XNYS:FDO Family Dollar Stores Inc Quarterly Report 10-Q Filing - 5/26/2012

Effective Date 5/26/2012

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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 May 26, 2012

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 June 19, 2012

Common Stock, $0.10 par value     116,861,728


Table of Contents

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

INDEX

 

     Page No.  

Part I - Financial Information

  

Item 1 - Consolidated Condensed Financial Statements (unaudited):

  

Consolidated Condensed Balance Sheets –

May 26, 2012, and August 27, 2011

     3   

Consolidated Condensed Statements of Income –

Quarter Ended May 26, 2012, and May 28, 2011

     4   

Consolidated Condensed Statements of Income –

Three Quarters Ended May 26, 2012, and May 28, 2011

     5   

Consolidated Condensed Statements of Cash Flows –

Three Quarters Ended May 26, 2012, and May 28, 2011

     6   

Notes to Consolidated Condensed Financial Statements

     7   

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

     17   

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

     25   

Item 4 - Controls and Procedures

     25   

Part II - Other Information

  

Item 1 - Legal Proceedings

     26   

Item 1A - Risk Factors

     26   

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

     26   

Item 6 - Exhibits

     27   

Signatures

     28   

 

2


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)

     May 26,  
2012
      August 27,  
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 120,901      $ 141,405   

Short-term investment securities

     21,006        96,006   

Restricted cash and investments

     82,197          

Merchandise inventories

     1,387,380        1,154,660   

Deferred income taxes

     53,212        60,011   

Income tax refund receivable

            10,326   

Prepayments and other current assets

     44,137        71,436   
  

 

 

   

 

 

 

Total current assets

     1,708,833        1,533,844   

Property and equipment, net

     1,420,034        1,280,589   

Investment securities

     60,888        107,458   

Other assets

     83,289        74,314   
  

 

 

   

 

 

 

Total assets

   $ 3,273,044      $ 2,996,205   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 16,200      $ 16,200   

Accounts payable

     695,292        685,063   

Accrued liabilities

     300,290        310,818   

Income taxes

     25,285        4,974   
  

 

 

   

 

 

 

Total current liabilities

     1,037,067        1,017,055   

Long-term debt

     516,283        532,370   

Other liabilities

     328,101        270,466   

Deferred income taxes

     79,099        89,240   

Commitments and contingencies (Note 8)

    

Shareholders’ equity (Notes 1 and 6):

    

Preferred stock, $1 par; authorized 500,000 shares; no shares issued and outstanding

              

Common stock, $.10 par; authorized 600,000,000 shares; issued 119,114,905 shares at May 26, 2012, and 147,316,232 shares at August 27, 2011, and outstanding 116,860,678 shares at May 26, 2012, and 117,353,341 shares at August 27, 2011

     11,911        14,732   

Capital in excess of par

     256,898        274,445   

Retained earnings

     1,153,453        1,969,749   

Accumulated other comprehensive loss

     (3,750     (6,403

Common stock held in treasury, at cost (2,254,227 shares at May 26, 2012, and 29,962,891 shares at August 27, 2011)

     (106,018     (1,165,449
  

 

 

   

 

 

 

Total shareholders’ equity

     1,312,494        1,087,074   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $    3,273,044      $ 2,996,205   
  

 

 

   

 

 

 

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)

   May 26,
2012
     May 28,
2011
 

Net sales

   $ 2,359,957       $ 2,153,395   

Cost and expenses:

     

Cost of sales

     1,514,684         1,373,639   

Selling, general and administrative

     645,867         595,403   
  

 

 

    

 

 

 

Cost of sales and operating expenses

     2,160,551         1,969,042   
  

 

 

    

 

 

 

Operating profit

     199,406         184,353   

Investment income

     274         455   

Interest expense

     5,635         7,144   
  

 

 

    

 

 

 

Income before income taxes

     194,045         177,664   

Income taxes

     69,505         66,563   
  

 

 

    

 

 

 

Net income

   $ 124,540       $ 111,101   
  

 

 

    

 

 

 

Net income per common share — basic

   $ 1.07       $ 0.91   
  

 

 

    

 

 

 

Weighted average shares — basic

     116,815         121,546   
  

 

 

    

 

 

 

Net income per common share — diluted

   $ 1.06       $ 0.91   
  

 

 

    

 

 

 

Weighted average shares — diluted

     117,633         122,656   
  

 

 

    

 

 

 

Dividends declared per common share

   $ 0.21       $ 0.18   
  

 

 

    

 

 

 

See notes to the consolidated condensed financial statements.

 

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Three Quarters Ended  

(in thousands, except per share amounts)

   May 26,
2012
     May 28,
2011
 

Net sales

   $ 6,966,880       $ 6,413,505   

Cost and expenses:

     

Cost of sales

     4,506,636         4,106,817   

Selling, general and administrative

     1,904,800         1,800,388   
  

 

 

    

 

 

 

Cost of sales and operating expenses

     6,411,436         5,907,205   
  

 

 

    

 

 

 

Operating profit

     555,444         506,300   

Investment income

     716         1,264   

Interest expense

     18,772         15,244   
  

 

 

    

 

 

 

Income before income taxes

     537,388         492,320   

Income taxes

     196,079         183,724   
  

 

 

    

 

 

 

Net income

   $ 341,309       $ 308,596   
  

 

 

    

 

 

 

Net income per common share — basic

   $ 2.91       $ 2.47   
  

 

 

    

 

 

 

Weighted average shares — basic

     117,331         124,716   
  

 

 

    

 

 

 

Net income per common share — diluted

   $ 2.89       $ 2.45   
  

 

 

    

 

 

 

Weighted average shares — diluted

     118,176         125,833   
  

 

 

    

 

 

 

Dividends declared per common share

   $ 0.600       $ 0.515   
  

 

 

    

 

 

 

See notes to the consolidated condensed financial statements.

