This discussion and analysis should be read with, and is qualified in its
entirety by, the Consolidated Financial Statements and the notes thereto. It
also should be read in conjunction with the Cautionary Disclosure Regarding
Forward-Looking Statements and the Risk Factors disclosures set forth in the
Introduction and in Item 1A of this report, respectively.



Impact of COVID-19



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



In early March 2020, we began seeing heightened demand from customers,
particularly for consumable products such as paper, food and cleaning products,
which continued throughout 2020, although with some variability as to the volume
and product mix. Beginning in April, we also saw a significant increase in
demand in many non-consumable products, including home, seasonal and apparel,
resulting in an overall significant mix shift into non-consumable categories in
the remainder of 2020. Also beginning in early March 2020, many new customers
began shopping with us for their everyday essential needs, and we are working to
retain them going forward. We have also seen a shift in customer behavior toward
trip consolidation, as customers shopped our stores less frequently than in the
same period in 2019, but purchased a larger average basket amount. We have seen
a continuation of these general trends toward trip consolidation and larger
basket size. To address the increased demand, we increased our hiring of new
store associates in March and April of 2020, and have worked and continue to
work with suppliers to incorporate new items in stores to meet the essential
needs of customers while addressing certain product shortages and vendor
allocation limitations, some of which we expect to persist through at least the
first half of 2021. We believe that this increased customer demand significantly
benefited our results of operations, and in particular, sales, gross profit,
operating income and net income for fiscal 2020. Although we incurred additional
payroll related expenses throughout fiscal 2020, including employee appreciation
bonuses of approximately $167 million, increased distribution and transportation
costs, and other costs to meet the significant customer demand and to protect
the health and safety of our employees and customers, these costs were more than
offset by the incremental sales. The overall net impact of the pandemic to
operating income and net income in 2021 may be less favorable due to the
moderating positive impact to our net sales and our anticipation that some of
these incremental costs, particularly those related to health and safety
measures, will continue into 2021.



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

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caused by the COVID-19 pandemic to continue in at least the near term,
potentially resulting in continued elevated unemployment, reduced economic
activity, and capital markets volatility. We may experience adverse effects on
our business, results of operations and cash flows from a recessionary economic
environment that may persist after the COVID-19 pandemic has moderated. As a
result, the quarterly cadence of our results of operations, which varied from
historical patterns in fiscal 2020, may continue to do so in fiscal 2021.



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



Executive Overview



We are the largest discount retailer in the United States by number of stores,
with 17,266 stores located in 46 states as of February 26, 2021, with the
greatest concentration of stores in the southern, southwestern, midwestern and
eastern United States. We offer a broad selection of merchandise, including
consumable products such as food, paper and cleaning products, health and beauty
products and pet supplies, and non-consumable products such as seasonal
merchandise, home decor and domestics, and basic apparel. Our merchandise
includes national brands from leading manufacturers, as well as our own private
brand selections with prices at substantial discounts to national brands. We
offer our customers these national brand and private brand products at everyday
low prices (typically $10 or less) in our convenient small-box locations.



We believe our convenient store formats, locations, and broad selection of
high-quality products at compelling values have driven our substantial growth
and financial success over the years and through a variety of economic cycles.
We are mindful that the majority of our customers are value-conscious, and many
have low and/or fixed incomes. As a result, we are intensely focused on helping
our customers make the most of their spending dollars. Our core customers are
often among the first to be affected by negative or uncertain economic
conditions and among the last to feel the effects of improving economic
conditions, particularly when trends are inconsistent and of an uncertain
duration. The primary macroeconomic factors that affect our core customers
include the unemployment and underemployment rates, wage growth, changes in U.S.
and global trade policy (including price increases resulting from the imposition
of tariffs), and changes to certain government assistance programs, such as the
Supplemental Nutrition Assistance Program. In 2020, our customers experienced
impacts to many of these factors, as detailed above under "Impact of COVID-19".
Additionally, our customers are impacted by increases in those expenses that
generally comprise a large portion of their household budgets, such as rent,
healthcare and fuel prices. Finally, significant unseasonable or unusual weather
patterns can impact customer shopping behaviors.



We remain committed to our long-term operating priorities as we consistently
strive to improve our performance while retaining our customer-centric focus.
These priorities include: 1) driving profitable sales growth, 2) capturing
growth opportunities, 3) enhancing our position as a low-cost operator, and 4)
investing in our diverse teams through development, empowerment and inclusion.



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



Historically, our sales in our consumables category, which tend to have lower
gross margins, have been the key drivers of net sales and customer traffic,
while sales in our non-consumables categories, which tend to have higher gross
margins, have contributed to more profitable sales growth and an increase in
average transaction amount. Prior to 2020, our sales mix had continued to shift
toward consumables, and, within consumables, toward lower margin departments
such as perishables. Although this trend did not occur in 2020 (as discussed
above under "Impact of COVID-19"), we continue to expect some sales mix
challenges to persist, and we expect the trend toward consumables will resume in
2021 and beyond. Several of our initiatives, including certain of those
discussed

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below, are intended to address these mix challenges; however, there can be no assurances that these efforts will be successful.


We continue to make progress on and invest in certain strategic initiatives that
we believe will help drive profitable sales growth, both with new and existing
customers, 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. This technology includes our Dollar General app, which contains a
variety of tools to enhance the in-store shopping experience. Additionally, DG
Pickup, which is a buy online, pickup in-store initiative aimed at offering
another convenient access point for customers, is now available in more than
17,000 stores across the chain.



