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Family Dollar Stores 10-Q 2011
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

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

For the quarterly period ended November 27, 2010

Or

 

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

Commission File Number: 1-6807

FAMILY DOLLAR STORES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   56-0942963

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

P.O. Box 1017, 10401 Monroe Road

Charlotte, North Carolina

  28201-1017
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:  (704) 847-6961

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No ¨

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

 

Large accelerated filer x    Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)    Smaller reporting company ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

     

Outstanding at December 27, 2010

Common Stock, $0.10 par value     126,385,736 shares


Table of Contents

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

INDEX

 

     Page No.  

Part I - Financial Information

     3   

Item 1 - Consolidated Condensed Financial Statements (unaudited):

     3   

Consolidated Condensed Balance Sheets –

November 27, 2010, and August 28, 2010

     3   

Consolidated Condensed Statements of Income –

Quarter Ended November 27, 2010, and November 28, 2009

     4   

Consolidated Condensed Statements of Cash Flows –

Quarter Ended November 27, 2010, and November 28, 2009

     5   

Notes to Consolidated Condensed Financial Statements

     6   

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

     14   

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

     19   

Item 4 - Controls and Procedures

     19   

Part II - Other Information

     20   

Item 1 - Legal Proceedings

     20   

Item 1A - Risk Factors

     20   

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

     20   

Item 6 - Exhibits

     21   

Signatures

     22   

 

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.  Consolidated Condensed Financial Statements

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

(in thousands, except per share and share amounts)

   November 27,
2010
    August 28,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 84,621      $ 382,754   

Investment securities

     52,566        120,325   

Merchandise inventories

     1,138,466        1,028,022   

Deferred income taxes

     63,923        66,102   

Prepayments and other current assets

     75,169        63,005   
                

Total current assets

     1,414,745        1,660,208   

Property and equipment, net

     1,110,607        1,111,966   

Investment securities

     145,014        147,108   

Other assets

     70,753        62,775   
                

Total assets

   $ 2,741,119      $ 2,982,057   
                

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 16,200      $   

Accounts payable

     627,657        676,975   

Accrued liabilities

     324,993        359,065   

Income taxes

     48,169        18,447   
                

Total current liabilities

     1,017,019        1,054,487   

Long-term debt

     233,800        250,000   

Other liabilities

     215,358        203,857   

Deferred income taxes

     45,674        52,159   

Commitments and contingencies (Note 6)

    

Shareholders’ equity:

    

Preferred stock, $1 par; authorized and unissued 500,000 shares

    

Common stock, $.10 par; authorized 600,000,000 shares; issued 147,022,608 shares at November 27, 2010, and 146,496,237 shares at August 28, 2010, and outstanding 126,384,955 shares at November 27, 2010, and 130,452,959 shares at August 28, 2010

     14,702        14,650   

Capital in excess of par

     255,971        243,831   

Retained earnings

     1,720,400        1,665,646   

Accumulated other comprehensive loss

     (8,494     (7,046
                
     1,982,579        1,917,081   
                

Less: common stock held in treasury, at cost (20,637,653 shares at November 27, 2010, and 16,043,278 shares at August 28, 2010)

     753,311        495,527   
                

Total shareholders’ equity

     1,229,268        1,421,554   
                

Total liabilities and shareholders’ equity

   $     2,741,119      $       2,982,057   
                

See notes to the consolidated condensed financial statements.

 

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Table of Contents

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Quarter Ended  

(in thousands, except per share amounts)

   November 27,
2010
     November 28,
2009
 

Net sales

   $ 1,996,941       $ 1,822,906   

Cost and expenses:

     

Cost of sales

     1,277,376         1,164,684   

Selling, general and administrative

     597,983         548,551   
                 

Cost of sales and operating expenses

     1,875,359         1,713,235   
                 

Operating profit

     121,582         109,671   

Interest income

     387         395   

Interest expense

     3,518         3,335   
                 

Income before income taxes

     118,451         106,731   

Income taxes

     44,136         39,110   
                 

Net income

   $ 74,315       $ 67,621   
                 

Net income per common share — basic

   $ 0.58       $ 0.49   
                 

Weighted average shares — basic

     127,984         138,686   
                 

Net income per common share — diluted

   $ 0.58       $ 0.49   
                 

Weighted average shares — diluted

     129,141         139,271   
                 

Dividends declared per common share

   $ 0.155       $ 0.135   
                 

See notes to the consolidated condensed financial statements.

 

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Table of Contents

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Quarter Ended  

(in thousands)

   November 27,
2010
    November 28,
2009
 

Cash flows from operating activities:

    

Net income

   $ 74,315      $ 67,621   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     43,992        42,019   

Deferred income taxes

     802        20,076   

Excess tax benefits from stock-based compensation

     (3,599     (314

Stock-based compensation

     5,113        5,401   

Loss on disposition of property and equipment, including impairment

     3,223        2,541   

Changes in operating assets and liabilities:

    

Merchandise inventories

     (110,444     (33,717

Income tax refund receivable

            8,618   

Prepayments and other current assets

     (12,164     2,695   

Other assets

     (5,066     289   

Accounts payable and accrued liabilities

     (76,935     (119,268

Income taxes

     29,722        67   

Other liabilities

     10,821        2,792   
                
     (40,220     (1,180
                

Cash flows from investing activities:

    

Purchases of investment securities

     (19,128       

Sales of investment securities

     86,286        4,850   

Capital expenditures

     (38,918     (39,140

Proceeds from dispositions of property and equipment

     141        188   
                
     28,381        (34,102
                

Cash flows from financing activities:

    

Revolving credit facility borrowings

     36,000          

Repayment of revolving credit facility borrowings

     (36,000       

Payment of debt issuance costs

     (2,912       

Repurchases of common stock

     (257,784     (24,758

Change in cash overdrafts

     (17,931       

Proceeds from exercise of employee stock options

     8,926        5,931   

Excess tax benefits from stock-based compensation

     3,599        314   

Payment of dividends

     (20,192     (18,738
                
     (286,294     (37,251
                

Net change in cash and cash equivalents

     (298,133     (72,533

Cash and cash equivalents at beginning of period

     382,754        438,890   
                

Cash and cash equivalents at end of period

   $ 84,621      $ 366,357   
                

See notes to the consolidated condensed financial statements.