 

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Quarters Ended  

(in thousands)

   May 26,
2012
    May 28,
2011
 

Cash flows from operating activities:

    

Net income

   $ 341,309      $ 308,596   

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

    

Depreciation and amortization

     153,130        135,026   

Deferred income taxes

     3,336        18,031   

Excess tax benefits from stock-based compensation

     (12,234     (4,641

Stock-based compensation

     14,033        11,369   

Loss on disposition of property and equipment, including impairment

     10,331        5,674   

Changes in operating assets and liabilities:

    

Merchandise inventories

     (232,720     (106,381

Prepayments and other current assets

     27,308        (11,514

Other assets

     (1,242     (2,723

Accounts payable and accrued liabilities

     (72,275     (82,200

Income taxes

     30,637        17,379   

Other liabilities

     (7,766     18,872   
  

 

 

   

 

 

 
     253,847        307,488   

Cash flows from investing activities:

    

Purchases of investment securities

     (92,559     (338,482

Sales of investment securities

     217,017        308,470   

Change in restricted cash and investments

     (90,930       

Net proceeds from sale-leaseback

     177,552          

Capital expenditures

     (391,418     (230,302

Proceeds from dispositions of property and equipment

     739        812   
  

 

 

   

 

 

 
     (179,599     (259,502

Cash flows from financing activities:

    

Revolving credit facility borrowings

     306,300        46,000   

Repayment of revolving credit facility borrowings

     (306,300     (46,000

Issuance of long-term debt

            298,482   

Payment of debt issuance costs

            (6,585

Repayment of long-term debt

     (16,200       

Repurchases of common stock

     (91,573     (512,513

Change in cash overdrafts

     43,016        (2,321

Proceeds from exercise of employee stock options

     24,620        16,780   

Excess tax benefits from stock-based compensation

     12,234        4,641   

Payment of dividends

     (66,849     (61,796
  

 

 

   

 

 

 
     (94,752     (263,312

Net change in cash and cash equivalents

     (20,504     (215,326

Cash and cash equivalents at beginning of period

     141,405        382,754   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 120,901      $ 167,428   
  

 

 

   

 

 

 

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

(Unaudited)

 

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 May 26, 2012; the results of operations for the thirteen-week and thirty-nine week periods ended May 26, 2012 (“third quarter and first three quarters of fiscal 2012”), and May 28, 2011 (“third quarter and first three quarters of fiscal 2011”); and the cash flows for the thirty-nine week periods ended May 26, 2012 and May 28,2011. The Unaudited Consolidated Condensed Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2011 (“fiscal 2011”).

The results of operations for the third quarter and first three quarters of fiscal 2012 are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications of the amounts on the Consolidated Condensed Statements of Cash Flows for the first three quarters of fiscal 2011 have been made to conform to the presentation of the first three quarters of fiscal 2012. These 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

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The adoption of ASU 2011-04 in the third quarter of fiscal 2012 did not have a material impact on the Company’s Consolidated Condensed Financial Statements.

In June 2011, FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 deferred certain aspects of ASU 2011-05. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is not required to adopt this guidance until the first quarter of fiscal 2013. The adoption of ASU 2011-05 and the deferrals in ASU 2011-12 are not expected to have a material impact on the Company’s Consolidated Condensed Financial Statements.

Update to Significant Accounting Policies

The Company periodically retires treasury shares that it acquires through share repurchases and returns those shares to the status of authorized but unissued. When treasury shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired to both Retained Earnings and Capital in Excess of Par. The portion allocated to Capital in Excess of Par is calculated on a pro-rata basis of the shares to be retired and the total shares issued and outstanding as of the date of the retirement.

 

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, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

 

  ¡  

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

 

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  ¡  

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 May 26, 2012, and August 27, 2011, for items that are required to be measured at fair value on a recurring basis:

 

     May 26, 2012  

(in thousands)

     Fair Value            Level 1              Level 2              Level 3      

Cash equivalents:

           

Money market funds

   $ 48,097       $ 48,097       $       $   

Investment securities:

           

Auction rate securities

     60,888                         60,888   

Variable rate demand notes

     7,185         7,185                   

Short-term bond mutual fund

     5,000         5,000                   

Municipal debt securities

     6,796                 6,796           

Corporate debt securities

     911                 911           

Equity securities

     1,114         1,114                   

Restricted cash and investments:(2)

           

Money market funds

     437         437                   

Municipal debt securities

     54,542                 54,542           

Other assets:

           

Mutual funds (1)

     17,823         17,823                   
     August 27, 2011  

(in thousands)

     Fair Value          Level 1          Level 2          Level 3    

Cash equivalents:

           

Money market funds

   $ 77,842       $ 77,842       $       $   

Investment securities:

           

Auction rate securities

     107,608                 150         107,458   

Variable rate demand notes

     42,299         42,299                   

Municipal debt securities

     51,398                 51,398           

Corporate debt securities

     950                 950           

Equity securities

     1,209         1,209                   

Other assets:

           

Mutual funds(1)

     15,580         15,580                   

 

  (1) 

Represents assets held pursuant to a deferred compensation plan.

  (2)

As of May 26, 2012, restricted cash and investments of $46.2 million and $8.8 million were included in Restricted Cash and Investments and Other Assets, respectively, in the Consolidated Condensed Balance Sheet.

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 or asset group 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 performance. Impairment charges were not material during the third quarter or first three quarters of fiscal 2012.

 

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Level 2 Inputs

The majority of the assets classified as Level 2 are valued by a third-party pricing service which uses matrix pricing to value the assets. The Company believes that while a majority of the assets valued using Level 2 inputs currently trade in active markets and prices could be obtained for identical assets, the classification of these investments as Level 2 is more appropriate when matrix pricing is used.

Auction Rate Securities

The Company’s auction rate securities (“ARS”) are tax-exempt bonds that are collateralized by federally guaranteed student loans and are valued using Level 3 inputs. 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). Due to the continued issues in the global credit and capital markets, specifically as it relates to the ARS market, the Company’s ARS portfolio experienced sustained failed auctions. A failed auction typically occurs when the number of securities submitted for sale in the auction exceeds the number of purchase bids. As of May 26, 2012, all of the Company’s $66.0 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, or the underlying securities mature.

The Company does not currently expect to liquidate any ARSs going forward through the normal auction process. However, the Company does expect to be able to liquidate substantially all of its remaining ARS portfolio at par through issuer calls, refinancings or upon maturity. During the third quarter and first three quarters of fiscal 2012, the Company liquidated $37.7 million and $51.0 million, respectively, of the ARS portfolio at par as a result of issuer calls. Additionally, subsequent to the end of the third quarter of fiscal 2012, the Company liquidated an additional $10.0 million of the ARS portfolio at par. As of May 26, 2012, all of the Company’s ARS portfolio was subject to failed auctions and was classified as long-term assets due to the continued failure of the auction process and the continued uncertainty regarding the timing of future liquidity.