Our non-consumables initiative, or "NCI," offers a new, differentiated and
limited assortment that will change throughout the year. NCI is continuing to
evolve and help shape our approach to non-consumables categories throughout the
chain and is contributing to improved overall sales and gross margin performance
in the stores where it is offered. As we extend this initiative more broadly, as
well as incorporate certain related merchandising efforts throughout our chain,
our goal is to provide our customers with a broader, even more relevant
non-consumables merchandise assortment, while continuing to deliver exceptional
value within key areas of our non-consumables categories. Additionally, as we
expand this offering, we plan to incorporate the full NCI set in certain stores
as well as an "NCI Lite" version in others so as to reach a greater number of
stores and customers more quickly. The NCI Lite version incorporates the
majority of the NCI assortment, but without the footprint and display changes in
the store. We plan to significantly expand the number of stores with either the
full NCI or NCI Lite version in 2021, with a goal of more than 11,000 stores by
the end of fiscal 2021.




Additionally, we recently introduced pOpshelf, a unique retail concept that
incorporates certain of the lessons learned from NCI in a differentiated format
that is focused on categories such as seasonal and home décor, health and
beauty, home cleaning supplies, and party and entertainment goods. Our goal is
to operate up to 50 pOpshelf locations by the end of fiscal 2021.



We are continuing our rollout of the "DG Fresh" initiative, a self-distribution
model for frozen and refrigerated products that is designed to reduce product
costs, enhance item assortment, improve our in-stock position, and enhance
sales. By the end of fiscal 2021, we plan to complete our initial rollout of DG
Fresh distribution facilities, which will serve all stores across the chain. DG
Fresh contributed to our strong sales performance in 2020, driven by higher
in-stock levels and the introduction of new products in select stores. In
addition, DG Fresh benefitted gross profit in 2020 through improved initial
markups on inventory purchases, which were partially offset by increased
distribution and transportation costs. We expect this net benefit to continue in
2021 as we proceed with the rollout.



Tariffs on products from China, as applied to both our direct imports and
domestic purchases, did not have a net material impact on our financial results
in 2020, and we do not expect a net material impact in 2021. As noted above,
changes in trade policy that result in higher prices for our customers may
negatively impact their budgets, and consequently, their spending, and
additional increases in tariff rates or expansion of products subject to tariffs
may have a more significant impact on our future business.



To support our other operating priorities, we remain focused on capturing growth
opportunities. In 2020, we opened 1,000 new stores, remodeled 1,670 stores, and
relocated 110 stores. The COVID-19 pandemic has not materially delayed our real
estate plans, and, based on information currently known to management, we do not
expect any significant delays in 2021. For 2021, we plan to open approximately
1,050 new stores (including any pOpshelf stores), remodel approximately 1,750
stores, and relocate approximately 100 stores, for a total of 2,900 real estate
projects.




We continue to innovate within our channel and are able to utilize the most
productive of our various Dollar General store formats based on the specific
market opportunity. We expect that our traditional 7,300 square foot store
format will continue to be the primary store layout for new stores in 2021. We
expect approximately 75% of our planned remodels in 2021 to feature our
higher-cooler-count store format that enables us to offer an increased selection
of perishable items. In addition, the majority of these and other real estate
projects in 2021 will also

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incorporate high-capacity coolers. Our smaller format store (less than 6,000
square feet) is expected to allow us to capture growth opportunities in urban
areas. We have also recently introduced two new larger format stores (one at
approximately 8,500 square feet and the other at approximately 9,500 square
feet), which allows us to further expand our offering and our ability to serve
our customers. Beginning later in 2021, we expect the 8,500 square-foot concept,
along with our existing Dollar General Plus format of a similar size, to become
our base prototypes for nearly all new stores moving forward, replacing our
traditional 7,300 square foot store format and higher-cooler count Dollar
General Traditional Plus format. The innovation in store formats is expected to
allow us to capture additional growth opportunities within our existing markets.
We continue to incorporate lessons learned from our various store formats and
layouts into our existing store base. These lessons contribute to innovation in
developing new formats, with a goal of driving increased customer traffic,
average transaction amount, same-store sales and overall store productivity.



We have established a position as a low-cost operator, always seeking ways to
reduce or control costs that do not affect our customers' shopping experiences.
We plan to continue enhancing this position over time while employing ongoing
cost discipline to reduce certain expenses as a percentage of sales.
Nonetheless, we seek to maintain flexibility to invest in the business as
necessary to enhance our long-term competitiveness and profitability. We have
experienced incremental costs related to the COVID-19 pandemic as discussed
above under "Impact of COVID-19" and below under "Results of Operations," some
of which are expected to continue in 2021.



We also have launched "Fast Track", an initiative aimed at further enhancing our
convenience proposition and in-stock position as well as increasing labor
efficiencies within our stores. The first phase of Fast Track involved sorting
process optimization within our distribution centers, as well as increased
shelf-ready packaging, to allow for greater store-level stocking efficiencies,
followed by the second-phase pilot of a self-checkout option in a limited number
of stores. We completed the sorting process optimization at all of our
non-refrigerated distribution centers in 2019. Additionally, we expect to
continue to add self-checkout capabilities in additional stores throughout 2021.
These and the other strategic initiatives discussed above will require us to
incur upfront expenses for which there may not be an immediate return in terms
of sales or enhanced profitability.



Certain of our operating expenses, such as wage rates and occupancy costs, have
continued to increase in recent years, due primarily to market forces, including
increases in minimum wage rates. While we expect these increases to persist,
certain of our initiatives and plans are intended to help offset these
challenges, although there can be no assurance we will be successful in
mitigating them. In addition, federal, state and/or local minimum wage increases
could have a material negative impact on our operating expenses, although the
magnitude and timing of such impact, and our ability to mitigate (whether in
whole or in part), depends on the scale and timing of the mandated increases,
among other factors. We have also experienced incremental payroll, distribution
and transportation costs related to the COVID-19 pandemic as discussed above
under "Impact of COVID-19".




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

To further enhance shareholder returns, we repurchased shares of our common stock and paid quarterly cash dividends throughout 2020. In 2021, we expect to continue our share repurchase activity and to pay quarterly cash dividends, subject to Board discretion and approval.





