the Company had no outstanding borrowings, outstanding letters of credit of $9.1 million, and borrowing availability of $1.24 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 $774.1 million. In addition, as of August 3, 2018, the Company had outstanding letters of credit of $38.9 million which were issued pursuant to separate agreements.
As of August 3, 2018, 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 August 3, 2018, the Company’s condensed consolidated balance sheet reflected
outstanding unsecured CP Notes of $280.8 million classified as long-term obligations due to its intent and ability to refinance these obligations as long-term debt. An additional $186.0 million of outstanding CP Notes were held by a wholly-owned subsidiary of the Company and are therefore not reflected on the condensed consolidated balance sheet. As of August 3, 2018, the outstanding CP Notes had a weighted average borrowing rate of 2.3%.
On April 10, 2018, the Company issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”), net of discount of $0.5 million, which are scheduled to mature on May 1, 2028. Interest on the 2028 Senior Notes is payable in cash on May 1 and November 1 of each year, with the first payment commencing on November 1, 2018. The Company incurred $4.4 million of debt issuance costs associated with the issuance of the 2028 Senior Notes.
Effective April 15, 2018, the Company redeemed $400.0 million aggregate principal amount of outstanding 1.875% senior notes due 2018 (the “2018 Senior Notes”). There was no gain or loss associated with the redemption. The Company funded the redemption price for the 2018 Senior Notes with proceeds from the issuance of the 2028 Senior Notes.
On April 11, 2017, the Company issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”), net of discount of $0.4 million, which are scheduled to mature on April 15, 2027. Interest on the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year. The Company incurred $5.2 million of debt issuance costs associated with the issuance of the 2027 Senior Notes.
On April 27, 2017, the Company redeemed $500.0 million aggregate principal amount of outstanding 4.125% senior notes due 2017 (the “2017 Senior Notes”), resulting in a pretax loss of $3.4 million which is reflected in Other (income) expense in the condensed consolidated statement of income for the 13-week and 26-week periods ended August 4, 2017. The Company funded the redemption price for the 2017 Senior Notes with proceeds from the issuance of the 2027 Senior Notes.
5.
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 August 3, 2018.
The following table presents the Company’s assets and liabilities disclosed at fair value as of August 3, 2018, 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
|
|
August 3,
|
|
(In thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations (a)
|
|
$
|
2,467,011
|
|
$
|
299,793
|
|
$
|
—
|
|
$
|
2,766,804
|
|
Deferred compensation (b)
|
|
|
25,875
|
|
|
—
|
|
|
—
|
|
|
25,875
|
|
|
(a)
|
|
Included in the condensed consolidated balance sheet at book value as Current portion of long-term obligations of $1,909 and Long-term obligations of $2,776,811.
|
|
(b)
|
|
Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $2,620 and noncurrent Other liabilities of $23,255.
|
matters; however, if the Company is not successful in its defense efforts, the resolution of these actions could have a material adverse effect on the Company’s consolidated financial statements as a whole.
Other Employment Litigation
The Company is defending the following employment-related matters (collectively the “Employment Litigation”):
|
·
|
|
California Suitable Seating Litigation
: Plaintiff alleges that the Company failed to provide her and other current and former California store employees with “suitable seats” in violation of California law. Plaintiff seeks to recover penalties under the PAGA, injunctive relief, and attorneys’ fees and costs.
|
|
·
|
|
EEOC Litigation
: The United States Equal Employment Opportunity Commission (“EEOC”) alleges that the Company’s use of post offer, pre-employment physical assessments, as applied to candidates for the general warehouse position in the Bessemer, Alabama distribution center, violates the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”). The EEOC seeks injunctive and monetary relief for a class of applicants and employees under the ADA and GINA.
|
The Company is vigorously defending the Employment Litigation and believes that its employment policies and practices comply with federal and state law and that these matters are not appropriate for class or similar treatment. At this time, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, or the size of any putative class or classes. Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, the Company is unable to estimate any potential loss or range of loss in these matters; however if the Company is not successful in its defense efforts, the resolution of these matters could have a material adverse effect on the Company’s consolidated financial statements as a whole.
Consumer/Product Litigation
In December 2015 the Company was first notified of several lawsuits in which plaintiffs allege violation of state law, including state consumer protection laws, relating to the labeling, marketing and sale of certain Dollar General private-label motor oil. Each of these lawsuits, as well as additional, similar lawsuits filed after December 2015, was filed in, or removed to, various federal district courts of the United States (collectively “the Motor Oil Lawsuits”).