 

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Table of Contents

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. General Information

In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of November 27, 2010; the results of operations for the first quarter ended November 27, 2010 (“first quarter of fiscal 2011”), and November 28, 2009 (“first quarter of fiscal 2010”); and the cash flows for the first quarter of fiscal 2011 and first quarter of fiscal 2010. For further information, refer to the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 28, 2010 (“fiscal 2010”).

The results of operations for the first quarter of fiscal 2011 are not necessarily indicative of the results to be expected for the full year.

Certain adjustments and reclassifications of the amounts on the Consolidated Condensed Statements of Cash Flows for the first quarter of fiscal 2010 have been made to conform to the presentation for the first quarter of fiscal 2011. The adjustments and reclassifications are not material.

The preparation of the Company’s Consolidated Condensed Financial Statements, in conformity with generally accepted accounting principles in the United States of America (“GAAP”), requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements that impacted the first quarter of fiscal 2011, or which are expected to impact future periods, that were not already adopted and disclosed in prior periods.

 

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Table of Contents
2. Fair Value Measurements

Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority.

 

  ¡  

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

  ¡  

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

  ¡  

Level 3 – Inputs that are unobservable for the asset or liability.

The unobservable inputs in Level 3 can only be used to measure fair value to the extent that observable inputs in Level 1 and Level 2 are not available. The following table represents the Company’s fair value hierarchy as of November 27, 2010, and August 28, 2010, for items that are required to be measured at fair value on a recurring basis:

 

     November 27, 2010  

(in thousands)

     Fair Value            Level 1              Level 2              Level 3      

Cash equivalents:

           

Money market funds

   $ 11,717       $ 11,717       $       $   

Investment securities:

           

Auction rate securities

     145,064                 50         145,014   

Other debt securities

     50,784         50,784                   

Equity securities

     1,732         1,732                   

Other assets:

           

Mutual funds(1)

     14,187         14,187                   
     August 28, 2010  

(in thousands)

     Fair Value          Level 1          Level 2          Level 3    

Cash equivalents:

           

Money market funds

   $ 287,003       $ 287,003       $       $   

Investment securities:

           

Auction rate securities

     154,158                     7,050         147,108   

Other debt securities

     111,306         111,306                   

Equity securities

     1,969         1,969                   

Other assets:

           

Mutual funds(1)

     11,402         11,402                   

 

  (1)

Represents assets held pursuant to a deferred compensation plan for certain key management employees.

On a non-recurring basis, the Company adjusts certain property and equipment to fair value through impairment charges. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value of the property and equipment is determined based on a discounted cash flow analysis using Level 3 inputs. The Company estimates future cash flows based on historical experience and its expectations of future cash flows. Impairment charges were not material during the first quarter of fiscal 2011.

 

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Table of Contents

Auction Rate Securities

The Company’s investment securities include student loan auction rate securities that were measured at fair value using Level 3 inputs. The auction rate securities are tax-exempt bonds that are collateralized by federally guaranteed student loans. While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates reset periodically in scheduled auctions (generally every 7-35 days). The Company generally has the opportunity to sell its investments during such periodic auctions subject to the availability of buyers.

Beginning in the second quarter of fiscal 2008, issues in the global credit and capital markets led to failed auctions with respect to substantially all of the Company’s auction rate securities. A failed auction typically occurs when the number of securities submitted for sale in the auction exceeds the number of purchase bids. As of November 27, 2010, all of the Company’s $158.5 million par value investments were subject to failed auctions. As a result of the failed auctions, the interest rates on the investments reset to the established rates per the applicable investment offering statements. The Company will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, the securities are repurchased by the broker dealers, or the securities mature.

The Company does not currently expect to liquidate any auction rate securities going forward through the normal auction process. However, the Company does expect to be able to liquidate substantially all of its remaining auction rate securities at par through issuer calls or refinancings, repurchases by the broker dealers, or upon maturity. During the first quarter of fiscal 2011, the Company liquidated $7.2 million of auction rate securities at par as a result of issuer calls. As of November 27, 2010, the Company’s remaining auction rate securities were classified as long-term assets due to the continued failure of the auction process and the continued uncertainty regarding the timing of future liquidity, and were measured at fair value using Level 3 inputs, as discussed below.

Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the resetting rates, and the Company had no cumulative gross unrealized or realized gains or losses from these investments prior to fiscal 2008. However, due to the liquidity issues noted above, the Company had a temporary gross unrealized loss of $13.4 million ($8.5 million, net of taxes) with respect to these investments as of November 27, 2010. Changes in the unrealized loss are included in Accumulated Other Comprehensive Loss within Shareholders’ Equity on the Consolidated Condensed Balance Sheets. Because there is no active market for the Company’s auction rate securities, the fair value of each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the securities will be called or refinanced by the issuer or repurchased by the broker dealers prior to maturity. The discount rates used in the analysis were based on market rates for similar liquid tax-exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the discount rates were adjusted further to reflect the illiquidity of the investments. The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used. A 100 basis point increase or decrease in the discount rate along with a 12-month increase or decrease in the term could result in a gross unrealized loss ranging from $5.4 million to $24.1 million.

The Company evaluated each of its auction rate securities for other-than-temporary impairment. The Company determined that there was no material other-than-temporary impairment as of November 27, 2010. The Company’s evaluation was based on an analysis of the credit rating and parity ratio of each security. The parity ratio is the ratio of trust assets available for distribution to creditors to the trust obligations to those creditors. The credit quality of the Company’s auction rate securities portfolio remains high (77% AAA rated, 16% AA rated, and 7% A rated) and the securities had a weighted average parity ratio of 108% as of November 27, 2010.