We utilize key performance indicators ("KPIs") in the management of our
business. Our KPIs include same-store sales, average sales per square foot, and
inventory turnover. Same-store sales are calculated based upon stores that were
open at least 13 full fiscal months and remain open at the end of the reporting
period. We include stores that have been remodeled, expanded or relocated in our
same-store sales calculation. Changes in same-store sales are calculated based
on the comparable 52 calendar weeks in the current and prior years. Net sales
per square foot is calculated based on total sales for the preceding 12 months
as of the ending date of the reporting period divided by the average selling
square footage during the period, including the end of the fiscal year, the

beginning of

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the fiscal year, and the end of each of our three interim fiscal quarters.
Inventory turnover is calculated based on total cost of goods sold for the
preceding four quarters divided by the average inventory balance as of the
ending date of the reporting period, including the end of the fiscal year, the
beginning of the fiscal year, and the end of each of our three interim fiscal
quarters. Each of these measures is commonly used by investors in retail
companies to measure the health of the business. We use these measures to
maximize profitability and for decisions about the allocation of resources.



A continued focus on our four operating priorities as discussed above, coupled
with pandemic-related sales and other impacts (additional discussion below) and
strong cash flow management resulted in strong overall operating and financial
performance in 2020 as compared to 2019, as set forth below. Basis points, as
referred to below, are equal to 0.01% as a percentage of net sales.

Net sales in 2020 increased 21.6% over 2019. Sales in same-stores increased

? 16.3%, primarily due to increases in average transaction amount. Average sales


   per square foot in 2020 were $273.

Our gross profit rate increased by 117 basis points due primarily to lower

? markdowns as a percentage of sales and higher initial markups on inventory


   purchases.

SG&A as a percentage of sales decreased by 106 basis points primarily due to

? our significant increase in 2020 sales, partially offset by incremental costs


   related to COVID-19.

? Operating profit increased 54.4% to $3.55 billion in 2020 compared to $2.30


   billion in 2019.

Interest expense increased by $49.8 million in 2020 primarily due to higher

? average outstanding debt balances in connection with the issuance of debt in


   the first quarter of 2020.

The decrease in the effective income tax rate to 22.0% in 2020 from 22.2% in

? 2019 was due primarily to income tax benefits associated with share-based


   compensation.

? We reported net income of $2.66 billion, or $10.62 per diluted share, for 2020

compared to net income of $1.71 billion, or $6.64 per diluted share, for 2019.

? We generated approximately $3.88 billion of cash flows from operating

activities in 2020, an increase of 73.2% compared to 2019.

? Inventory turnover was 4.9 times, and inventories increased 6.3% on a per store


   basis compared to 2019.

? We repurchased approximately 12.3 million shares of our outstanding common


   stock for $2.5 billion.




Readers should refer to the detailed discussion of our operating results below
for additional comments on financial performance in the current year as compared
with the prior years presented.



Results of Operations



Accounting Periods. The following text contains references to years 2020, 2019,
and 2018, which represent fiscal years ended January 29, 2021, January 31, 2020,
and February 1, 2019, respectively. Our fiscal year ends on the Friday closest
to January 31. Fiscal years 2020, 2019 and 2018 were each 52-week accounting
periods.



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

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

The following table contains results of operations data for fiscal years 2020, 2019 and 2018, and the dollar and percentage variances among those years.






                                                                          2020 vs. 2019         2019 vs. 2018
(amounts
in millions, except                                                      Amount       %        Amount       %
per share amounts)               2020          2019          2018        Change     Change     Change     Change
Net sales by category:
Consumables                   $ 25,906.7    $ 21,635.9    $ 19,865.1    $ 4,270.8     19.7 %  $ 1,770.8      8.9 %
% of net sales                     76.77 %       77.96 %       77.52 %
Seasonal                         4,083.7       3,258.9       3,050.3        824.8     25.3        208.6      6.8
% of net sales                     12.10 %       11.74 %       11.90 %
Home products                    2,210.0       1,611.9       1,506.1        598.1     37.1        105.8      7.0
% of net sales                      6.55 %        5.81 %        5.88 %
Apparel                          1,546.6       1,247.3       1,203.6        299.2     24.0         43.7      3.6
% of net sales                      4.58 %        4.49 %        4.70 %
Net sales                     $ 33,746.8    $ 27,754.0    $ 25,625.0    $ 5,992.9     21.6 %  $ 2,128.9      8.3 %
Cost of goods sold              23,028.0      19,264.9      17,821.2      3,763.1     19.5      1,443.7      8.1
% of net sales                     68.24 %       69.41 %       69.55 %
Gross profit                    10,718.9       8,489.1       7,803.9      2,229.8     26.3        685.2      8.8
% of net sales                     31.76 %       30.59 %       30.45 %
Selling, general and
administrative expenses          7,164.1       6,186.8       5,687.6        977.3     15.8        499.2      8.8
% of net sales                     21.23 %       22.29 %       22.20 %
Operating profit                 3,554.8       2,302.3       2,116.3      1,252.5     54.4        186.0      8.8
% of net sales                     10.53 %        8.30 %        8.26 %
Interest expense                   150.4         100.6          99.9         49.8     49.5          0.7      0.7
% of net sales                      0.45 %        0.36 %        0.39 %
Other (income) expense                 -             -           1.0            -        -        (1.0)        -
% of net sales                      0.00 %        0.00 %        0.00 %
Income before income taxes       3,404.4       2,201.7       2,015.4      1,202.7     54.6        186.3      9.2
% of net sales                     10.09 %        7.93 %        7.87 %
Income tax expense                 749.3         489.2         425.9        260.2     53.2         63.2     14.8
% of net sales                      2.22 %        1.76 %        1.66 %
Net income                    $  2,655.1    $  1,712.6    $  1,589.5    $   942.5     55.0 %  $   123.1      7.7 %
% of net sales                      7.87 %        6.17 %        6.20 %
Diluted earnings per share    $    10.62    $     6.64    $     5.97    $    3.98     59.9 %  $    0.67     11.2 %




Net Sales. The net sales increase in 2020 reflects a same-store sales increase
of 16.3% compared to 2019. In 2020, our 16,050 same-stores accounted for sales
of $31.9 billion. The increase in same-store sales reflects an increase in
average transaction amount driven by a significant increase in items per
transaction and, to a lesser degree, higher average item retail prices, which
were offset in part by a decline in customer traffic. Same-store sales increased
in each of the consumables, seasonal, home products and apparel categories, with
the largest percentage increase in the home products category. The 2020 net
sales increase was positively affected by new stores, modestly offset by sales
from closed stores.