On June 2, 2016, the United States Judicial Panel on Multidistrict Litigation (“JPML”) granted the Company’s motion to centralize the Motor Oil Lawsuits in a matter styled
In re Dollar General Corp. Motor Oil Litigation
, Case MDL No. 2709, before the United States District Court for the Western District of Missouri (“Motor Oil MDL”). Subsequently, plaintiffs in the Motor Oil MDL filed a consolidated amended complaint, in which they seek to certify two nationwide classes and multiple statewide sub-classes and for each putative class member some or all of the following relief: compensatory damages, injunctive relief, statutory damages, punitive damages and attorneys’ fees. The Company’s motion to dismiss the allegations raised in the consolidated amended complaint was granted in part and denied in part. To the extent additional consumer lawsuits alleging violation of laws relating to the labeling, marketing and sale of Dollar General private-label motor oil have been or will be filed, the Company expects that such lawsuits will be transferred to the Motor Oil MDL.
In May 2017, the Company received a Notice of Proposed Action from the Office of the New Mexico Attorney General (the “New Mexico AG”) which alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated New Mexico law (the “New Mexico Motor Oil Matter”). The State is represented in connection with this matter by counsel for plaintiffs in the Motor Oil MDL.
On May 25, 2017, in response to the Notice of Proposed Action, the Company filed an action in New Mexico federal court seeking a declaratory judgment that the New Mexico AG is prohibited by, among other things, the United States Constitution, from pursuing the New Mexico Motor Oil Matter and an order enjoining the New Mexico AG from pursuing such an action. (
Dollar General Corporation v. Hector H. Balderas
, D.N.M., Case No. 1:17-cv-00588). Thereafter, on June 20, 2017, the New Mexico AG filed an action in the First Judicial District Court, County of Santa Fe, New Mexico pertaining to the New Mexico Motor Oil Matter. (
Hector H. Balderas v. Dolgencorp, LLC
, Case No. D-101-cv-2017-01562). The Company removed this matter to New Mexico federal court on July 26, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the New Mexico AG has moved to
remand it to state court. (
Hector H. Balderas v. Dolgencorp, LLC
, D.N.M., Case No. 1:17-cv-772). The Company’s and the New Mexico AG’s above-referenced motions are pending.
On September 1, 2017, the Mississippi Attorney General (the “Mississippi AG”), who also is represented by the counsel for plaintiffs in the Motor Oil MDL, filed an action in the Chancery Court of the First Judicial District of Hinds County, Mississippi in which the Mississippi AG alleges that the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil violated Mississippi law. (
Jim Hood v. Dollar General Corporation
, Case No. G2017-1229 T/1) (the “Mississippi Motor Oil Matter”). The Company removed this matter to Mississippi federal court on October 5, 2017, and filed a motion to dismiss the action. The matter was transferred to the Motor Oil MDL and the Mississippi AG moved to remand it to state court. (
Jim Hood v. Dollar General Corporation
, N.D. Miss., Case No. 3:17-cv-801-LG-LRA). The Company’s and the Mississippi AG’s above-referenced motions are pending.
On January 30, 2018, the Company received a Civil Investigative Demand (“CID”) from the Office of the Louisiana Attorney General requesting information concerning the Company’s labeling, marketing and sale of certain Dollar General private-label motor oil (the “Louisiana Motor Oil Matter”). In response to the CID, the Company filed a petition for a protective order on February 20, 2018 in the 19
th
Judicial District Court for the Parish of East Baton Rouge, Louisiana seeking to set aside the CID. (
In re Dollar General Corp. and Dolgencorp, LLC
, Case No. 666499). The Company’s petition is pending.
A mediation held in the Motor Oil MDL on February 26, 2018, was unsuccessful. On August 20, 2018, plaintiffs moved to certify two nationwide classes relating to their claims of alleged unjust enrichment and breach of implied warranties. In addition, plaintiffs moved to certify 17 statewide classes relating to their claims of alleged unfair trade practices/consumer fraud statutory claims.
The Company is vigorously defending these matters and believes that the labeling, marketing and sale of its private-label motor oil comply with applicable federal and state requirements and are not misleading. The Company further believes that these matters are not appropriate for class or similar treatment. At this time, however, it is not possible to predict whether these matters will be permitted to proceed as a class or in a similar fashion, whether on a statewide or nationwide basis, or the size of any putative class or classes. Likewise, at this time, it is not possible to estimate the value of the claims asserted, and no assurances can be given that the Company will be successful in its defense of these matters on the merits or otherwise. For these reasons, the Company is unable to estimate the potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of the Motor Oil MDL, the New Mexico Motor Oil Matter, the Mississippi Motor Oil Matter or the Louisiana Motor Oil Matter could have a material adverse effect on the Company’s consolidated financial statements as a whole.
7.