The following table summarizes the change in the fair value of the Company’s auction rate securities measured using Level 3 inputs during the first quarter of fiscal 2011 and the first quarter of fiscal 2010 (in thousands):

 

     Quarter Ended  

(in thousands)

   November 27,
2010
    November 28,
2009
 

Beginning Balance

   $ 147,108      $ 163,545   

Net unrealized gains (losses) included in other comprehensive income

     (1,944     2,046   

Sales

     (100     (2,150

Transfers out of Level 3

     (50     (300
                

Ending Balance

   $ 145,014      $ 163,141   

 

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Table of Contents

Additional Fair Value Disclosures

The estimated fair value of the Company’s $250.0 million par value debt was $275.1 million as of November 27, 2010, and $277.8 million as of August 28, 2010. Because the Company’s debt was a private placement and there are no quoted prices in active markets, the fair value was determined through the use of a discounted cash flow analysis using Level 3 inputs. The discount rate used in the analysis was based on borrowing rates available to the Company for debt of the same remaining maturities, issued in the same private placement debt market. The fair value was greater than the carrying value of the debt by $25.1 million as of November 27, 2010, and $27.8 million as of August 28, 2010.

 

3. Current and Long-Term Debt

The Company’s current and long-term debt consisted of the following as of November 27, 2010, and August 28, 2010:

 

(in thousands)

   November 27,
2010
     August 28,
2010
 

5.24% Notes

   $ 81,000       $ 81,000   

5.41% Notes

     169,000         169,000   
                 
     250,000         250,000   

Less: current portion

     16,200           
                 

Long-term portion

   $ 233,800       $ 250,000   

Notes

On September 27, 2005, the Company obtained $250 million through a private placement of unsecured Senior Notes (the “Notes”) to a group of institutional accredited investors. The Notes were issued in two tranches at par and rank pari passu in right of payment with the Company’s other unsecured senior indebtedness. The first tranche has an aggregate principal amount of $169 million, is payable in a single installment on September 27, 2015, and bears interest at a rate of 5.41% per annum from the date of issuance. The second tranche has an aggregate principal amount of $81 million, matures on September 27, 2015, with amortization commencing on September 27, 2011, and bears interest at a rate of 5.24% per annum from the date of issuance. The second tranche has a required principal payment of $16.2 million on September 27, 2011, and on each September 27 thereafter to and including September 27, 2015. Interest on the Notes is payable semi-annually in arrears on the 27th day of March and September of each year. The Notes contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 27, 2010, the Company was in compliance with all such covenants.

On November 17, 2010, the Company amended the Notes to remove all subsidiary co-borrowers and guarantors, consistent with the credit facility changes noted below. The amendment to the Note Purchase Agreement is filed as exhibit 10.4 to this Report on Form 10-Q (the “Report”).

Credit Facilities

On November 17, 2010, the Company entered into a new four-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $400 million. The credit facility matures on November 17, 2014, and provides for two one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The new credit facility is filed as exhibit 10.5 to this Report.

On November 17, 2010, the Company amended its existing five-year $350 million unsecured revolving credit facility maturing on August 24, 2011, and terminated its 364-day $250 million unsecured revolving credit facility maturing on December 15, 2010. The amendment of the five-year facility reduces the borrowing capacity from $350 million to $200 million and limits its usage to stand-by letters of credit only ($143.0 million as of November 27, 2010). The amendment also eliminates the Company’s ability to extend the facility beyond its current maturity date of August 24, 2011, and removes all subsidiary co-borrowers and guarantors. The amendment to the credit facility is filed as exhibit 10.6 to this Report.

During the first quarter of fiscal 2011, the Company borrowed $36.0 million under the credit facilities at a weighted-average rate of 0.5%. As of November 27, 2010, the Company had no outstanding borrowings under the credit facilities. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 27, 2010, the Company was in compliance with all such covenants.

 

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4. Stock Repurchases

On October 5, 2010, the Company entered into an accelerated share repurchase agreement with a large financial institution. In connection with the agreement, the Company made a prepayment of $250.0 million to the financial institution and immediately received 4.4 million shares (80% of the prepayment amount). The financial institution will purchase shares of the Company’s common stock in the open market over an averaging period in order to cover its position with respect to shares it borrowed for the initial delivery and for any shares payable upon settlement. The averaging period began on October 7, 2010, and will end during the second quarter of fiscal 2011. The number of shares to be delivered upon settlement of the agreement will be based on the volume weighted average price of the Company’s common stock during the averaging period less an agreed upon discount. In the event that the total number of shares to be delivered is less than the initial delivery amount, the Company will be required, at its option, to deliver either shares or cash to the financial institution for the difference.

During the first quarter of fiscal 2011, the Company purchased 4.6 million shares of its common stock at a cost of $257.8 million, including the prepayment amount noted above. During the first quarter of fiscal 2010, the Company purchased 0.9 million shares of its common stock at a cost of $24.8 million.

All shares are purchased pursuant to share repurchase authorizations approved by the Board of Directors. On November 18, 2009, the Company announced that the Board of Directors authorized the Company to purchase up to $400 million of the Company’s outstanding common stock from time to time as market conditions warrant. On September 29, 2010, the Company announced that the Board of Directors authorized the Company to purchase up to $750 million of the Company’s outstanding common stock. The remaining amount under the previous authorization was cancelled. As of November 27, 2010, the Company had $500.0 million remaining under the new authorization.

There is no expiration date related to the above referenced authorization. Shares purchased under the share repurchase authorizations are generally held in treasury or have been cancelled and returned to the status of authorized but unissued shares.

 

5. Earnings Per Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per common share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. Certain stock options and performance share rights were excluded from the calculation of diluted net income per common share because their effects were antidilutive (0.3 million shares for the quarter ended November 27, 2010, and 1.5 million shares for the quarter ended November 28, 2009). In the calculation of diluted net income per common share, the denominator includes the number of additional common shares that would have been outstanding if the Company’s outstanding dilutive stock options and performance share rights had been exercised, as determined pursuant to the treasury stock method.