The net sales increase in 2019 reflects a same-store sales increase of 3.9%
compared to 2018. In 2019, our 15,209 same-stores accounted for sales of $26.4
billion. The increase in same-store sales primarily reflects an increase in
average transaction amount and customer traffic compared to 2018. The increase
in average transaction amount was driven by higher average item retail prices.
Same-store sales in 2019 increased in each of the consumables, seasonal and home
products and apparel categories, compared to 2018. The 2019 net sales increase
was positively affected by new stores, modestly offset by sales from closed
stores.



Gross Profit. In 2020, gross profit increased by 26.3%, and as a percentage of
net sales increased by 117 basis points to 31.8% compared to 2019. A reduction
in markdowns as a percentage of net sales and higher initial

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markups on inventory purchases each contributed to the increase in the gross
profit rate. In addition, non-consumables sales increased at a higher rate than
consumables sales in 2020, which contributed to the increase in the gross profit
rate. We also experienced a lower rate of inventory shrink in 2020 compared to
2019. It is uncertain at this time whether these trends, which differ from our
recent historical trends prior to 2020, will continue. These factors were
partially offset by increased distribution and transportation costs which were
impacted by increased volume, some of which is attributable to the COVID-19
pandemic, and discretionary employee bonus expense. As noted above, we believe
the effect of the COVID-19 pandemic on consumer behavior had a significant
positive effect on net sales, and also had a positive effect on our gross
profit.



In 2019, gross profit increased by 8.8%, and as a percentage of net sales
increased by 14 basis points to 30.6% compared to 2018. Higher initial markups
on inventory purchases and a lower LIFO provision contributed to the increase in
the gross profit rate. These factors were partially offset by increased
distribution and transportation costs, a greater proportion of sales of
consumables, which generally have a lower gross profit rate than our other
product categories, and sales of lower margin products comprising a higher
proportion of consumables sales, as well as a higher rate of inventory
shrinkage.



SG&A. SG&A as a percentage of net sales was 21.2% in 2020 compared to 22.3% in
2019, a decrease of 106 basis points. Although we incurred certain incremental
costs discussed above under "Impact of COVID-19," including discretionary
employee bonus expense, they were more than offset by the significant increase
in net sales during the period as discussed above. Among the expenses that were
a lower percentage of net sales in 2020 were retail labor, store occupancy
costs, utilities, and depreciation and amortization. In addition, we recorded
expenses of $31.0 million in 2019 reflecting our estimate for the settlement of
significant legal matters. These items were partially offset by 2020 increases
in incentive compensation and hurricane-related expenses.



SG&A as a percentage of sales was 22.3% in 2019 compared to 22.2% in 2018, an
increase of 9 basis points, which included the $31.0 million estimate in 2019
for the settlement of significant legal matters. SG&A in 2019 included a
decrease of approximately $22.8 million in hurricane and other disaster-related
expenses compared to 2018 as well as an increase in retail labor costs at a rate
less than the increase in net sales.



Interest Expense. Interest expense increased $49.8 million to $150.4 million in
2020 compared to 2019, primarily due to higher average outstanding debt balances
in connection with the issuance of debt in the first quarter of 2020, and
increased $0.7 million to $100.6 million in 2019 compared to 2018. See the
detailed discussion under "Liquidity and Capital Resources" regarding the
financing of various long-term obligations.



We had consolidated outstanding variable-rate debt of $3.4 million and $430.1
million as of January 29, 2021 and January 31, 2020, respectively, and the
remainder of our outstanding indebtedness as of each of those dates was fixed
rate debt.

Other (income) expense. Other (income) expense in 2018 reflects expenses associated with the voluntary prepayment of our senior unsecured term loan facility.


Income Taxes. The effective income tax rate for 2020 was 22.0% compared to a
rate of 22.2% for 2019 which represents a net decrease of 0.2 percentage points.
The effective income tax rate was lower in 2020 primarily due to increased tax
benefits associated with share-based compensation and a larger income tax rate
benefit from state taxes offset by a lower income tax rate benefit from federal
income tax credits due primarily to higher pre-tax earnings in 2020 compared to
2019.



The effective income tax rate for 2019 was 22.2% compared to a rate of 21.1% for
2018 which represents a net increase of 1.1 percentage points. The effective
income tax rate was higher in 2019 primarily due to an increase in income taxes
resulting from changes in state income tax laws and a federal income tax benefit
arising from the Tax Cuts and Jobs Act in 2018 that did not reoccur in 2019.

Off Balance Sheet Arrangements

We are not party to any material off balance sheet arrangements.



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Effects of Inflation

In 2020, 2019 and 2018, we experienced increases in product costs due in part to tariffs on certain items imported from China.

Liquidity and Capital Resources

Current Financial Condition and Recent Developments





During the past three years, we have generated an aggregate of approximately
$8.3 billion in cash flows from operating activities and incurred approximately
$2.5 billion in capital expenditures. During that period, we expanded the number
of stores we operate by 2,643, representing growth of approximately 18%, and we
remodeled or relocated 4,069 stores, or approximately 28% of the stores we
operated as of the beginning of the three-year period. In 2021, we intend to
continue our current strategy of pursuing store growth, remodels and
relocations.