The Company had a temporary gross unrealized loss of $5.1 million ($3.2 million, net of taxes) and $9.3 million ($5.8 million, net of taxes) with respect to its ARS portfolio as of May 26, 2012, and August 27, 2011, respectively. 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 ARS portfolio, the fair value of each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The two most significant unobservable inputs used in the analysis are the weighted average expected term to liquidate the securities and the illiquidity factor applied to the discount rate. The weighted average expected term assumption used in the analysis is based on the Company’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 are 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, a factor was applied to the discount rates to reflect the illiquidity of the investments. These inputs used in the Company’s analysis are sensitive to market conditions and the Company’s valuation of its ARS portfolio can change significantly based on the assumptions used. As of May 26, 2012, a 100 basis point increase or decrease in the illiquidity factor along with a 12-month increase or decrease in the weighted average term could result in a gross unrealized loss ranging from $2.0 million to $9.3 million.

The Company also evaluated each of its ARS for other-than-temporary impairment. 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 ARS portfolio remains high (92% AAA rated and 8% A rated), and the securities had a weighted average parity ratio of 112.7% as of May 26, 2012. Based on these factors, the Company concluded that there was no other-than-temporary impairment as of May 26, 2012.

 

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The following table summarizes the change in the fair value of the Company’s ARS portfolio measured using Level 3 inputs during the third quarter and first three quarters of fiscal 2012 and the third quarter and first three quarters of fiscal 2011:

 

     Quarter Ended  

(in thousands)

   May 26,
2012
    May 28,
2011
 

Beginning Balance

   $ 95,365      $ 142,664   

Net unrealized gains (losses) included in other comprehensive income

     3,173        4,559   

Sales

     (37,650     (39,800

Transfers out of Level 3

            (500
  

 

 

   

 

 

 

Ending Balance

   $ 60,888      $ 106,923   
     Three Quarters Ended  

(in thousands)

   May 26,
2012
    May 28,
2011
 

Beginning Balance

   $ 107,458      $ 147,108   

Net unrealized gains (losses) included in other comprehensive income

     4,255        1,390   

Sales

     (50,825     (41,075

Transfers out of Level 3

            (500
  

 

 

   

 

 

 

Ending Balance

   $ 60,888      $ 106,923   

Additional Fair Value Disclosures

The estimated fair value of the Company’s current and long-term debt was $570.8 million as of May 26, 2012, and $566.0 million as of August 27, 2011. The Company has both public notes and private placement notes. The fair value for the public notes is determined using Level 1 inputs as quoted prices in active markets for identical assets or liabilities are available. The fair value of the portion of the debt that are private placement notes is determined through the use of a discounted cash flow analysis using Level 3 inputs as there are no quoted prices in active markets for these notes. 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 of the Company’s current and long-term debt was greater than the carrying value of the debt by $38.3 million as of May 26, 2012, and $16.0 million as of August 27, 2011.

3.     Current and Long-Term Debt

Principal Payment

During the first quarter of fiscal 2012, the Company made a scheduled principal payment on its private placement notes in the amount of $16.2 million. The next principal payment of $16.2 million is due in September 2012.

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 credit facility replaced the previous 364-day $250 million unsecured revolving credit facility.

On August 17, 2011, the Company entered into a new five-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $300 million. The credit facility matures on August 17, 2016, 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 credit facility replaced the Company’s previous five-year $200 million unsecured credit facility.

During the third quarter and first three quarters of fiscal 2012, the Company borrowed $55.0 million and $306.3 million, respectively, under the credit facilities at a weighted-average rate of 1.5% and 1.6%, respectively. As of May 26, 2012, the Company had no borrowings outstanding 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 May 26, 2012, the Company was in compliance with all such covenants.

 

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4. Sale-Leaseback Transaction

During the third quarter of fiscal 2012, the Company completed a sale-leaseback transaction under which it sold 137 stores to an unrelated third party. Net proceeds from these sales were $177.6 million. Concurrent with these sales, the Company entered into agreements to lease the properties back from the purchaser over an initial lease terms of 15 years. The master leases for the 137 stores includes an initial term of 15 years and four, five-year renewal options and provides for the Company to evaluate each store individually upon certain events during the life of the lease, including individual renewal options. The Company classified these leases as operating leases, actively uses the leased properties and considers the leases as normal leasebacks. The Company deferred the $74.1 million gain realized on the sale of the stores and will amortize the gain over the initial lease term.

Additionally, subsequent to May 26, 2012, the Company completed an additional sale-leaseback transaction under which it sold an additional 137 stores to a separate unrelated third party. Net proceeds from these sales were $178.8 million. Concurrent with these sales, the Company entered into agreements to lease the properties back from the purchaser over an initial lease terms of 15 years. The master leases for the 137 stores includes an initial term of 15 years and four, five-year renewal options and provides for the Company to evaluate each store individually upon certain events during the life of the lease, including individual renewal options. The Company will classify these leases as operating leases, actively uses the leased properties and considers the leases as normal leasebacks. The Company will defer the $95.5 million gain realized on the sale of the stores and will amortize the gain over the initial lease term. The deferred gain on both transactions includes both a current and non-current portion, with the current portion based on the amount that is expected to amortize over the next 12 months. The current and non-current portions are included in Accrued Liabilities and Other Liabilities, respectively, on the Consolidated Condensed Balance Sheets.

 

5. Restricted Cash and Investments

The Company has restricted cash and investments that serve as collateral for certain of the Company’s insurance obligations. These restricted funds cannot be withdrawn from the Company’s account without the consent of the secured party. As of May 26, 2012, the Company held $55.0 million in this restricted account, of which $46.2 million was included in Restricted Cash and Investments and $8.8 million was included in Other Assets in the Consolidated Condensed Balance Sheet. The classification between current and non-current is based on the timing of expected payments of the secured insurance obligations. Previously, these obligations were collateralized using standby letters of credit under our revolving credit facilities.

Additionally, in conjunction with the sale-leaseback transaction completed during the third quarter of fiscal 2012, certain proceeds from the transaction were placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. The Company intends to use these proceeds to purchase additional new stores and must do so within 180 days to realize the deferral. At the Company’s option, the proceeds can be returned for general operating needs; however, the tax gain deferral would not be realized. As of May 26, 2012, the Company held $36.0 million in this account. These assets are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheet.

 

6. Shareholders’ Equity

Stock Repurchases

During the first three quarters of fiscal 2012, the Company purchased 1.7 million shares of its common stock at a cost of $91.6 million. All shares are purchased pursuant to share repurchase authorizations approved by the Board of Directors. 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 “2010 authorization”). The remaining amounts under previous authorizations were cancelled. On September 28, 2011, the Company announced that the Board of Directors authorized the Company to purchase up to an additional $250 million of the Company’s outstanding common stock (the “2011 authorization”). As of May 26, 2012, the Company had no amounts remaining under the 2010 authorization and $245.7 million remaining under the 2011 authorization.