The following table sets forth the computation of basic and diluted net income per common share:

 

     Quarter Ended  

(in thousands, except per share amounts)

   November 27,
2010
    November 28,
2009
 

Basic Net Income Per Share:

    

Net income

   $ 74,315      $ 67,621   
                

Weighted average number of shares outstanding

     127,984        138,686   
                

Net income per common share — basic

   $ 0.58      $ 0.49   
                

Diluted Net Income Per Share:

    

Net income

   $ 74,315      $ 67,621   
                

Weighted average number of shares outstanding

     127,984        138,686   

Effect of dilutive securities — stock options

     691        210   

Effect of dilutive securities — performance share rights

     466        375   
                

Weighted average shares — diluted

     129,141        139,271   
                

Net income per common share — diluted

   $ 0.58      $ 0.49   
                

 

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6. Litigation

Since 2004, individuals who have held the position of Store Manager for the Company have filed lawsuits alleging that the Company violated the Fair Labor Standards Act (“FLSA”), and/or similar state laws, by classifying them as “exempt” employees who are not entitled to overtime compensation. The majority of the complaints in each action also request that the cases proceed as collective actions under the FLSA or as class actions under state laws and request recovery of overtime pay, liquidated damages, and attorneys’ fees and court costs. The Company currently has 22 such cases pending against it.

Grace v. Family Dollar Stores, Inc. and Ward v. Family Dollar Stores, Inc. are both pending in the U.S. District Court for the Western District of North Carolina, Charlotte Division (the “N.C. Federal Court”). In those cases, the court has returned orders finding that the plaintiffs were not similarly situated and, therefore, that neither nationwide notice nor collective treatment under the FLSA is appropriate. Hence, the Grace and Ward cases are proceeding as 43 individual plaintiff cases.

On July 9, 2009, the Court granted summary judgment against Irene Grace on the merits of her misclassification claim under the FLSA. The Company has filed summary judgment motions related to each of the remaining 42 plaintiffs in the Grace and Ward cases. The plaintiffs appealed certain rulings of the N.C. Federal Court to the United States Court of Appeals for the Fourth Circuit including the court’s summary judgment order against Irene Grace. We intend to vigorously defend the Company in these actions; however, no assurances can be given that the Company will be successful in the defense of these matters.

Including Grace and Ward, a total of seventeen class and/or collective or single plaintiff misclassification cases are now pending before the N.C. Federal Court. The N.C. Federal Court has stayed all discovery in these cases pending the outcome of the Grace and Ward appeals. Presently, there are a total of 70 named plaintiffs and/or opt-ins in these cases.

The Company has been sued in four additional class action lawsuits alleging that Store Managers should be non-exempt employees under various state laws. The plaintiffs in these cases seek recovery of overtime pay, liquidated damages, and attorneys’ fees and court costs. Twila Walters et. al. v. Family Dollar Stores of Missouri, Inc., alleging violations of the Missouri Minimum Wage Law, was originally filed on January 26, 2010, and is pending in the Circuit Court of Jackson County, Missouri. Barker v. Family Dollar, Inc., alleging violations of the Kentucky Wages and Hours Law, was filed in Circuit Court in Jefferson County, Kentucky on February 17, 2010, and removed to the United States District Court for the Western District of Kentucky. Youngblood, et al. v. Family Dollar Stores, Inc., Family Dollar, Inc., Family Dollar Stores of New York, Inc. et al., was filed in the United States District Court for the Southern District of New York on April 2, 2009. Rancharan v. Family Dollar Stores, Inc., was filed in the Supreme Court of the State of New York, Queens County on March 4, 2009, was removed to the United States District Court for the Eastern District of New York on May 6, 2009, and was subsequently transferred to the Southern District of New York and has been consolidated with Youngblood.

In general, the Company continues to believe that its Store Managers are “exempt” employees under the FLSA and have been and are being properly compensated under both federal and state laws. The Company further believes that these actions are not appropriate for collective or class action treatment. The Company intends to vigorously defend the claims in these actions. While the N.C. Federal Court has previously found that the Grace and Ward actions are not appropriate for collective action treatment, at this time it is not possible to predict whether one or more of the remaining cases may be permitted to proceed collectively on a nationwide or other basis. No assurances can be given that the Company will be successful in the defense of these actions, on the merits or otherwise. The Company cannot reasonably estimate the possible loss or range of loss that may result from these actions.

If at some point in the future the Company determines that a reclassification of some or all of its Store Managers as non-exempt employees under the FLSA is required, such action could have a material adverse effect on the Company’s financial position, liquidity or results of operation. At this time, the Company cannot quantify the impact of such a determination.

A putative state law class action has been filed on behalf of store Team Members who are paid on an hourly basis. This case, McCauley et al. v. Family Dollar, Inc., was filed on April 27, 2010, in Circuit Court in Jefferson County, Kentucky, and was removed to the United States District Court for the Western District of Kentucky. The plaintiffs allege that they and a putative class of similarly situated store Team Members throughout Kentucky were required to work off the clock and without breaks in violation of the Kentucky Wages and Hours Law. The plaintiffs seek the value of their unpaid wages, liquidated damages in an equal amount, attorneys’ fees and costs, and pre- and post-judgment interest. The Company maintains strict policies prohibiting off-the-clock work and requiring employees to take all breaks required by applicable law, and intends to vigorously defend this action. The Company cannot reasonably estimate the possible loss or range of loss that may result from this action.

On October 14, 2008, a complaint was filed in the U.S. District Court in Birmingham, Alabama, captioned Scott, et al. v. Family Dollar Stores, Inc., alleging discriminatory pay practices with respect to the Company’s female store managers. This case was pled as a putative class action or collective action under applicable statutes on behalf of all Family Dollar female store managers. The plaintiffs seek recovery of compensatory and punitive money damages, recovery of attorneys’ fees and equitable relief. The case has been transferred to the N.C. Federal Court. Presently, there are 48 named plaintiffs in the Scott case, with no additional opt-ins. The Company is vigorously defending the allegations in the Scott case. The Company cannot reasonably estimate the possible loss or range of loss that may result from this action.