At January 29, 2021, we had a $1.25 billion unsecured revolving credit agreement
(the "Revolving Facility"), $4.0 billion aggregate principal amount of senior
notes, and a commercial paper program that may provide borrowing availability of
up to $1.0 billion. At January 29, 2021, we had total consolidated outstanding
debt (including the current portion of long-term obligations) of $4.1 billion,
most of which was in the form of senior notes. All of our material borrowing
arrangements are described in greater detail below. Our borrowing availability
under the Revolving Facility may be effectively limited by our commercial paper
notes ("CP Notes") as further described below. The information contained in Note
5 to the consolidated financial statements contained in Part II, Item 8 of this
report is incorporated herein by reference.



At January 29, 2021, we had a total consolidated cash balance of $1.4 billion.
Our balance of cash and cash equivalents was impacted by our issuance of senior
unsecured notes in April 2020 as we sought to strengthen liquidity as a result
of uncertainty created by the COVID-19 pandemic.



We believe our cash flow from operations, and our existing cash balances,
combined with availability under the Revolving Facility, CP Notes 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 fiscal 2021, we anticipate potential combined borrowings under the Revolving
Facility and CP Notes to be a maximum of approximately $600 million outstanding
at any one time, including any anticipated borrowings to fund repurchases of
common stock.



Revolving Credit Facility




On September 10, 2019, we entered into the Revolving Facility consisting of a
$1.25 billion senior unsecured revolving credit facility of which up to $175.0
million is available for the issuance of letters of credit and which is
scheduled to mature on September 10, 2024.



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 January 29, 2021 was 1.015% for LIBOR
borrowings and 0.015% 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
January 29, 2021, the facility fee rate was 0.11%. The applicable interest rate
margins for borrowings, the facility fees and the

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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 January 29, 2021, we were in compliance with all such covenants.
The Revolving Facility also contains customary events of default.



As of January 29, 2021, under the Revolving Facility, we had no outstanding
borrowings, outstanding letters of credit of $3.5 million, and borrowing
availability of $1.25 billion that, due to our intention to maintain borrowing
availability related to the commercial paper program described below, could
contribute incremental liquidity of $1.07 billion at January 29, 2021. In
addition, as of January 29, 2021 we had outstanding letters of credit of $77.7
million which were issued pursuant to separate agreements.



Commercial Paper



As of January 29, 2021, our consolidated balance sheet reflected no outstanding
unsecured CP Notes. CP Notes totaling $181.0 million were held by a wholly-owned
subsidiary and therefore are not reflected on the consolidated balance sheet. 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.



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. In April 2020 we issued $1.0 billion
aggregate principal amount of 3.5% senior notes due 2030 (the "2030 Senior
Notes") at a discount of $0.7 million, which are scheduled to mature on April 3,
2030, and $500.0 million aggregate principal amount of 4.125% senior notes due
2050 (the "2050 Senior Notes") at a discount of $5.0 million, which are
scheduled to mature on April 3, 2050. Collectively, the 2023 Senior Notes, 2025
Senior Notes, 2027 Senior Notes, 2028 Senior Notes, 2030 Senior Notes and 2050
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.
Interest on the 2030 and 2050 Senior Notes is payable in cash on April 3 and
October 3 of each year.



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



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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.



Rating Agencies




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.



Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments as of January 29, 2021 (in thousands):






                                                             Payments Due by Period
Contractual obligations               Total         < 1 year      1 - 3 years     3 - 5 years      5+ years
Long-term debt obligations         $  4,164,365    $     4,127    $    913,765    $    513,722    $ 2,732,751
Interest(a)                           1,431,214        153,876         284,119         242,921        750,298
Self-insurance liabilities(b)           245,086        110,383          87,880          30,310         16,513
Operating lease obligations          11,366,117      1,419,082       2,672,507       2,337,755      4,936,773
Subtotal                           $ 17,206,782    $ 1,687,468    $  3,958,271    $  3,124,708    $ 8,436,335





                                                      Commitments Expiring by Period
Commercial commitments(c)          Total         < 1 year      1 - 3 years     3 - 5 years      5+ years
Letters of credit               $     47,313    $    47,313    $          -    $          -    $         -
Purchase obligations(d)              741,344        737,872           3,472               -              -
Subtotal                        $    788,657    $   785,185    $      3,472    $          -    $         -
Total contractual
obligations and commercial
commitments(e)                  $ 17,995,439    $ 2,472,653    $  3,961,743

$ 3,124,708 $ 8,436,335

Represents obligations for interest payments on long-term debt and includes

projected interest on variable rate long-term debt using 2020 year end rates

and balances. Variable rate long-term debt includes the Revolving Facility (a) (although such facility had a balance of zero as of January 29, 2021), the CP

Notes (which also had a balance of zero as of January 29, 2021, and which

amount is net of $181 million held by a wholly-owned subsidiary), and the


    balance of an outstanding tax increment financing of $3.4 million.

We retain a significant portion of the risk for our workers' compensation,

employee health, general liability, property loss, automobile, and (b) third-party landlord claims exposures. As these obligations do not have

scheduled maturities, these amounts represent undiscounted estimates based


    upon actuarial assumptions. Substantially all amounts are reflected on an
    undiscounted basis in our consolidated balance sheets.

Commercial commitments include information technology license and support (c) agreements, supplies, fixtures, letters of credit for import merchandise, and


    other inventory purchase obligations.

Purchase obligations include legally binding agreements for software licenses (d) and support, supplies, fixtures, and merchandise purchases (excluding such


    purchases subject to letters of credit).