Segment reporting
The Company manages its business on the basis of one reportable operating segment. As of August 3, 2018, all of the Company’s operations were located within the United States with the exception of certain subsidiaries in Hong Kong and China and a liaison office in India, 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
|
|
26 Weeks Ended
|
|
|
August 3,
|
|
August 4,
|
|
August 3,
|
|
August 4,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Classes of similar products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
4,988,063
|
|
$
|
4,484,359
|
|
$
|
9,760,451
|
|
$
|
8,799,872
|
Seasonal
|
|
|
792,513
|
|
|
717,993
|
|
|
1,483,544
|
|
|
1,380,631
|
Home products
|
|
|
345,161
|
|
|
327,648
|
|
|
699,794
|
|
|
660,798
|
Apparel
|
|
|
317,572
|
|
|
298,305
|
|
|
613,983
|
|
|
596,629
|
Net sales
|
|
$
|
6,443,309
|
|
$
|
5,828,305
|
|
$
|
12,557,772
|
|
$
|
11,437,930
|
8.
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 March 14, 2018, the Company’s Board of Directors authorized a $1.0 billion increase to the existing common stock repurchase program. As of August 3, 2018, a cumulative total of $6.0 billion had been authorized under the program since its inception and approximately $1.0 billion remained available for repurchase. The repurchase authorization has no expiration date and allows repurchases from
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 February 2, 2018. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.
Executive Overview
We are among the largest discount retailers in the United States by number of stores, with 15,015 stores located in 44 states as of August 3, 2018. Our greatest concentration of stores is 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. 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 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 are 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, fuel prices, changes to certain government assistance programs, such as the Supplemental Nutrition Assistance Program, and potential changes in U.S. trade policy. Additionally, our customers are impacted by increases in those expenses that generally comprise a large portion of their household budget, such as rent and healthcare. Finally, significant unseasonable or unusual weather patterns can impact customer shopping behaviors.
We remain committed to the following long-term operating priorities as we consistently strive to improve our performance while retaining our customer-centric focus: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing our position as a low-cost operator, and 4) investing in our people as a competitive advantage.
We seek to drive profitable sales growth through initiatives aimed at increasing customer traffic and average transaction amount, as well as an ongoing focus on enhancing our gross margins while maintaining both everyday low price and affordability. Several of these initiatives are also designed to capture growth opportunities and are discussed in more detail below. Even as we work to provide everyday low prices and meet our customers’ affordability needs, we also 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.
Historically, our sales of consumables, which tend to have lower gross margins, have been the key drivers of net sales and customer traffic, while sales of non-consumables, which tend to have higher gross margins, have contributed to more profitable sales growth and an increase in average transaction amount. In the first half of 2018, our sales mix continued to shift slightly toward consumables, and, within consumables, slightly toward lower margin departments such as perishables and tobacco. While we expect some sales mix challenges to persist, certain of our initiatives are intended to address these trends, although there can be no assurance we will be successful in their reversal.
We continue to make progress on certain strategic initiatives that we believe will help drive profitable sales growth and capture long-term growth opportunities. Such opportunities include leveraging existing, and developing new, digital tools and technology to provide our customers with additional shopping access points and even greater
convenience. Following an in-depth analysis, we are also testing a refreshed approach to our non-consumables product offerings. This non-consumables initiative is a merchandising strategy that offers a new, differentiated and limited assortment that will change throughout the year. Our goal for this initiative is to improve the shopping experience while delivering exceptional value within key areas of our non-consumable categories.
The imposition of proposed or future tariffs by the U.S. government could have a material impact on our core customers, as well as on our business, although tariff regulations currently in effect are not expected to have a material impact on our direct imports. It is more difficult, however, to assess the potential impact to products that we buy from domestic vendors with global supply chains. We continue to monitor updates, and we are actively working to mitigate such pressures through various merchandising efforts, although there can be no assurance we will be successful in whole or in part.
To support our other operating priorities, we remain focused on capturing growth opportunities. In the first half of 2018, we opened 510 new stores, remodeled 643 stores, and relocated 67 stores. For 2018, we plan to open approximately 900 new stores, remodel approximately 1,000 mature store locations, and relocate approximately 100 stores for an approximate total of 2,000 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, relocations and remodels in 2018. We expect approximately 400 of the planned 1,000 remodels in 2018 to include a higher cooler count for increased selection of perishable items. In addition, our smaller format store (less than 6,000 square feet) allows us to capture growth opportunities in metropolitan areas as well as in rural areas with a low number of households. We continue to incorporate lessons learned from our various store formats and layouts into our existing store base with a goal of driving increased customer traffic, average transaction amount, same-store sales and overall store productivity.
To support our new store growth and drive productivity, we continue to make investments in our distribution center network. Our distribution centers in Longview, Texas and Amsterdam, New York, respectively, are currently under construction. We expect both of these distribution centers to begin shipping in the 2019 calendar year.
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 experience. We plan to continue enhancing this position over time as we aim to continually streamline our business while also 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.
Our employees are a competitive advantage, and we are always searching for ways to continue investing in them. We invest in our employees in an effort to create an environment that attracts and retains talented personnel, as we believe that, particularly at the store level, 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.