 

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The Company is involved in numerous other legal proceedings and claims incidental to its business, including litigation related to alleged failures to comply with various state and federal employment laws, some of which are or may be pled as class or collective actions, and litigation related to alleged personal or property damage, as to which the Company carries insurance coverage and/or has established accrued liabilities as set forth in the Company’s financial statements. While the ultimate outcome cannot be determined, the Company currently believes that these proceedings and claims, both individually and in the aggregate, should not have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, the outcome of any litigation is inherently uncertain and, if decided adversely to the Company, or, if the Company determines that settlement of such actions is appropriate, the Company may be subject to liability that could have a material adverse effect on the Company’s financial position, liquidity or results of operations.

 

7. Comprehensive Income

The following table provides a reconciliation of net income to comprehensive income. The unrealized gains and losses on investment securities are shown net of tax ($0.8 million income tax benefit for the quarter ended November 27, 2010, and $0.5 million income tax expense for the quarter ended November 28, 2009).

 

     Quarter Ended  

(in thousands)

   November 27,
2010
    November 28,
2009
 

Net income

   $ 74,315      $ 67,621   

Other comprehensive income (loss):

    

Unrealized gains (losses) on investment securities

     (1,448     843   
                

Comprehensive income

   $ 72,867      $ 68,464   
                

 

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8. Segment Information

The Company operates a chain of more than 6,800 general merchandise retail discount stores in 44 states, serving the basic needs of customers primarily in the low- and middle-income brackets. The stores are supported by nine distribution centers and one corporate headquarters. All of the stores operate under the Family Dollar name and are substantially the same in terms of size, merchandise, customers, distribution and operations. The Company has no franchised locations or other lines of business. All of the Company’s operations are located in the United States with the exception of certain sourcing entities located in Asia. The foreign operations are not material. The Company manages the business on the basis of one operating segment and therefore, has only one reportable segment. The following table presents net sales by classes of similar products.

 

     Quarter Ended  

(in thousands)

   November 27,
2010
     November 28,
2009
 

Classes of similar Products:

     

Consumables

   $ 1,355,453       $ 1,221,857   

Home Products

     253,036         235,297   

Apparel and Accessories

     192,812         182,299   

Seasonal and Electronics

     195,640         183,453   
                 

Net sales

   $ 1,996,941       $ 1,822,906   
                 

The following table describes the Company’s product categories in more detail:

 

Consumables

  

Household chemicals

  

Paper products

  

Food, including candy and snacks

  

Health and beauty aids

  

Hardware and automotive supplies

  

Pet food and supplies

Home Products

  

Domestics, including blankets, sheets and towels

  

Housewares

  

Giftware

  

Home décor

Apparel and Accessories

  

Men’s clothing

  

Women’s clothing

  

Boys’ and girls’ clothing

  

Infants’ clothing

  

Shoes

  

Fashion accessories

Seasonal and Electronics

  

Toys

  

Stationery and school supplies

  

Seasonal goods

  

Personal electronics, including pre-paid cellular phones and services

 

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

The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the thirteen-week periods ended November 27, 2010, and November 28, 2009 (“first quarter of fiscal 2011” and “first quarter of fiscal 2010”, respectively). This discussion should be read in conjunction with, and is qualified by, the financial statements included in this Report, the financial statements for the fiscal year ended August 28, 2010 (“fiscal 2010”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our Annual Report on Form 10-K for fiscal 2010. This discussion also should be read in conjunction with the “Cautionary Statement Regarding Forward Looking Statements” set forth following this MD&A, and the “Risk Factors” set forth in Part I - Item 1A of our Annual Report on Form 10-K for fiscal 2010.

Executive Overview

We operate a chain of more than 6,800 general merchandise retail discount stores in 44 states, providing primarily low- and middle-income consumers with a selection of competitively priced merchandise in convenient neighborhood stores. Our merchandise assortment includes Consumables, Home Products, Apparel and Accessories, and Seasonal and Electronics. We sell merchandise at prices that generally range from less than $1 to $10.

During the first quarter of fiscal 2011, as compared with the first quarter of fiscal 2010, our net sales increased 9.5% to $2.0 billion, our net income increased 9.9% to $74.3 million, and our diluted net income per common share increased 18.4% to $0.58. Comparable store sales (stores open more than 13 months) for the first quarter of fiscal 2011 increased 6.9% compared with the first quarter of fiscal 2010.

Our performance during the first quarter of fiscal 2011 was driven primarily by our strong sales performance, particularly in the consumable categories. Many of the initiatives we launched over the past several years continue to deliver results, including the expansion of our key consumable categories and the expansion of our operating hours in fiscal 2010. During fiscal 2011, we remain focused on continuing to strengthen our value and convenience proposition. In addition, we are accelerating our new store growth and launching a comprehensive store renovation program.

During the first quarter of fiscal 2011, we opened 85 stores and closed 18 stores for a net addition of 67 stores, compared with the opening of 43 stores and closing of 33 stores for a net addition of 10 stores during the first quarter of fiscal 2010. We plan to open approximately 300 new stores during fiscal 2011, a 50% increase over fiscal 2010 openings.

Leveraging our concept renewal efforts, enhanced merchandising and supply chain capabilities, a refreshed store technology platform, and a better trained and more productive workforce, we are initiating a comprehensive renovation program intended to re-energize the Family Dollar brand. During the first quarter of fiscal 2011, we renovated 173 stores under the renovation program. We plan to renovate approximately 800 stores by the end of fiscal 2011, at a projected cost of $100,000 to $130,000 per store. The renovations address both the interior and exterior of the stores and create more customer-focused assortments and layouts and more customer-centric teams.