There is no expiration date related to the 2011 authorization. Shares purchased under the share repurchase authorizations are generally held in treasury or are cancelled and returned to the status of authorized but unissued shares.

Retirement of Treasury Shares

On November 25, 2011, the Company retired 29.4 million shares of its common stock held in treasury. The shares were returned to the status of authorized but unissued shares. As a result, the treasury stock balance decreased by approximately $1.2 billion. As a part of the retirement, the Company reduced its Common Stock, Capital in Excess of Par, and Retained Earnings balances by approximately $2.9 million, $60.1 million, and $1.1 billion, respectively. Refer to Note 1 for the Company’s accounting policy for retirements of treasury shares.

 

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Option Exercises

During the first three quarters of fiscal 2012, 0.9 million stock options were exercised with a weighted average exercise price of $26.15. The total intrinsic value of the options exercised during the first three quarters of fiscal 2012 was $28.2 million.

Stockholders’ Rights Plan

On March 2, 2011, the Company adopted a stockholders’ rights plan whereby the Board of Directors of the Company authorized and declared a dividend distribution of one right for each outstanding share of common stock of the Company to stockholders of record at the close of business on March 2, 2011. Each right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share, at a price of $250.00 per unit, subject to adjustment. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events. Subject to certain exceptions, the rights will separate from the shares of common stock and a distribution date will be deemed to occur on the earlier of (i) the tenth business day after a person or group becomes a beneficial owner of at least 10% of the Company’s outstanding common stock or (ii) the tenth business day after the date that a tender or exchange offer is launched that would, if completed, result in a person or group becoming a beneficial owner of at least 10% of the Company’s outstanding common stock. Upon such an event, each holder of a right, other than the person or group becoming a beneficial owner of at least 10% of the Company’s outstanding common stock, will thereafter have the right to receive, upon exercise, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the right. The Company may redeem the rights in whole at a price of $0.001 per right. On February 24, 2012, the Board of Directors approved, and the Company entered into, an amendment to the stockholders’ rights plan to extend the expiration date of the rights to March 2, 2013. The stockholders’ rights plan otherwise remains unmodified. The rights will expire on March 2, 2013, unless exercised, redeemed or exchanged prior to that time. The Board may terminate the rights plan before the expiration date or extend the expiration date. The rights have no voting or dividend privileges, and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.

 

7. 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. The number of antidilutive shares were not material for all periods presented. 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      Three Quarters Ended  

(in thousands, except per share amounts)

   May 26,
2012
     May 28,
2011
     May 26,
2012
     May 28,
2011
 

Basic Net Income Per Share:

           

Net income

   $ 124,540       $ 111,101       $ 341,309       $ 308,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding

     116,815         121,546         117,331         124,716   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share — basic

   $ 1.07       $ 0.91       $ 2.91       $ 2.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Net Income Per Share:

           

Net income

   $ 124,540       $ 111,101       $ 341,309       $ 308,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding

     116,815         121,546         117,331         124,716   

Effect of dilutive securities — stock options

     511         688         519         678   

Effect of dilutive securities — performance share rights

     307         422         326         439   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares — diluted

     117,633         122,656         118,176         125,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share — diluted

   $ 1.06       $ 0.91       $ 2.89       $ 2.45   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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8. Litigation

The Company is engaged in a number of legal proceedings. The matters or groups of related matters discussed below, if decided adversely to the Company, or settled by the Company, individually or in the aggregate, may result in liability material to the Company’s financial condition or results of operations.

Wage and Hour Class Actions

Since 2004, certain individuals who 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. Some of the cases also seek to proceed as collective actions under the FLSA or as class actions under state laws. Plaintiffs seek recovery of overtime pay, liquidated damages, attorneys’ fees and court costs. The Company currently has 17 class and/or collective actions pending against it.

The Multi-District Litigation

Many of the cases asserting claims under the FLSA were consolidated in a Multi-District Litigation (“MDL”) proceeding pending in the Western District of North Carolina, Charlotte Division (the “N.C. Federal Court”). There are presently ten cases in the MDL proceeding in which plaintiffs are asserting class and/or collective action status. In April 2012, the Joint Panel for the MDL transferred two more cases to the MDL, Phillips v. Family Dollar Stores of South Carolina, Inc. and Samuels, et al. v. Family Dollar Stores of Florida, Inc. In total, following certain dismissals and summary dispositions, 53 individually named plaintiffs currently have cases pending in the MDL proceeding.

In two of the cases, Grace v. Family Dollar Stores, Inc. and Ward v. Family Dollar Stores, Inc., the N.C. Federal Court determined that the plaintiffs were not similarly situated and, therefore, that neither nationwide notice nor collective treatment under the FLSA was appropriate. The N.C. Federal Court also granted summary judgment against Irene Grace on the merits of her misclassification claim under the FLSA. The plaintiffs appealed certain rulings of the N.C. Federal Court to the United States Court of Appeals for the Fourth Circuit (the “Fourth Circuit”). On March 22, 2011, the Fourth Circuit affirmed the N.C. Federal Court’s decision finding that Ms. Grace was exempt from overtime compensation under the FLSA. The Fourth Circuit did not address the class certification finding the issue was moot given that the claims had been dismissed on the merits.

In addition to the Grace decision, the N. C. Federal Court has ruled in favor of the Company and granted summary judgment to 16 other plaintiffs, finding that the plaintiffs were properly classified as exempt from overtime. Of these plaintiffs,13 have appealed and their appeals are currently pending before the Fourth Circuit. Presently, all matters within the MDL are stayed through July 2012.

All putative class action cases based solely on state law have been dismissed from the MDL and were remanded to the appropriate state court jurisdiction (see below).

State Law Class Actions

In addition to the cases pending in the MDL proceeding, the Company is a defendant in seven class action lawsuits in seven states alleging that Store Managers should be non-exempt employees under various state laws. The plaintiffs in these cases also seek recovery of overtime pay, liquidated damages, attorneys’ fees and court costs. The states and cases are:

 

  ¡  

Colorado – Julie Farley v. Family Dollar Stores of Colorado, Inc., was filed on February 7, 2012, in the United States District Court for the District of Colorado seeking unpaid overtime for a class of current and former Colorado Store Managers whom plaintiffs claim are not properly classified as exempt from overtime pay under Colorado law. On June 4, 2012, the Company filed a motion to dismiss certain of plaintiff’s state law claims. That motion is currently pending before the court.

 

  ¡  

Connecticut – Cook, et al. v. Family Dollar Stores of Connecticut, Inc., was filed on October 5, 2011, in the Superior Court of the State of Connecticut seeking unpaid overtime pay for a class of current and former Connecticut Store Managers whom plaintiffs claim are not properly classified as exempt from overtime under Connecticut law.