Highlights of our 2018 second quarter results of operations compared to the 2017 second quarter and our financial condition at August 3, 2018 are set forth below. Basis points amounts referred to below are equal to 0.01% as a percentage of net sales.
|
·
|
|
Net sales increased 10.6% to $6.44 billion. Sales in same-stores increased 3.7% due to increases in both average transaction amount and customer traffic. Average sales per square foot for all stores over the 52-week period ended August 3, 2018 was $229.
|
|
·
|
|
Gross profit, as a percentage of net sales, was 30.6% in the 2018 period compared to 30.7% in the 2017 period, a decrease of 7 basis points, reflecting changes in the mix of sales among other factors discussed below.
|
|
·
|
|
SG&A expense, as a percentage of net sales, was 22.2% in the 2018 period compared to 22.3% in the 2017 period, a decrease of 8 basis points, reflecting reductions in repairs and maintenance costs and lease termination expenses, among other factors discussed below.
|
|
·
|
|
Interest expense increased by $1.7 million to $25.5 million in the 2018 period primarily due to higher weighted average borrowing rates.
|
|
·
|
|
The effective income tax rate for the 2018 period was 21.5% compared to a rate of 37.2% for the 2017 period primarily due to the Tax Cuts and Jobs Act.
|
|
·
|
|
Net income was $407.2 million, or $1.52 per diluted share, in the 2018 period compared to net income of $294.8 million, or $1.08 per diluted share, in the 2017 period.
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Highlights of the first half of 2018 include:
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·
|
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Cash generated from operating activities was $1.1 billion for the 2018 period, an increase of 39.6% over $786.2 million in the comparable 2017 period.
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·
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Total cash dividends of $154.7 million, or $0.58 per share, were paid during the 2018 period, compared to $142.3 million, or $0.52 per share, in the comparable 2017 period.
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·
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Inventory turnover was 4.7 times on a rolling four-quarter basis. On a per store basis, inventories at August 3, 2018 increased by 3.9% over the balances at August 4, 2017.
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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 August 3, 2018.
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 2018 and 2017, which represent the 52-week fiscal years ending or ended February 1, 2019 and February 2, 2018, respectively. References to the second quarter accounting periods for 2018 and 2017 contained herein refer to the 13-week accounting periods ended August 3, 2018 and August 4, 2017, 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 achieved 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.
The following table contains results of operations data for the second 13-week periods and the 26-week periods of 2018 and 2017, and the dollar and percentage variances among those periods:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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13 Weeks Ended
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2018 vs. 2017
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26 Weeks Ended
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2018 vs. 2017
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(amounts in millions, except
|
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August 3,
|
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August 4,
|
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Amount
|
|
%
|
|
August 3,
|
|
August 4,
|
|
Amount
|
|
%
|
|
per share amounts)
|
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
Change
|