 

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Results of Operations

Our results of operations for the first quarter of fiscal 2011 and the first quarter of fiscal 2010 are highlighted in the table below and discussed in the following paragraphs:

 

     Quarter Ended  

(in thousands)

   November 27, 2010      November 28, 2009  

Net sales

   $ 1,996,941       $ 1,822,906   

Cost and expenses:

     

Cost of sales

     1,277,376         1,164,684   

% of net sales

     64.0%         63.9%   

Selling, general and administrative

     597,983         548,551   

% of net sales

     29.9%         30.1%   
                 

Cost of sales and operating expenses

     1,875,359         1,713,235   

% of net sales

     93.9%         94.0%   
                 

Operating profit

     121,582         109,671   

% of net sales

     6.1%         6.0%   

Interest income

     387         395   

% of net sales

     0.0%         0.0%   

Interest expense

     3,518         3,335   

% of net sales

     0.2%         0.2%   
                 

Income before income taxes

     118,451         106,731   

% of net sales

     5.9%         5.9%   

Income taxes

     44,136         39,110   

% of net sales

     2.2%         2.1%   
                 

Net Income

   $ 74,315       $ 67,621   

% of net sales

     3.7%         3.7%   
                 

Net Sales

Net sales increased 9.5% in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The net sales increase in the first quarter of fiscal 2011 reflects an increase in comparable store sales of 6.9%, with the balance of the increase due primarily to sales from new stores opened as part of our store growth program. Comparable store sales includes stores that have been open more than 13 months. Stores that have been renovated, relocated or expanded are included in the comparable store sales calculation to the extent that they had sales during comparable weeks in each year. The method of calculating comparable store sales varies across the retail industry. As a result, our comparable store sales calculation may not be comparable to similarly titled measures reported by other companies.

The 6.9% increase in comparable store sales in the first quarter of fiscal 2011 resulted primarily from an increase in customer traffic, as measured by the number of register transactions in comparable stores. The dollar value of the average customer transaction was approximately flat. Sales during the first quarter of fiscal 2011, on a comparable store basis, were strongest in the Consumables category.

The average number of stores in operation during the first quarter of fiscal 2011 was 2.4% higher than the average number of stores in operation during the first quarter of fiscal 2010. We had 6,852 stores in operation at the end of the first quarter of fiscal 2011 compared with 6,665 stores in operation at the end of the first quarter of fiscal 2010, representing an increase of 2.8%. As of November 27, 2010, we had, in the aggregate, approximately 48.7 million square feet of selling space compared to 47.3 million as of November 28, 2009.

 

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Cost of Sales

Cost of sales increased 9.7% in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The increase was due primarily to additional sales volume. Cost of sales, as a percentage of net sales, was 64.0% in the first quarter of fiscal 2011 and 63.9% in the first quarter of fiscal 2010. The increase in cost of sales, as a percentage of net sales, was due primarily to increased sales of lower-margin consumable merchandise and an increase in freight expense, offset in large part by lower inventory shrinkage. Freight expense was negatively impacted by higher diesel costs. We believe that inventory shrinkage benefited from continued workforce stabilization in our stores and improved analytics and monitoring processes.

Selling, General and Administrative Expenses

SG&A expenses increased 9.0% in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The increases in these expenses were due in part to additional sales volume and additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 29.9% in the first quarter of fiscal 2011 and 30.1% in the first quarter of fiscal 2010. Most costs in the first quarter of fiscal 2011, including occupancy costs, were leveraged as a result of a 6.9% increase in comparable store sales and continued productivity improvements, which more than offset an increase in store payroll expense (approximately 0.4% of net sales) and increased advertising expense (approximately 0.1% of net sales). The increase in store payroll expense was due primarily to the expansion of our store operating hours and store renovation program. Our advertising expense increased as we are expanding our customer communications, leveraging various marketing vehicles, and developing new customer relationship management tools to help us optimize our marketing and promotional materials.

Interest Income

The change in interest income in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 was not material.

Interest Expense

The change in interest expense in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 was not material.

Income Taxes

The effective tax rate was 37.3% for the first quarter of fiscal 2011 compared with 36.6% for the first quarter of fiscal 2010. The increase in the effective tax rate was due primarily to a decrease in federal jobs tax credits, an increase in state income taxes, and an increase in our liabilities for uncertain tax positions.

Liquidity and Capital Resources

General

We have consistently maintained a strong liquidity position, and our operating cash flows are generally sufficient to fund our regular operating needs, capital expenditure program, cash dividend payments, interest payments, and share repurchases. During the first quarter of fiscal 2011, our cash and cash equivalents decreased $298.1 million, due primarily to the funding of $257.8 million in stock repurchases. Despite the decrease in cash and cash equivalents, our working capital level remains strong. Working capital at the end of the first quarter of fiscal 2011 was $397.7 million compared to $722.0 million as of the end of the first quarter of fiscal 2010. Working capital at the end of the first quarter of fiscal 2010 was adjusted to reflect the insurance adjustments disclosed in Note 1 of our Annual Report on Form 10-K for fiscal 2010. We believe operating cash flows and existing credit facilities will provide sufficient liquidity for our ongoing operations, and growth initiatives. We plan to fund future share repurchases through a combination of cash on hand, cash from operations and potentially, debt financings.

Credit Facilities

On November 17, 2010, we entered into a new four-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $400 million. The credit facility matures on November 17, 2014, and provides for two one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The new credit facility is filed as exhibit 10.5 to this Report.

              On November 17, 2010, we also amended our existing five-year $350 million unsecured revolving credit facility maturing on August 24, 2011, and terminated our 364-day $250 million unsecured revolving credit facility maturing on December 15, 2010. The amendment of the five-year facility reduces the borrowing capacity from $350 million to $200 million and limits its usage to stand-by letters of credit only ($143.0 million as of November 27, 2010). The amendment also eliminates our ability to extend the facility beyond its current maturity date of August 24, 2011, and removes all subsidiary co-borrowers and guarantors. The amendment to the credit facility is filed as exhibit 10.6 to this Report.

 

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During the first quarter of fiscal 2011, we borrowed $36.0 million under the credit facilities at a weighted-average rate of 0.5%. As of November 27, 2010, we had no outstanding borrowings under the credit facilities. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 27, 2010, we were in compliance with all such covenants.