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We have potential payment obligations associated with uncertain tax positions

that are not reflected in these totals. We are currently unable to make (e) reasonably reliable estimates of the period of cash settlement with the


    taxing authorities for the $7.5 million of reserves for uncertain tax
    positions.




Share Repurchase Program



Our common stock repurchase program had a total remaining authorization of
approximately $0.68 billion at January 29, 2021. Effective March 17, 2021, our
Board of Directors authorized a $2 billion increase to such program which
resulted in a total remaining authorization of approximately $2.38 billion under
the program at such date. The authorization allows repurchases from time to time
in open market transactions, including pursuant to trading plans adopted in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended,
or in privately negotiated transactions. The timing, manner and number of shares
repurchased will depend on a variety of factors, including price, market
conditions, compliance with the covenants and restrictions under our debt
agreements and other factors. The repurchase program has no expiration date and
may be modified or terminated from time to time at the discretion of our Board
of Directors. For more detail about our share repurchase program, see Part II,
Item 5 of this report and Note 11 to the consolidated financial statements
contained in Part II, Item 8 of this report.



Other Considerations



On March 16, 2021, the Board of Directors declared a quarterly cash dividend of
$0.42 per share which is payable on or before April 20, 2021 to shareholders of
record of our common stock on April 6, 2021. We paid quarterly cash dividends of
$0.36 per share in 2020. Although the Board currently expects to continue
regular quarterly cash dividends, the declaration and amount of future cash
dividends are subject to the Board's sole discretion and will depend upon, among
other factors, our results of operations, cash requirements, financial
condition, contractual restrictions and other factors that our Board may deem
relevant in its sole discretion.



Our inventory balance represented approximately 48% of our total assets
exclusive of goodwill, operating lease assets, and other intangible assets as of
January 29, 2021. 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 7 to the 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.



Cash Flows




Cash flows from operating activities. Cash flows from operating activities were
$3.88 billion in 2020, which represents a $1.64 billion increase compared to
2019. As noted above, the COVID-19 pandemic has resulted in increased sales,
gross profit, and operating income, which contributed to the increase in net
income of $942.5 million in 2020 over 2019. Changes in accounts payable resulted
in a $745.6 million increase in our working capital in 2020 compared to a $428.6
million increase in 2019, due primarily to the timing of receipts and payments.
Changes in accrued expenses resulted in a $388.6 million increase in our working
capital in 2020 compared to a $100.3 million increase in 2019, due primarily to
increased accruals for compensation and non-income taxes. Changes in merchandise
inventories resulted in a $575.8 million decrease in our working capital in 2020
which was similar to the decrease of $578.8 million in 2019 as described in
greater detail below. Changes in income taxes including an increase in cash paid
for income taxes in 2020 compared to 2019 are primarily due to the increase

in
pre-tax earnings in 2020.



Cash flows from operating activities were $2.24 billion in 2019, which
represents a $94.4 million increase compared to 2018. Changes in accounts
payable resulted in a $428.6 million increase in 2019 compared to a $375.2
million increase in 2018, due primarily to the timing of receipts and payments
which was partially impacted by certain changes in payment terms. In addition,
net income increased by $123.1 million in 2019 over 2018. These

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items were offset by changes in merchandise inventories which resulted in a
$578.8 million decrease in 2019 as compared to a decrease of $521.3 million in
2018. Changes in income taxes in 2019 compared to 2018 are primarily due to the
timing of payments for income taxes.



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 by 12% in
2020, by 14% in 2019 and by 14% in 2018. Inventory levels in the consumables
category increased by $455.6 million, or 15%, in 2020, by $371.9 million, or
14%, in 2019, and by $320.9 million, or 14% in 2018. The seasonal category
increased by $35.7 million, or 4%, in 2020, by $127.3 million, or 17%, in 2019,
and by $108.4 million, or 17%, in 2018. The home products category increased by
$66.3 million, or 15%, in 2020, by $82.8 million, or 23%, in 2019, and by $24.0
million, or 7%, in 2018. The apparel category increased by $12.9 million, or 3%,
in 2020, decreased by $2.1 million, or 1%, in 2019, and increased by $34.7
million, or 10%, in 2018.



Cash flows from investing activities. Significant components of property and
equipment purchases in 2020 included the following approximate amounts: $447
million for improvements, upgrades, remodels and relocations of existing stores;
$271 million for distribution and transportation-related capital expenditures;
$250 million related to store facilities, primarily for leasehold improvements,
fixtures and equipment in new stores; and $50 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 2020, we opened 1,000 new stores and remodeled or relocated
1,780 stores.




Significant components of property and equipment purchases in 2019 included the
following approximate amounts: $338 million for improvements, upgrades, remodels
and relocations of existing stores; $217 million for distribution and
transportation-related projects; $149 million for new leased stores, primarily
for leasehold improvements, fixtures and equipment; and $59 million for
information systems upgrades and technology-related projects. During 2019, we
opened 975 new stores and remodeled or relocated 1,124 stores.



Significant components of property and equipment purchases in 2018 included the
following approximate amounts: $289 million for improvements, upgrades, remodels
and relocations of existing stores; $242 million for distribution and
transportation-related projects; $138 million for new leased stores, primarily
for leasehold improvements, fixtures and equipment; and $47 million for
information systems upgrades and technology-related projects. During 2018, we
opened 900 new stores and remodeled or relocated 1,165 stores.



Capital expenditures during 2021 are projected to be in the range of $1.05
billion to $1.15 billion. We anticipate funding 2021 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 senior notes and CP Notes. We plan to continue to invest in store
growth and development of approximately 1,050 new stores and approximately 1,850
stores to be remodeled or relocated. Capital expenditures in 2021 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 initiatives; as well as routine and
ongoing capital requirements.