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Net sales by category:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Consumables
|
|
$
|
4,988.1
|
|
$
|
4,484.4
|
|
$
|
503.7
|
|
11.2
|
%
|
$
|
9,760.5
|
|
$
|
8,799.9
|
|
$
|
960.6
|
|
10.9
|
%
|
% of net sales
|
|
|
77.41
|
%
|
|
76.94
|
%
|
|
|
|
|
|
|
77.72
|
%
|
|
76.94
|
%
|
|
|
|
|
|
Seasonal
|
|
|
792.5
|
|
|
718.0
|
|
|
74.5
|
|
10.4
|
|
|
1,483.5
|
|
|
1,380.6
|
|
|
102.9
|
|
7.5
|
|
% of net sales
|
|
|
12.30
|
%
|
|
12.32
|
%
|
|
|
|
|
|
|
11.81
|
%
|
|
12.07
|
%
|
|
|
|
|
|
Home products
|
|
|
345.2
|
|
|
327.6
|
|
|
17.5
|
|
5.3
|
|
|
699.8
|
|
|
660.8
|
|
|
39.0
|
|
5.9
|
|
% of net sales
|
|
|
5.36
|
%
|
|
5.62
|
%
|
|
|
|
|
|
|
5.57
|
%
|
|
5.78
|
%
|
|
|
|
|
|
Apparel
|
|
|
317.6
|
|
|
298.3
|
|
|
19.3
|
|
6.5
|
|
|
614.0
|
|
|
596.6
|
|
|
17.4
|
|
2.9
|
|
% of net sales
|
|
|
4.93
|
%
|
|
5.12
|
%
|
|
|
|
|
|
|
4.89
|
%
|
|
5.22
|
%
|
|
|
|
|
|
Net sales
|
|
$
|
6,443.3
|
|
$
|
5,828.3
|
|
$
|
615.0
|
|
10.6
|
%
|
$
|
12,557.8
|
|
$
|
11,437.9
|
|
$
|
1,119.8
|
|
9.8
|
%
|
Cost of goods sold
|
|
|
4,468.4
|
|
|
4,037.8
|
|
|
430.7
|
|
10.7
|
|
|
8,720.7
|
|
|
7,948.4
|
|
|
772.2
|
|
9.7
|
|
% of net sales
|
|
|
69.35
|
%
|
|
69.28
|
%
|
|
|
|
|
|
|
69.44
|
%
|
|
69.49
|
%
|
|
|
|
|
|
Gross profit
|
|
|
1,974.9
|
|
|
1,790.5
|
|
|
184.4
|
|
10.3
|
|
|
3,837.1
|
|
|
3,489.5
|
|
|
347.6
|
|
10.0
|
|
% of net sales
|
|
|
30.65
|
%
|
|
30.72
|
%
|
|
|
|
|
|
|
30.56
|
%
|
|
30.51
|
%
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,429.4
|
|
|
1,297.4
|
|
|
132.0
|
|
10.2
|
|
|
2,801.5
|
|
|
2,522.6
|
|
|
278.9
|
|
11.1
|
|
% of net sales
|
|
|
22.18
|
%
|
|
22.26
|
%
|
|
|
|
|
|
|
22.31
|
%
|
|
22.05
|
%
|
|
|
|
|
|
Operating profit
|
|
|
545.5
|
|
|
493.1
|
|
|
52.3
|
|
10.6
|
|
|
1,035.7
|
|
|
966.9
|
|
|
68.7
|
|
7.1
|
|
% of net sales
|
|
|
8.47
|
%
|
|
8.46
|
%
|
|
|
|
|
|
|
8.25
|
%
|
|
8.45
|
%
|
|
|
|
|
|
Interest expense
|
|
|
25.5
|
|
|
23.7
|
|
|
1.7
|
|
7.2
|
|
|
50.2
|
|
|
48.8
|
|
|
1.5
|
|
3.0
|
|
% of net sales
|
|
|
0.39
|
%
|
|
0.41
|
%
|
|
|
|
|
|
|
0.40
|
%
|
|
0.43
|
%
|
|
|
|
|
|
Other (income) expense
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
—
|
|
|
1.0
|
|
|
3.5
|
|
|
(2.5)
|
|
—
|
|
% of net sales
|
|
|
0.02
|
%
|
|
0.00
|
%
|
|
|
|
|
|
|
0.01
|
%
|
|
0.03
|
%
|
|
|
|
|
|
Income before income taxes
|
|
|
519.0
|
|
|
469.4
|
|
|
49.6
|
|
10.6
|
|
|
984.4
|
|
|
914.7
|
|
|
69.7
|
|
7.6
|
|
% of net sales
|
|
|
8.05
|
%
|
|
8.05
|
%
|
|
|
|
|
|
|
7.84
|
%
|
|
8.00
|
%
|
|
|
|
|
|
Income tax expense
|
|
|
111.8
|
|
|
174.6
|
|
|
(62.8)
|
|
(36.0)
|
|
|
212.3
|
|
|
340.4
|
|
|
(128.1)
|
|
(37.6)
|
|
% of net sales
|
|
|
1.73
|
%
|
|
3.00
|
%
|
|
|
|
|
|
|
1.69
|
%
|
|
2.98
|
%
|
|
|
|
|
|
Net income
|
|
$
|
407.2
|
|
$
|
294.8
|
|
$
|
112.5
|
|
38.1
|
%
|
$
|
772.1
|
|
$
|
574.3
|
|
$
|
197.8
|
|
34.4
|
%
|
% of net sales
|
|
|
6.32
|
%
|
|
5.06
|
%
|
|
|
|
|
|
|
6.15
|
%
|
|
5.02
|
%
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.52
|
|
$
|
1.08
|
|
$
|
0.44
|
|
40.7
|
%
|
$
|
2.88
|
|
$
|
2.09
|
|
$
|
0.79
|
|
37.8
|
%
|
13 WEEKS ENDED AUGUST 3, 2018 AND AUGUST 4, 2017
Net Sales
. The net sales increase in the 2018 period reflects a same-store sales increase of 3.7% compared to the 2017 period. Same-stores include stores that have been open for at least 13 months and remain open at the end of the reporting period. For the 2018 period, there were 13,568 same-stores which accounted for sales of $6.0 billion. The increase in same-store sales reflects increases in average transaction amount and customer traffic. The increase in average transaction amount was driven by both higher average units sold and higher average retail prices per transaction. Same-store sales increased in the consumables, seasonal and apparel categories and declined in the home product category. The net sales increase was also positively affected by sales from new stores, modestly offset by sales from closed stores.
Gross Profit.