Notes

On September 27, 2005, we obtained $250 million through a private placement of unsecured Senior Notes (the “Notes”) to a group of institutional accredited investors. The Notes were issued in two tranches at par and rank pari passu in right of payment with our other unsecured senior indebtedness. The first tranche has an aggregate principal amount of $169 million, is payable in a single installment on September 27, 2015, and bears interest at a rate of 5.41% per annum from the date of issuance. The second tranche has an aggregate principal amount of $81 million, matures on September 27, 2015, with amortization commencing on September 27, 2011, and bears interest at a rate of 5.24% per annum from the date of issuance. The second tranche has a required principal payment of $16.2 million on September 27, 2011, and on each September 27 thereafter to and including September 27, 2015. Interest on the Notes is payable semi-annually in arrears on the 27th day of March and September of each year. The Notes contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 27, 2010, we were in compliance with all such covenants.

On November 17, 2010, we amended the Notes to remove all subsidiary co-borrowers and guarantors, consistent with the credit facility changes noted above. The amendment to the Note Purchase Agreement is filed as exhibit 10.4 to this Report.

We are considering incurring additional debt in order to fund part of our $750 million stock repurchase program, which we announced on September 29, 2010. We have not yet determined whether to do so or in what form, and the terms and availability of debt financing will depend on market conditions. In analyzing our credit we consider our ability to service not only our financial indebtedness but also our lease obligations.

Other Considerations

Our merchandise inventories at the end of the first quarter of fiscal 2011 were 10.8% higher than at the end of the first quarter of fiscal 2010. Inventory per store at the end of the first quarter of fiscal 2011 was approximately 7.8% higher than inventory per store at the end of the first quarter of fiscal 2010. The increases in inventory were driven primarily by an increased focus on improving the in-stock levels in our stores and the investments we are making to support the expansion of our consumable merchandise assortments, including our comprehensive store renovation program.

Capital expenditures for the first quarter of fiscal 2011 were $38.9 million compared with $39.1 million for the first quarter of fiscal 2010. The capital expenditures during the first quarter of fiscal 2011 relate primarily to the investments we are making related to our comprehensive renovation program and new store growth. Capital expenditures for fiscal 2011 are expected to be between $300 and $350 million and relate primarily to the investments we are making to drive revenue growth, including the acceleration of our new store growth and the launch of our comprehensive store renovation program. The remaining expenditures relate primarily to technology-related projects and costs to begin construction of our tenth distribution center.

In the first quarter of fiscal 2011, we opened 85 stores, closed 18 stores, relocated 5 stores, expanded 6 stores, and renovated 173 stores. The renovations are part of a comprehensive store renovation program intended to re-energize the Family Dollar brand. During fiscal 2011, we plan to renovate approximately 800 stores at a projected cost of $100,000 to $130,000 per store. The renovations address both the interior and exterior of the stores and create more customer-focused assortments and layouts and more customer-centric teams. We occupy most of our stores under operating leases. Store opening, closing, relocation, expansion, and renovation plans, as well as overall capital expenditure plans, are continually reviewed and may change.

On September 29, 2010, we announced that the Board of Directors authorized the purchase of up to $750 million of our outstanding common stock. The remaining amount under the previous authorization was cancelled. On October 5, 2010, we entered into an accelerated share repurchase agreement with a large financial institution for $250.0 million. See Note 4 to the Consolidated Condensed Financial Statements included in this Report for more information.

During the first quarter of fiscal 2011, we purchased 4.6 million shares of our common stock at a cost of $257.8 million, including prepaid amounts for the accelerated share repurchase agreement noted above. During the first quarter of fiscal 2010, we purchased 0.9 million shares at a cost of $24.8 million. As of November 27, 2010, we had outstanding authorizations to purchase a total of $500.0 million of our common stock.

              The timing and amount of any shares repurchased have been and will continue to be determined by management based on its evaluation of market conditions and other factors. Our share repurchase program does not have a stated expiration date, and purchases may be made through open market purchases, private market transactions or other structured transactions.

 

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Our wholly-owned captive insurance subsidiary maintains certain balances in cash and cash equivalents and investment securities that are used in connection with our retained workers’ compensation, general liability and automobile liability risks and are not designated for general corporate purposes. As of November 27, 2010, these cash and cash equivalents and investment securities balances were $11.8 million and $97.8 million, respectively.

Cash Flows From Operating Activities

Cash provided by operating activities decreased $39.0 million during the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010. The decrease was due primarily to an increase in merchandise inventories, offset partially by changes in accounts payable and accrued liabilities, all in the ordinary course of business.

Cash Flows From Investing Activities

During the first quarter of fiscal 2011, we had a cash inflow from investing activities of $28.4 million compared to a cash outflow of $34.1 million in the first quarter of fiscal 2010. The change was due primarily to the sale of investment securities during the first quarter of fiscal 2011 in order to fund our share repurchase program. During the first quarter of fiscal 2011, we had a cash inflow of $67.2 million from the sale of investment securities, net of purchases, compared to a cash inflow of $4.9 million during the first quarter of fiscal 2010.

Cash Flows From Financing Activities

During the first quarter of fiscal 2011, we had a cash outflow from financing activities of $286.3 million compared to a cash outflow of $37.3 million during the first quarter of fiscal 2010. The increase was due primarily to an increase in repurchases of common stock, offset partially by changes in cash overdrafts. We paid $257.8 million for purchases of our common stock during the first quarter of fiscal 2011 compared to $24.8 million in the first quarter of fiscal 2010.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements that impacted the first quarter of fiscal 2011, or which are expected to impact future periods, that were not already adopted and disclosed in prior periods.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ from these estimates.