 

  ¡  

Kentucky – Barker v. Family Dollar, Inc., was filed on February 17, 2010, in Circuit Court in Jefferson County, Kentucky seeking unpaid overtime, compensation for unpaid breaks and for seventh day work under Kentucky law for a class of current and former Kentucky Store Managers. The Company removed this matter to the United States District Court for the Western District of Kentucky. The parties have concluded discovery. On March 15, 2012, the Company filed a motion for summary judgment asserting that the plaintiffs are properly classified as exempt from overtime. That motion is currently pending before the court.

 

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  ¡  

Missouri – Twila Walters et. al. v. Family Dollar Stores of Missouri, Inc., was originally filed on January 26, 2010, seeking unpaid overtime for a class of current and former Missouri Store Managers who presently reside in Missouri and whom plaintiffs claim are not properly classified as exempt from overtime under Missouri law. This matter is pending in the Circuit Court of Jackson County, Missouri (the “Circuit Court”). On May 10, 2011, the Circuit Court certified the class under the Missouri Minimum Wage Law and common law. The Company sought appeal of the class certification decision with the Missouri Court of Appeals and the Missouri Supreme Court, but both courts declined to hear the appeal. The parties are engaged in merits discovery and the trial is scheduled for February 25, 2013.

 

  ¡  

New Jersey – Hegab v. Family Dollar Stores, Inc., was filed in the United States District Court for the District of New Jersey on March 3, 2011, seeking unpaid overtime pay for a class of current and former New Jersey Store Managers whom plaintiffs claim are not properly classified as exempt from overtime pay under New Jersey law. The parties are now engaged in class discovery.

 

  ¡  

New York – Youngblood, et al. v. 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 transferred to the Southern District of New York where the case has been consolidated with Youngblood. Plaintiffs are seeking unpaid overtime for a class of current and former New York Store Managers whom plaintiffs claim are not properly classified as exempt from overtime pay under New York law. On October 4, 2011, the New York District Court certified the class. The parties have scheduled mediation in August 2012.

 

  ¡  

Pennsylvania – Itterly v. Family Dollar Stores, Inc., which was formerly pending in the N.C. Federal Court, was remanded back to the United States District Court for the Eastern District of Pennsylvania on February 8, 2012. In Itterly, plaintiffs are seeking unpaid overtime for a class of current and former Pennsylvania Store Managers whom plaintiffs claim are not properly classified as exempt from overtime pay under Pennsylvania law. Discovery closed in June 2012.

In general, the Company continues to believe that its Store Managers relevant to this litigation 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. 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 effect on the Company’s financial position, liquidity or results of operation. At this time, the Company cannot reasonably estimate the possible loss or range of loss that may result from these actions.

Gender Pay Litigation

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 current and former female Store Managers. The plaintiffs seek recovery of back pay, compensatory and punitive damages, recovery of attorneys’ fees and equitable relief. The case was transferred to the N.C. Federal Court. Presently, there are 48 named plaintiffs in Scott.

On January 13, 2012, the N.C. Federal Court ruled in the Company’s favor, striking the plaintiffs’ class claims and denying plaintiffs’ motion to amend their complaint. On January 26, 2012, the plaintiffs filed a petition to appeal this decision to the Fourth Circuit under Rule 23(f), which the Fourth Circuit granted on May 8, 2012. The plaintiffs’ appellate brief is currently due on July 9, 2012, and the Company’s response brief is due on August 13, 2012.

At this time, it is not possible to predict whether the Fourth Circuit will affirm the N.C. Federal Court’s decision striking the class allegations. However, the claims of the 48 named plaintiffs remain under the Equal Pay Act and Title VII of the Civil Rights Act. Although the Company intends to vigorously defend the action, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. For these reasons, the Company is unable to estimate any potential loss or range of loss. The Company has tendered the matter to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy. At this time, the Company expects that the EPLI carrier will participate in any potential resolution of some or all of the plaintiffs’ claims.

 

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Other Matters

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 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 effect on the Company’s financial position, liquidity or results of operations.

 

9. 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 ($1.1 million and $1.5 million income tax expense for the third quarter and first three quarters ended May 26, 2012, respectively, and $1.6 million and $0.5 million income tax benefit for the third quarter and first three quarters ended May 28, 2011, respectively).

 

     Quarter Ended      Three Quarters Ended  

(in thousands)

   May 26, 2012      May 28, 2011      May 26, 2012      May 28, 2011  

Net income

   $ 124,540       $ 111,101       $ 341,309       $ 308,596   

Other comprehensive income (loss):

           

Unrealized gains (losses) on investment securities

     1,874         2,674         2,621         765   

Other

     4         19         32         (277
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 126,418       $ 113,794       $ 343,962       $ 309,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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10. Segment Information

As of May 26, 2012, the Company operated a chain of 7,267 general merchandise retail discount stores in 45 states, serving the basic needs of customers primarily in the low- and middle-income brackets. As of May 26, 2012, the stores were 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      Three Quarters Ended  

(in thousands)

   May 26,
2012
     May 28,
2011
     May 26,
2012
     May 28,
2011
 

Classes of similar Products:

           

Consumables

   $ 1,626,004       $ 1,448,655       $ 4,723,782       $ 4,211,078   

Home Products

     270,015         275,048         842,900         856,717   

Apparel and Accessories

     226,783         224,242         618,930         635,940   

Seasonal and Electronics

     237,155         205,450         781,268         709,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net sales

   $ 2,359,957       $ 2,153,395       $ 6,966,880       $ 6,413,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Consumables

  

Household chemicals

  

Paper products

  

Food

  

Health and beauty aids

  

Hardware and automotive supplies

  

Pet food and supplies

Tobacco

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 May 26, 2012, and May 28, 2011 (“third quarter of fiscal 2012” and “third quarter of fiscal 2011”, respectively), and the thirty-nine-week periods ended May 26, 2012, and May 28, 2011 (“first three quarters of fiscal 2012” and “first three quarters of fiscal 2011”, 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 27, 2011 (“fiscal 2011”), 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 2011. 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 2011.

Executive Overview

We operate a chain of more than 7,200 general merchandise retail discount stores in 45 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 three quarters of fiscal 2012, as compared with the first three quarters of fiscal 2011, our net sales increased 8.6% to $7.0 billion, our net income increased 10.6% to $341.3 million, and our diluted net income per common share increased 18.0% to $2.89. Comparable store sales (stores open more than 13 months) for the first three quarters of fiscal 2012 increased 4.5% compared with the first three quarters of fiscal 2011.