For the 2018 period, gross profit increased by 10.3%, and as a percentage of net sales decreased by 7 basis points to 30.6% compared to the 2017 period. A greater proportion of sales of consumables, which generally have a lower gross profit rate than our other product categories, the sales of lower margin products comprising a higher proportion of consumables sales, higher markdowns, and increased transportation costs contributed to the decline in the gross profit rate. These factors were partially offset by an improved rate of inventory shrinkage and higher initial markups on inventory purchases. We believe our improved rate of inventory shrinkage reflects our continued implementation of in-store defensive merchandising and technology-based tools, including a significant increase in the number of stores utilizing Electronic Article Surveillance (“EAS”). We believe that the results from those stores in which EAS has been implemented suggests that EAS improves our inventory shrinkage which in turn helps to improve our in-stock position. As a result of increasing carrier and fuel rates, our transportation costs have continued to increase and pressured our overall gross margin in the second quarter. To mitigate these ongoing pressures, we continue to pursue
opportunities such as stem mile reduction, shipment load optimization and private fleet expansion to improve our distribution and transportation efficiencies.
Selling, General & Administrative Expenses (“SG&A”).
SG&A was 22.2% as a percentage of net sales in the 2018 period compared to 22.3% in the comparable 2017 period, a decrease of 8 basis points. The 2018 period results reflect lower repairs and maintenance expenses, a reduction in lease termination expenses primarily due to acquired stores in the 2017 period, lower fixed asset impairment costs, and a reduction in retail labor expenses as a percentage of sales, partially offset by an increase in professional fees, higher incentive compensation expenses, and increased costs to support certain loss prevention initiatives.
Interest Expense
. Interest expense increased by $1.7 million to $25.5 million in the 2018 period primarily due to higher weighted average borrowing rates. See Liquidity and Capital Resources.
Income Taxes.
The effective income tax rate for the 2018 period was 21.5% compared to a rate of 37.2% for the 2017 period which represents a net decrease of 15.7 percentage points.
The tax rate for the 2018 period was lower than the comparable 2017 period primarily due to the federal tax law changes contained in the Tax Cuts and Jobs Act, including the change in the federal income tax rate to 21% in the 2018 period compared to 35% in the 2017 period.
26 WEEKS ENDED AUGUST 3, 2018 AND AUGUST 4, 2017
Net Sales.
The net sales increase in the 2018 period reflects a same-store sales increase of 2.9% compared to the 2017 period. For the 2018 period, there were 13,568 same-stores which accounted for sales of $11.6 billion. The increase in same-store sales reflects an increase in average transaction amount, partially offset by a decline in customer traffic. The increase in average transaction amount was driven by both higher average units sold and higher average retail prices per transaction. Same-store sales increased in the consumables and seasonal categories and declined in the apparel and home products categories. The net sales increase was also positively affected by sales from new stores, modestly offset by sales from closed stores.
Gross Profit.
For the 2018 period, gross profit increased by 10.0%, and as a percentage of net sales increased by 5 basis points to 30.6% compared to the 2017 period. Higher initial markups on inventory purchases and an improved rate of inventory shrinkage contributed to the increase in the gross profit rate. These factors were partially offset by a greater proportion of sales of consumables, which generally have a lower gross profit rate than our other product categories, the sales of lower margin products comprising a higher proportion of consumables sales, and increased transportation costs.
Selling, General & Administrative Expenses.
SG&A was 22.3% as a percentage of net sales in the 2018 period compared to 22.1% in the comparable 2017 period, an increase of 26 basis points. The 2018 period results reflect increased occupancy costs, utilities and professional fees, each of which increased at a rate greater than the increase in net sales, partially offset by reductions, as a percentage of sales, in repairs and maintenance expenses and lease termination expenses primarily due to acquired stores in the 2017 period.
Interest Expense
. Interest expense increased by $1.5 million to $50.2 million in the 2018 period primarily due to higher weighted average borrowing rates.
Income Taxes.
The effective income tax rate for the 2018 period was 21.6% compared to a rate of 37.2% for the 2017 period which represents a net decrease of 15.6 percentage points. The tax rate for the 2018 period was lower than the comparable 2017 period primarily due to the federal tax law changes contained in the Tax Cuts and Jobs Act, including the change in the federal income tax rate to 21% in the 2018 period compared to 35% in the 2017 period.
Accounting Standards
In February 2016, the FASB issued new guidance related to lease accounting, which when effective will require a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. As originally issued, this guidance required a modified retrospective approach
for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. In July 2018, the FASB issued additional guidance which allows companies to record the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption as an alternative to the modified retrospective approach. We formed a project team to assess and implement the standard, which has completed its internal evaluation of existing contractual arrangements for embedded leases. The project team is also testing computations in our lease administration system, integrating interfaces between the lease administration system and the enterprise resource planning systems, identifying and implementing new processes and controls to ensure compliance, and is in the process of evaluating and documenting our accounting conclusions related to the new standard. As a result of the efforts of this project team, we have identified store leases as the area in which we would most likely be affected by the new guidance. Our assessment of the impact that adoption of this guidance will have on our consolidated financial statements is ongoing and we are anticipating a material impact because we are party to a significant number of lease contracts for our stores.