There have been no material changes to the Critical Accounting Policies disclosed in our Annual Report on Form 10-K for fiscal 2010.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Report, or in other public filings, press releases, or other written or oral communications made by Family Dollar or our representatives, which are not historical facts, are forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things, our plans, activities or events which we expect will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance, including, but not limited to, investment and financing plans, net sales, comparable store sales, cost of sales, SG&A expenses, earning per diluted share, dividends and share repurchases; or statements regarding the outcome or impact of pending or threatened litigation. These forward-looking statements may be identified by the use of the words “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties and other factors may cause our actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in Part I - Item 1A of our Annual Report on Form 10-K for fiscal 2010, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Critical Accounting Policies” in Part I - Item 2 above, or in other filings or statements made by us. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

 

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You should not place undue reliance on the forward-looking statements included in this Report. We assume no obligation to update any forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission (“SEC”).

Item  3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We maintain unsecured revolving credit facilities at variable rates of interest to meet the short-term needs of our expansion program and seasonal inventory increases. During the first quarter of fiscal 2011 and the first quarter of fiscal 2010, we did not incur any material interest expense related to our credit facilities. Our $250.0 million of current and long-term debt related to the Notes bears interest at fixed rates ranging from 5.24% to 5.41%.

We are also subject to market risk from exposure to changes in the fair value of our investment securities. Our investment securities currently include auction rate securities that are subject to failed auctions and are not currently liquid. As of November 27, 2010, we had a $13.4 million unrealized loss ($8.5 million net of taxes) related to these investments. We believe that we will be able to liquidate our auction rate securities at par at some point in the future as a result of issuer calls or refinancings, repurchases by the broker dealers, or upon maturity. However, volatility in the credit markets could continue to negatively impact the timing of future liquidity related to these investments and lead to additional adjustments to their carrying value. See Note 2 to the Consolidated Condensed Financial Statements included in this Report for more information on our auction rate securities.

Item  4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of November 27, 2010. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of November 27, 2010.

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

The information in Note 6 to the Consolidated Condensed Financial Statements contained in Part I, Item 1 of the Form 10-Q is incorporated herein by this reference.

Item 1A.  Risk Factors

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for fiscal 2010.

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

The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended November 27, 2010, by us, on our behalf, or by any “affiliated purchaser” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934.

 

Period

   Total Number
of  Shares
Purchased
     Average Price
Paid Per  Share
     Total Number of
Shares  Purchased as
Part of Publicly
Announced Plans or
Programs(1)
     Maximum Number
of Shares  that May
Yet Be Purchased
Under the Plans or
Programs(1) (2)
 

September (8/29/10 - 10/2/10)

     183,259       $ 42.47         183,259         16,930,023   

October (10/3/10 - 10/30/10)

     4,411,116         45.34         4,411,116         10,829,543   

November (10/31/10 - 11/27/10)

                             9,867,772   
                                   

Total

     4,594,375       $ 45.23         4,594,375         9,867,772   
                                   

 

  (1)

On November 18, 2009, we announced that the Board of Directors authorized the purchase of up to $400 million of our outstanding common stock from time to time as market conditions warrant. On September 29, 2010, we announced that the Board of Directors authorized the purchase of up to $750 million of our outstanding common stock. The remaining amount under the previous authorization was cancelled. As of November 27, 2010, there was $500.0 million remaining under the new authorization.

 

  (2)

Remaining dollar amounts are converted to shares using the closing stock price as of the end of the fiscal month.

On October 5, 2010, we entered into an accelerated share repurchase agreement with a large financial institution for $250.0 million. See Note 4 to the Consolidated Condensed Financial Statements included in this Report for more information.

 

20


Table of Contents

Item 6.  Exhibits

 

      (a)      Exhibits incorporated by reference:

*    10.1   

Issuer Accelerated Share Repurchase Transaction Confirmation dated October 5, 2010, between Family Dollar Stores, Inc., and Wells Fargo Bank, N.A. (filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended August 28, 2010)

**    10.2   

Summary of compensation arrangements of the Company’s named executive officers for fiscal 2011 (filed under Item 5.02 in the Company’s Current Report on Form 8-K filed with the SEC on October 15, 2010)

**    10.3   

Family Dollar Stores, Inc., 2006 Incentive Plan (filed as Appendix B to the Company’s Definitive Proxy Statement filed with the SEC on December 7, 2010)

      (a)      Exhibits filed herewith:

   10.4   

First Amendment dated as of November 17, 2010, to the Note Purchase Agreement dated as of September 27, 2005, between Family Dollar Stores, Inc. and the various purchasers named therein, relating to $169,000,000 5.41% Series 2005-A Senior Notes, Tranche A, due September 27, 2015 and $81,000,000 5.24% Series 2005-A Senior Notes, Tranche B, due September 27, 2015

  

10.5

  

$400 Million Credit Agreement dated as of November 17, 2010, by and among Family Dollar Stores, Inc. as Borrower, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders party thereto

  

10.6

  

Second Amendment dated as of November 17, 2010, to the Credit Agreement dated August 24, 2006, between the Family Dollar Stores, Inc., as Borrower, and Wells Fargo Bank, National Association (successor by merger to Wachovia Bank, National Association), as Administrative Agent, and various lenders named therein

  

31.1

  

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

31.2

  

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

32

  

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   101.INS   

XBRL Instance Document

   101.SCH   

XBRL Taxonomy Extension Schema Document

   101.CAL   

XBRL Taxonomy Extension Calculation Linkbase Document

   101.LAB   

XBRL Taxonomy Extension Label Linkbase Document

   101.PRE   

XBRL Taxonomy Extension Presentation Linkbase Document

   101.DEF   

XBRL Taxonomy Extension Definitions Linkbase Document

 

  * Confidential treatment has been granted with respect to certain information in this exhibit pursuant to a confidential treatment request
  ** Exhibit represents a management contract or compensatory plan

 

21


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

        FAMILY DOLLAR STORES, INC.
    (Registrant)

Date: January 5, 2011

   

/s/ Kenneth T. Smith

    Kenneth T. Smith
    Senior Vice President – Chief Financial Officer

Date: January 5, 2011

   

/s/ C. Martin Sowers

    C. Martin Sowers
    Senior Vice President – Finance

 

22

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