During the third quarter of fiscal 2012, as compared with the third quarter of fiscal 2011, our net sales increased 9.6% to $2.4 billion, our net income increased 12.1% to $124.5 million, and our diluted net income per common share increased 16.5% to $1.06. Comparable store sales for the third quarter of fiscal 2012 increased 5.0% compared with the third quarter of fiscal 2011.

Our performance during the third quarter and first three quarters of fiscal 2012 was driven primarily by our strong sales performance, particularly in the Consumables and Seasonal and Electronics categories. Many of the initiatives we launched over the past several years continue to deliver results, including the expansion of our global sourcing efforts, increased investment in our private brands assortment, our multi-year comprehensive store renovation program and the expansion of our key consumables categories. During fiscal 2012, we remain focused on continuing to strengthen our value and convenience proposition. In addition, we are accelerating our new store growth, continuing to aggressively renovate our stores, and expanding our consumable assortment further.

During the first three quarters of fiscal 2012, we opened 287 stores and closed 43 stores for a net addition of 244 stores, compared with the opening of 206 stores and closing of 48 stores for a net addition of 158 stores during the first three quarters of fiscal 2011. During the third quarter of fiscal 2012, we opened 103 stores and closed 7 stores for a net addition of 96 stores, compared with the opening of 60 stores and closing of 5 stores for a net addition of 55 stores during the third quarter of fiscal 2011. We plan to open approximately 450 to 500 new stores during fiscal 2012, compared with 300 new store openings in fiscal 2011.

In today’s uncertain economic environment, value and convenience continues to resonate with consumers. Our strategy of providing customers with value and convenience continues to attract not only our core low-income customers, but also middle-income families with more frequency. We continue to invest aggressively in our merchandise assortment to respond to the challenging macro-economic environment and customer demand. In the second half of fiscal 2011, we executed an expansion in key consumable categories in more than 5,700 stores. Additionally, in the third quarter of fiscal 2012, we completed a further expansion of health and beauty aids in more than 2,500 stores and began selling tobacco in approximately 1,300 stores. We expect to continue these expansions as well as further expand our food assortment in the fourth quarter of fiscal 2012. As a result of these Consumables merchandise expansions, in the third quarter and first three quarters of fiscal 2012, our Consumables sales increased by 12.2% in both periods, as compared to the third quarter and first three quarters of fiscal 2011. Consumables sales, as a percentage of net sales, increased to 68.9% and 67.8% in the third quarter and first three quarters of fiscal 2012, respectively, from 67.3% and 65.7% in the third quarter and first three quarters of fiscal 2011, respectively. The investments we are making in global sourcing, private brands and price management capabilities have resulted in more favorable purchase markups that continue to offset much of the pressure created by the shift in sales mix to lower margin Consumables.

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 continue to deliver on our multi-year comprehensive renovation program intended to re-energize the Family Dollar brand. During the first three quarters of fiscal 2012, we renovated, relocated or

 

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expanded 583 stores under this new format. We plan to renovate, relocate or expand approximately 1,000 stores in this new format in fiscal 2012. The renovations address both the interior and exterior of the stores, create more customer-focused assortments and layouts, and position more customer-centric teams.

During the third quarter of fiscal 2012, we completed a sale-leaseback transaction under which we sold 137 stores and received net proceeds of $177.6 million. Subsequent to the end of the third quarter of fiscal 2012, we completed and additional sale-leaseback transaction under which we sold an additional 137 stores and received net proceeds of $178.8 million. Concurrent with these sales, we entered into agreements to lease the properties back from the purchasers over an initial lease term of 15 years. The leases for all stores under these transactions qualify for operating lease treatment.

Results of Operations

Our results of operations for the third quarter and first three quarters of fiscal 2012 and the third quarter and first three quarters of fiscal 2011 are highlighted in the table below and discussed in the following paragraphs:

 

     Quarter Ended      Three Quarters Ended  

(in thousands)

   May 26, 2012      May 28, 2011      May 26, 2012      May 28, 2011  

Net sales

   $ 2,359,957       $ 2,153,395       $ 6,966,880       $ 6,413,505   

Cost and expenses:

           

Cost of sales

     1,514,684         1,373,639         4,506,636         4,106,817   

% of net sales

     64.2%         63.8%         64.7%         64.0%   

Selling, general and administrative

     645,867         595,403         1,904,800         1,800,388   

% of net sales

     27.4%         27.7%         27.3%         28.1%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of sales and operating expenses

     2,160,551         1,969,042         6,411,436         5,907,205   

% of net sales

     91.6%         91.4%         92.0%         92.1%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     199,406         184,353         555,444         506,300   

% of net sales

     8.4%         8.6%         8.0%         7.9%   

Investment income

     274         455         716         1,264   

% of net sales

     0.0%         0.0%         0.0%         0.0%   

Interest expense

     5,635         7,144         18,772         15,244   

% of net sales

     0.2%         0.3%         0.3%         0.2%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     194,045         177,664         537,388         492,320   

% of net sales

     8.2%         8.3%         7.7%         7.7%   

Income taxes

     69,505         66,563         196,079         183,724   

% of net sales

     2.9%         3.1%         2.8%         2.9%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 124,540       $ 111,101       $ 341,309       $ 308,596   

% of net sales

     5.3%         5.2%         4.9%         4.8%   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Third quarter Results

Net Sales

Net sales increased 9.6% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. The net sales increase in the third quarter of fiscal 2012 reflects an increase in comparable store sales of 5.0%, 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 5.0% increase in comparable store sales in the third quarter of fiscal 2012 resulted from both an increase in customer traffic, as measured by the number of register transactions in comparable stores, and the dollar value of the average customer transaction. Sales during the third quarter of fiscal 2012, on a comparable store basis, were strongest in the Seasonal and Electronics and Consumables categories.

The average number of stores in operation during the third quarter of fiscal 2012 was 4.5% higher than the average number of stores in operation during the third quarter of fiscal 2011. We had 7,267 stores in operation at the end of the third quarter of fiscal 2012 compared with 6,943 stores in operation at the end of the third quarter of fiscal 2011, representing an increase of 4.7%. As of May 26, 2012, we had, in the aggregate, approximately 51.9 million square feet of selling space compared to 49.4 million as of May 28, 2011.