In January 2017, the FASB issued amendments to existing guidance related to the subsequent measurement of goodwill. These amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Subsequent to adoption, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments should be applied on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. We currently do not anticipate a material effect on our consolidated results of operations, financial position or cash flows to result from the adoption of this guidance.
Liquidity and Capital Resources
At August 3, 2018, we had a $1.25 billion unsecured credit agreement (the “Revolving Facility”), $2.5 billion aggregate principal amount of senior notes outstanding, and a commercial paper program that may provide borrowing availability of up to $1.0 billion. At August 3, 2018, we had total outstanding debt (including the current portion of long-term obligations) of $2.8 billion, which includes commercial paper and senior notes balances, all of which are described in greater detail below. Our borrowing availability under the Revolving Facility may be effectively limited by borrowings under the commercial paper program as further described below.
We believe our cash flow from operations and existing cash balances, combined with availability under the Revolving Facility, the commercial paper program and access to the debt markets will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending and anticipated dividend payments for a period that includes the next twelve months as well as the next several years. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, the proceeds of which could provide additional liquidity for our operations.
For the remainder of fiscal 2018, we anticipate potential combined borrowings under the Revolving Facility and our commercial paper program to be a maximum of approximately $800 million outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.
Revolving Credit Facility
On February 22, 2017, we entered into the Revolving Facility of which up to $175.0 million is available for the issuance of letters of credit and which is scheduled to mature on February 22, 2022.
Borrowings under the Revolving Facility bear interest at a rate equal to an applicable interest rate margin plus, at our 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 August 3, 2018 was 1.10% for LIBOR borrowings and 0.10% for base-rate borrowings. We must also 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 August 3, 2018, the commitment fee rate
was 0.15%. The applicable interest rate margins for borrowings, the facility fees and the letter of credit fees under the Revolving Facility are subject to adjustment from time to time based on our 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, our (including our subsidiaries’) ability to: incur additional liens; sell all or substantially all of our assets; consummate certain fundamental changes or change in our lines of business; and incur additional subsidiary indebtedness. The Revolving Facility also contains financial covenants that require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of August 3, 2018, we were in compliance with all such covenants. The Revolving Facility also contains customary events of default.
As of August 3, 2018, under the Revolving Facility, we had no outstanding borrowings, outstanding letters of credit of $9.1 million, and borrowing availability of $1.24 billion that, due to our intention to maintain borrowing availability related to the commercial paper program described below, could contribute incremental liquidity of $774.1 million at August 3, 2018. In addition, as of August 3, 2018 we had outstanding letters of credit of $38.9 million which were issued pursuant to separate agreements.
Commercial Paper
As of August 3, 2018, our condensed consolidated balance sheet reflected outstanding unsecured CP Notes of $280.8 million classified as long-term obligations due to our intent and ability to refinance these obligations as long-term debt. An additional $186.0 million of outstanding CP Notes were held by a wholly-owned subsidiary and are therefore not reflected on the condensed consolidated balance sheet. Under this program, we may issue 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 our other unsecured and unsubordinated indebtedness. We intend 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 August 3, 2018, the outstanding CP Notes had a weighted average borrowing rate of 2.3%.
Senior Notes
In April 2013 we issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the “2023 Senior Notes”) at a discount of $2.4 million, which are scheduled to mature on April 15, 2023. In October 2015 we issued $500.0 million aggregate principal amount of 4.150% senior notes due 2025 (the “2025 Senior Notes”) at a discount of $0.8 million, which are scheduled to mature on November 1, 2025. In April 2017 we issued $600.0 million aggregate principal amount of 3.875% senior notes due 2027 (the “2027 Senior Notes”) at a discount of $0.4 million, which are scheduled to mature on April 15, 2027. In April 2018 we issued $500.0 million aggregate principal amount of 4.125% senior notes due 2028 (the “2028 Senior Notes”) at a discount of $0.5 million, which are scheduled to mature on May 1, 2028. Collectively, the 2023 Senior Notes, 2025 Senior Notes, 2027 Senior Notes and 2028 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as supplemented and amended by supplemental indentures relating to each series of Senior Notes (as so supplemented and amended, the “Senior Indenture”). Interest on the 2023 Senior Notes and the 2027 Senior Notes is payable in cash on April 15 and October 15 of each year. Interest on the 2025 and 2028 Senior Notes is payable in cash on May 1 and November 1 of each year, with interest on the 2028 Senior Notes commencing on November 1, 2018.
We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The Senior Indenture contains covenants limiting, among other things, our ability (subject to certain exceptions) to consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets; and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.