Cash flows from financing activities. In 2020, net proceeds from the issuance of
the 2030 Senior Notes and 2050 Senior Notes totaled $1.5 billion, net commercial
paper borrowings decreased by $425.2 million, and borrowings and repayments
under the Revolving Facility were $300.0 million each. We repurchased 12.3
million shares of our common stock at a total cost of $2.5 billion and paid cash
dividends of $355.9 million.



In 2019, we had a net increase in consolidated commercial paper borrowings of
$58.3 million and had no borrowings or repayments under the Revolving Facility.
We repurchased 8.3 million outstanding shares of our common stock in 2019 at a
total cost of $1.2 billion and paid cash dividends of $327.6 million.

In 2018, we had net proceeds from the issuance of the 2028 Senior Notes of $499.5 million, redeemed the 2018 Senior Notes for $400.0 million, and made a voluntary prepayment of our senior unsecured term loan facility



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of $175.0 million. We had a net decrease in consolidated commercial paper
borrowings in 2018 of $63.3 million and had no borrowings or repayments under
the Revolving Facility. We repurchased 9.9 million outstanding shares of our
common stock in 2018 at a total cost of $1.0 billion and paid cash dividends of
$306.5 million.

Critical Accounting Policies and Estimates





The preparation of financial statements in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") requires management to
make estimates and assumptions that affect reported amounts and related
disclosures. In addition to the estimates presented below, there are other items
within our financial statements that require estimation, but are not deemed
critical as defined below. We believe these estimates are reasonable and
appropriate. However, if actual experience differs from the assumptions and
other considerations used, the resulting changes could have a material effect on
the financial statements taken as a whole.



Management believes the following policies and estimates are critical because
they involve significant judgments, assumptions, and estimates. Management has
discussed the development and selection of the critical accounting estimates
with the Audit Committee of our Board of Directors, and the Audit Committee has
reviewed the disclosures presented below relating to those policies and
estimates. See Note 1 to the consolidated financial statements for a detailed
discussion of our principal accounting policies.



Merchandise Inventories. Merchandise inventories are stated at the lower of cost
or market ("LCM") with cost determined using the retail last in, first out
("LIFO") method. We use the retail inventory method ("RIM") to calculate gross
profit and the resulting valuation of inventories at cost, which are computed
utilizing a calculated cost-to-retail inventory ratio at an inventory department
level. We apply the RIM to these departments, which are groups of products that
are fairly uniform in terms of cost, selling price relationship and turnover.
The RIM will result in valuing inventories at LCM if permanent markdowns are
currently taken as a reduction of the retail value of inventories. Inherent in
the RIM calculation are certain management judgments and estimates that may
impact the ending inventory valuation at cost, as well as the gross profit
recognized. These judgments include ensuring departments consist of similar
products, recording estimated shrinkage between physical inventories, and timely
recording of markdowns needed to sell inventory.



We perform an annual LIFO analysis whereby all merchandise units are considered
for inclusion in the index formulation. An actual valuation of inventory under
the LIFO method is made at the end of each year based on the inventory levels
and costs at that time. In contrast, interim LIFO calculations are based on
management's annual estimates of sales, the rate of inflation or deflation, and
year-end inventory levels. We also perform analyses for determining obsolete
inventory, adjusting inventory on a quarterly basis to an LCM value based on
various management assumptions including estimated below cost markdowns not yet
recorded, but required to liquidate such inventory in future periods.



Factors considered in the determination of markdowns include current and
anticipated demand based on changes in competitors' practices, consumer
preferences, consumer spending, significant weather events and unseasonable
weather patterns. Certain of these factors are outside of our control and may
result in greater than estimated markdowns to entice consumer purchases of
excess inventory. The amount and timing of markdowns may vary significantly

from
year to year.




We perform physical inventories in virtually all of our stores on an annual
basis. Due to the COVID-19 pandemic, we were unable to perform physical
inventories in our stores from mid-March through mid-May in 2020, which
prevented us from completing all of our planned store physical inventories in
2020, the effect of which was immaterial. We calculate our shrink provision
based on actual physical inventory results during the fiscal period and an
accrual for estimated shrink occurring subsequent to a physical inventory
through the end of the fiscal reporting period. This accrual is calculated as a
percentage of sales at each retail store, at a department level, based on the
store's most recent historical shrink rate. To the extent that subsequent
physical inventories yield different results than the estimated accrual, our
effective shrink rate for a given reporting period will include the impact of
adjusting to the actual results.



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We believe our estimates and assumptions related to the application of the RIM
results in a merchandise inventory valuation that reasonably approximates cost
on a consistent basis.



Impairment of Long-lived Assets. Impairment of long-lived assets results when
the carrying value of the assets exceeds the estimated undiscounted future cash
flows generated by the assets. Our estimate of undiscounted future store cash
flows is based upon historical operations of the stores and estimates of future
profitability which encompasses many factors that are subject to variability and
are difficult to predict. If our estimates of future cash flows are not
materially accurate, our impairment analysis could be impacted accordingly. If a
long-lived asset is found to be impaired, the amount recognized for impairment
is equal to the difference between the carrying value and the asset's estimated
fair value. The fair value is estimated based primarily upon projected future
cash flows (discounted at our credit adjusted risk-free rate) or other
reasonable estimates of fair market value. Although not currently anticipated,
changes in these estimates, assumptions or projections could materially affect
the determination of fair value or impairment.



Insurance Liabilities. We retain a significant portion of the risk for our
workers' compensation, employee health, general liability, property loss,
automobile and certain third-party landlord claim exposures. These represent
significant costs primarily due to our large employee base and number of stores.
Provisions are made for these liabilities on an undiscounted basis. Certain of
these liabilities are based on actual claim data and estimates of incurred but
not reported claims developed using actuarial methodologies based on historical
claim trends, which have been and are anticipated to continue to be materially
accurate. If future claim trends deviate from recent historical patterns, or
other unanticipated events affect the number and significance of future claims,
we may be required to record additional expenses or expense reductions, which
could be material to our future financial results.