Cost of Sales

Cost of sales increased 10.3% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. The increase was due primarily to additional sales volume. Cost of sales, as a percentage of net sales, was 64.2% in the third quarter of fiscal 2012 and 63.8% in the third quarter of fiscal 2011. Cost of sales, as a percentage of net sales, was negatively impacted by the shift in sales mix to lower-margin consumable merchandise, higher markdowns, and an increase in inventory shrinkage. These pressures were offset by an increase in the markups on the sales of merchandise, as well as lower freight expense, as a percentage of net sales. The growth in sales of lower-margin consumables (68.9% of net sales in the third quarter of fiscal 2012 compared with 67.3% of net sales in the third quarter of fiscal 2011) continues to pressure gross profit as a percentage of net sales. Markdowns in our stores increased primarily in the Consumables category as we cleared discontinued SKUs in preparation for our expanded merchandise assortment as noted above and increased promotional activities. Inventory shrinkage increased during the quarter as a result of increased activities in the stores including renovations and significant merchandise expansions. We continue to focus on improving our purchase markups through the continued development of our private brand assortment, the expansion of our global sourcing efforts and improved price management capabilities.

Selling, General and Administrative Expenses

SG&A expenses increased 8.5% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. 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 27.4% in the third quarter of fiscal 2012 compared to 27.7% in the third quarter of fiscal 2011. Most costs in the third quarter of fiscal 2012 were leveraged as a result of a 5.0% increase in comparable store sales. As a percentage of net sales, SG&A costs were leveraged as a result of a decrease in insurance expense (approximately 0.2% of net sales) and a decrease in store payroll costs (approximately 0.2% of net sales), which was offset by increased legal fees (approximately 0.2% of net sales). Insurance expense continues to benefit from favorable trends in workers’ compensation, general liability, and medical claims reflecting improvements we have made in our store operations and risk management processes. The decrease in store payroll costs was a result of the continued benefit from improvements we implemented in fiscal 2011 to re-engineer many of our core store processes, which has increased workforce productivity. Legal fees associated with litigation increased during the third quarter of fiscal 2012.

Investment Income

The change in investment income in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011 was not material.

 

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Interest Expense

The change in interest expense in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011 was not material.

Income Taxes

The effective tax rate was 35.8% for the third quarter of fiscal 2012 compared with 37.5% for the third quarter of fiscal 2011. The decrease in effective tax rate was due primarily to the change in the valuation of uncertain tax positions and lower state income taxes.

Year-to-date Results

Net Sales

Net sales increased 8.6% in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011. The net sales increase in the first three quarters of fiscal 2012 reflects an increase in comparable store sales of 4.5%, with the balance of the increase due primarily to sales from new stores opened as part of our store growth program.

The 4.5% increase in comparable store sales in the first three quarters of fiscal 2012 resulted from both an increase in customer traffic, as measured by the number of register transactions in comparable stores, and the dollar value of the average customer transaction. Net sales during the first three quarters of fiscal 2012, on a comparable store basis, were strongest in the Consumables and Seasonal and Electronic categories.

The average number of stores in operation during the first three quarters of fiscal 2012 was 4.1% higher than the average number of stores in operation during the first three quarters of fiscal 2011.

Cost of Sales

Cost of sales increased 9.7% in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011. The increase was due primarily to additional sales volume. Cost of sales, as a percentage of net sales, was 64.7% in the first three quarters of fiscal 2012 compared to 64.0% in the first three quarters fiscal 2011. Cost of sales, as a percentage of net sales, was negatively impacted by the shift in sales mix to lower-margin consumable merchandise, higher markdowns, and an increase in inventory shrinkage. These pressures were offset by an increase in the markups on the sales of merchandise. The growth in sales of lower-margin consumables (67.8% of net sales in the first three quarters of fiscal 2012 compared with 65.7% of net sales in the first three quarters of fiscal 2011) continues to pressure gross profit as a percentage of net sales. We continue to use markdowns in our stores to drive revenue growth during challenging macro-economic times as well as increase market share. Inventory shrinkage increased during the quarter as a result of increased activities in the stores including renovations and significant merchandise expansions. We continue to focus on improving our purchase markups through the continued development of our private brand assortment, the expansion of our global sourcing efforts and improved price management capabilities.

Selling, General and Administrative Expenses

SG&A expenses increased 5.8% in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011. 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 27.3% in the first three quarters of fiscal 2012 compared to 28.1% in the first three quarters fiscal 2011. Most costs in the first three quarters of fiscal 2012 were leveraged as a result of a 4.5% increase in comparable store sales. As a percentage of net sales, SG&A costs were leveraged as a result of a decrease in insurance expense (approximately 0.4% of net sales) and a decrease in store payroll costs (approximately 0.3% of net sales). Insurance expense continues to benefit from favorable trends in workers’ compensation and general liability costs reflecting improvements we have made in our store operations and risk management processes. The decrease in store payroll costs was a result of the continued benefit from improvements implemented in fiscal 2011 to re-engineer many of our core store processes, which has increased workforce productivity.

Investment Income

The change in investment income in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011 was not material.

Interest Expense

On January 28, 2011, we issued $300 million in senior unsecured notes with a coupon rate of 5.00% maturing in 2021. During the first three quarters of fiscal 2012, we incurred $11.5 million in interest expense related to the 2021 Notes compared with $5.0 million during the first three quarters of fiscal 2011.

 

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Table of Contents

Income Taxes

The effective tax rate was 36.5% for the first three quarters of fiscal 2012 compared with 37.3% for the first three quarters of fiscal 2011. The decrease in effective tax rate was due primarily to the change in the valuation of uncertain tax positions and lower state income taxes.

Liquidity and Capital Resources

General

We have consistently maintained a strong liquidity position. Our operating cash flows and credit facilities are more than sufficient to fund our regular operating needs, capital expenditure program, share repurchases, cash dividend payments, and principal and interest payments. We have availability under our two credit facilities to borrow up to $700 million (less standby letters of credit needed for collateral for our insurance programs of $56.1 million) to supplement operating cash flows. During the first three quarters of fiscal 2012, to help supplement our operating cash flows and to support the build of inventory for the holiday season and other growth initiatives, we borrowed a total of $306.3 million on our credit facilities and never carried a balance greater than $75.0 million. As of the end of the third quarter of fiscal 2012, no amounts were outstanding under the credit facilities. During the first three quarters of fiscal 2012, our cash and cash equivalents decreased $20.5 million. Despite the decrease in cash and cash equivalents and our borrowings under our credit facilities, our working capital level remains strong. Working capital at the end of the first three quarters of fiscal 2012 was $671.8 million compared to $670.5 million as of the end of the third quarter of fiscal 2011. We believe operating cash flows and capacity under existing credit facilities will continue to provide sufficient liquidity for our ongoing operations and growth initiatives.