The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable, as applicable.
Current Financial Condition / Recent Developments
Our inventory balance represented approximately 53% of our total assets exclusive of goodwill and other intangible assets as of August 3, 2018. Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year. Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory has been and continues to be an area of focus for us.
As described in Note 6 to the unaudited condensed consolidated financial statements, we are involved in a number of legal actions and claims, some of which could potentially result in material cash payments. Adverse developments in those actions could materially and adversely affect our liquidity.
Our senior unsecured debt is rated “Baa2,” by Moody’s with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook, and our commercial paper program is rated “P-2” by Moody’s and “A-2” by Standard and Poor’s. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we will maintain or improve our current credit ratings.
Unless otherwise noted, all references to the “2018 period” and the “2017 period” in the discussion of “Cash flows from operating activities,” “Cash flows from investing activities,” and “Cash flows from financing activities” below refer to the 26-week periods ended August 3, 2018 and August 4, 2017, respectively.
Cash flows from operating activities.
Cash flows from operating activities were $1.1 billion in the 2018 period, which represents a $311.1 million increase compared to the 2017 period. Net income increased by $197.8 million in the 2018 period over the 2017 period. Changes in merchandise inventories resulted in a $292.9 million decrease in the 2018 period as compared to a decrease of $205.4 million in the 2017 period. Changes in accounts payable resulted in a $270.9 million increase in the 2018 period compared to a $292.1 million increase in the 2017 period, due primarily to the timing of receipts and payments. Changes in income taxes in the 2018 period compared to the 2017 period reflect lower income tax payments primarily resulting from the timing of income taxes paid and the reduction in the federal income tax rate to 21% from 35% under the Tax Cuts and Jobs Act.
On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors. Merchandise inventories increased 8% in the 2018 period and increased 6% in the 2017 period. In the 2018 period compared to the 2017 period, changes in inventory balances in our four inventory categories were as follows: the consumables category increased by 11% in both periods; the seasonal category increased 5% compared to a minimal decrease; the home products category increased by 5% compared to a 3% increase; and apparel decreased by 3% compared to a 4% decrease.
Cash flows from investing activities
. Significant components of property and equipment purchases in the 2018 period included the following approximate amounts: $147 million for improvements, upgrades, remodels and relocations of existing stores; $113 million for distribution and transportation-related capital expenditures; $81 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; and $24 million for information systems upgrades and technology-related projects. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During the 2018 period, we opened 510 new stores and remodeled or relocated 710 stores.
Significant components of property and equipment purchases in the 2017 period included the following approximate amounts: $126 million for improvements, upgrades, remodels and relocations of existing stores; $90 million for distribution and transportation-related capital expenditures; $81 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; and $13 million for information systems upgrades and technology-related projects. During the 2017 period, we opened 574 new stores and remodeled or relocated 555 stores.
Capital expenditures for 2018 are currently projected to be in the range of $725 million to $800 million. We anticipate funding 2018 capital requirements with a combination of some or all of the following: existing cash balances, cash flows from operations, availability under our Revolving Facility and/or the issuance of additional CP Notes. We
plan to continue to invest in store growth through the development of new stores and the remodel or relocation of existing stores. Capital expenditures in 2018 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs to support and enhance our supply chain initiatives including new and existing distribution center facilities and our private fleet; technology and other strategic initiatives; as well as routine and ongoing capital requirements.
Cash flows from financing activities
. Net proceeds from the issuance of the 2028 Senior Notes in the 2018 period were $499.5 million and net proceeds from the issuance of the 2027 Senior Notes in the 2017 period were $599.6 million. In the 2018 period, we redeemed all outstanding 1.875% senior notes due 2018 for $400.0 million and made a principal payment on the Term Facility of $175.0 million. In the 2017 period, we redeemed all outstanding 4.125% senior notes due 2017 for $500.0 million and made a principal payment on the Term Facility of $250.0 million. Commercial paper borrowings were a net decrease in the 2018 period of $149.4 million and a net increase of $25.0 million in the 2017 period. There were no borrowings or repayments under the Revolving Facility during the 2018 or 2017 periods. Also during the 2018 and 2017 periods, we repurchased 3.7 million and 2.3 million shares of our common stock at a total cost of $349.5 million and $163.7 million, respectively, and paid cash dividends of $154.7 million and $142.3 million, respectively.
Share Repurchase Program
At August 3, 2018, our common stock repurchase program had a total remaining authorization of approximately $1.0 billion, which included the increase of $1.0 billion to the authorization available under this common stock repurchase program approved by our Board of Directors on March 14, 2018. Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions. The authorization has no expiration date and may be modified or terminated from time to time at the discretion of our Board of Directors. For more information about our share repurchase program, see Note 8 to the condensed consolidated financial statements contained in Part I, Item 1 of this report and Part II, Item 2 of this report.