Contingent Liabilities - Income Taxes. Income tax reserves are determined using
the methodology established by accounting standards relating to uncertainty in
income taxes. These standards require companies to assess each income tax
position taken using a two-step process. A determination is first made as to
whether it is more likely than not that the position will be sustained, based
upon the technical merits, upon examination by the taxing authorities. If the
tax position is expected to meet the more likely than not criteria, the benefit
recorded for the tax position equals the largest amount that is greater than 50%
likely to be realized upon ultimate settlement of the respective tax position.
Uncertain tax positions require determinations and liabilities to be estimated
based on provisions of the tax law which may be subject to change or varying
interpretation. If our determinations and estimates prove to be inaccurate, the
resulting adjustments could be material to our future financial results.



Lease Accounting. We adopted new accounting guidance related to leases as of
February 2, 2019, using the modified retrospective approach. Lease liabilities
are recorded at a discount based upon our estimated collateralized incremental
borrowing rate which involves significant judgments and estimates. Factors
incorporated into the calculation of lease discount rates include the valuations
and yields of our senior notes, their credit spread over comparable U.S.
Treasury rates, and an index of the credit spreads for all North American
investment grade companies by rating. To determine an indicative secured rate,
we use the estimated credit spread improvement that would result from an upgrade
of one ratings classification by tenor. Many of our stores are subject to
build-to-suit arrangements with landlords, which typically carry a primary lease
term of up to 15 years with multiple renewal options. We also have stores
subject to shorter-term leases and many of these leases have renewal options. We
record single lease expense on a straight-line basis over the lease term
including any option periods that are reasonably certain to be renewed,
commencing on the date that we take physical possession of the property from the
landlord. Tenant allowances, to the extent received, are recorded as a reduction
of the right of use asset. Improvements of leased properties are amortized over
the shorter of the life of the applicable lease term or the estimated useful
life of the asset.



Share-Based Payments. Our stock option awards are valued on an individual grant
basis using the Black-Scholes-Merton closed form option pricing model. We
believe that this model fairly estimates the value of our stock option awards.
The application of this valuation model involves assumptions that are judgmental
in the valuation of stock options, which affects compensation expense related to
these options. These assumptions include the term that the options are expected
to be outstanding, the historical volatility of our stock price, applicable
interest rates and the dividend yield of our stock. Other factors involving
judgments that affect the expensing of share-based payments include estimated
forfeiture rates of share-based awards. Historically, these estimates have

been
materially accurate;

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however, if our estimates differ materially from actual experience, we may be
required to record additional expense or reductions of expense, which could be
material to our future financial results.



Fair Value Measurements. Accounting standards for the measurement of fair value
of assets and liabilities 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). Therefore, Level 3 inputs are
typically based on an entity's own assumptions, as there is little, if any,
related market activity, and thus require the use of significant judgment and
estimates. Currently, we have no assets or liabilities that are valued based
solely on Level 3 inputs. Our fair value measurements are primarily associated
with our outstanding debt instruments. We use various valuation models in
determining the values of these liabilities. We believe that in recent years
these methodologies have produced materially accurate valuations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Financial Risk Management



We are exposed to market risk primarily from adverse changes in interest rates,
and to a lesser degree commodity prices. To minimize this risk, we may
periodically use financial instruments, including derivatives. All derivative
financial instrument transactions must be authorized and executed pursuant to
approval by the Board of Directors. As a matter of policy, we do not buy or sell
financial instruments for speculative or trading purposes, and any such
derivative financial instruments are intended to be used to reduce risk by
hedging an underlying economic exposure. Our objective is to correlate
derivative financial instruments and the underlying exposure being hedged, so
that fluctuations in the value of the financial instruments are generally offset
by reciprocal changes in the value of the underlying economic exposure.



Interest Rate Risk



We manage our interest rate risk through the strategic use of fixed and variable
interest rate debt and, from time to time, derivative financial instruments. In
recent years, our principal interest rate exposure has been from outstanding
borrowings under our Revolving Facility as well as our commercial paper program.
As of January 29, 2021, we had no consolidated borrowings under our commercial
paper program and no borrowings outstanding under our Revolving Facility. In
order to mitigate a portion of the variable rate interest exposure under the
credit facilities, in prior years we have entered into various interest rate
swaps. As of January 29, 2021, no such interest rate swaps were outstanding and,
as a result, we will have exposure to fluctuations in variable interest rates
for any future amounts borrowed under the Revolving Facility and our commercial
paper program. For a detailed discussion of our Revolving Facility and our
commercial paper program, see Note 5 to the consolidated financial statements.



At January 29, 2021, our primary interest rate exposure was from changes in
interest rates on our variable rate investment holdings, which were classified
as cash and cash equivalents in our consolidated financial statements. The
increase in cash and cash equivalents was driven primarily by our issuance of
$1.5 billion of senior unsecured notes during the first quarter of 2020 as we
sought to strengthen liquidity as a result of the continued uncertainty
generated by the COVID-19 pandemic. Based on our variable rate cash investment
balance of $1.1 billion at January 29, 2021, the annualized effect of a 0.1
percentage point decrease in interest rates would have resulted in a pre-tax
reduction of our earnings and cash flows of approximately $1.1 million in 2020.



At January 31, 2020, our primary interest rate exposure was from changes in
interest rates on our variable interest rate debt. A change in interest rates on
variable rate debt impacts our pre-tax earnings and cash flows; whereas a change
in interest rates on fixed rate debt impacts the economic fair value of debt but
not our pre-tax earnings and cash flows. Based on our variable rate borrowing
levels as of January 31, 2020, the annualized effect of a one percentage point
increase in variable interest rates would have resulted in a pretax reduction of
our earnings and cash flows of approximately $4.3 million in 2019.



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