Sale-Leaseback Transaction

During the third quarter of fiscal 2012, we completed a sale-leaseback transaction under which we sold 137 stores and received net proceeds of $177.6 million. Subsequent to the end of the third quarter of fiscal 2012, we completed an additional sale-leaseback transaction under which we sold an additional 137 stores and received net proceeds of $178.8 million. Concurrent with these sales, we entered into agreements to lease the properties back from the purchasers over an initial lease term of 15 years. The master leases for each transaction includes an initial term of 15 years and four, five-year renewal options and provides for the Company to evaluate each store individually upon certain events during the life of the lease, including individual renewal options. The leases for all stores qualify for operating lease treatment. Subsequent to completion of these transactions, we now own 318 of our stores.

Restricted Cash and Investments

We have restricted cash and investments to serve as collateral for certain of our insurance obligations that are held at our wholly owned captive insurance subsidiary. These restricted funds cannot be withdrawn from our account without the consent of the secured party. As of May 26, 2012, we held $55.0 million in this restricted account, of which $46.2 million was included in Restricted Cash and Investments and $8.8 million was included in Other Assets in the Consolidated Condensed Balance Sheet. The classification between current and non-current is based on the timing of expected payments of the secured insurance obligations. Previously, these obligations were collateralized using standby letters of credit under our revolving credit facilities. We did this to achieve savings in the cost of collateralizing its insurance obligations.

Additionally, in conjunction with the sale-leaseback transaction completed during the third quarter of fiscal 2012, certain proceeds of the transaction were placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. We intend to use these proceeds to purchase additional new stores and must do so within 180 days to realize the deferral. At the Company’s option, the proceeds can be returned for general operating needs, however, the tax gain deferral would not be realized. As of May 26, 2012, we held $36.0 million in this account. These assets are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheet.

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 credit facility replaced our previous 364-day $250 million unsecured revolving credit facility.

 

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On August 17, 2011, we entered into a new five-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $300 million. The credit facility matures on August 17, 2016, 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 credit facility replaced our previous five-year $200 million unsecured credit facility.

As noted above, during the first three quarters of fiscal 2012, we borrowed $306.3 million and re-paid $306.3 million under the credit facilities. Our borrowings during the first three quarters of fiscal 2012 had a weighted-average interest rate of 1.6%. As of May 26, 2012, we had no amounts outstanding 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 May 26, 2012, we were in compliance with all such covenants.

Principal Payment

During the first quarter of fiscal 2012, we made a scheduled principal payment on our private placement notes in the amount of $16.2 million. The next principal payment of $16.2 million is due in September 2012.

Fee Development Program

We occupy most of our stores under operating leases. As part of our new store growth strategy, we have created a Fee Development Program (“Fee Development Program”), intended to provide us with a more cost effective means to finance the construction of new store locations. Previously, developers would use their own capital to fund the construction of new sites, which they would then lease to us. Under the new program, we work with select developers to construct the new sites using our own investment grade credit rating to achieve a lower all-in cost. Upon completion of construction we own the stores. We intend to continue to use sale-leaseback transactions as a source of capital, providing additional liquidity for the Fee Development Program. As a result, we expect to achieve a lower cost of occupancy when compared to the previous program. During the first three quarters of fiscal 2012, we purchased stores at a cost of $70.2 million under this program.

Other Considerations

Our merchandise inventories at the end of the third quarter of fiscal 2012 were $1,387.4 million, as compared to $1,134.4 million at the end of the third quarter of fiscal 2011, an increase of 22.3%. Inventory per store at the end of the third quarter of fiscal 2012 was approximately 17% higher than inventory per store at the end of the third quarter of fiscal 2011. The increases in inventory were driven primarily by the investments we have made to continue to expand our consumable merchandise assortments in the second half of fiscal 2011 and in fiscal 2012.

Capital expenditures for the first three quarters of fiscal 2012 were $391.4 million compared with $230.3 million for the first three quarters of fiscal 2011. The increase in capital expenditures during the first three quarters of fiscal 2012 relate primarily to increased new store openings (including stores opened under our Fee Development Program) and the construction of our tenth distribution center, which opened in June, 2012. As part of our strategy to accelerate new store growth, we have increased the number of stores we initially own through the Fee Development Program. We now expect capital expenditures for fiscal 2012 to be between $650 and $675 million. The planned increase in capital expenditures in fiscal 2012 is due primarily to our efforts to support a greater number of new store openings (including the Fee Development Program), enhance our distribution network, execute our comprehensive store renovation program, and further invest in our existing stores to support our continued merchandise expansion efforts. In fiscal 2012, we expect to renovate, relocate or expand approximately 1,000 stores. We also plan to begin construction of our eleventh distribution center.

In the first three quarters of fiscal 2012, we opened 287 stores, closed 43 stores, and renovated, relocated or expanded 583 stores. The renovations are part of our multi-year comprehensive store renovation program intended to re-energize the Family Dollar brand. The renovations address both the interior and exterior of the stores, create more customer-focused assortments and layouts, and position more customer-centric teams. Store opening, closing, relocation, expansion, and renovation plans, as well as overall capital expenditure plans, are continually reviewed and may change.

During the first three quarters of fiscal 2012, we purchased 1.7 million shares of our common stock at a cost of $91.6 million. During the first three quarters of fiscal 2011, we purchased 10.9 million shares at a cost of $512.5 million, including the accelerated share repurchase agreement we entered into in the first quarter of fiscal 2011. As of May 26, 2012, we had outstanding authorizations to purchase a total of $245.7 million of our common stock.

All shares are purchased pursuant to share repurchase authorizations approved by the Board of Directors. On September 29, 2010, we announced that the Board of Directors authorized the purchase of up to $750 million of the Company’s outstanding common stock (the “2010 authorization”). The remaining amount under the previous authorization was cancelled. On September 28, 2011, we

 

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announced that the Board of Directors authorized the purchase of up to an additional $250 million of the Company’s outstanding common stock (the “2011 authorization”). As of May 26, 2012, we had no amounts remaining under the 2010 authorization and $245.7 million remaining under the 2011 authorization. See Note 6 to the Consolidated Condensed Financial Statements in this Report for more information on our share repurchases.

The timing and amount of any shares repurchased have been and will continue to be determined by the Company 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. We plan to fund future share repurchases through cash on hand and cash flows from operations.

In addition to the Restricted Cash and Investments noted above, our wholly-owned captive insurance subsidiary maintains additional 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 May 26, 2012, these cash and cash equivalents and investment securities balances (including Restricted Cash and Investments) were $48.4 million and $83.3 million, respectively.

Cash Flows From Operating Activities

Cash provided by operating activities decreased $53.6 million during the first three quarters of fiscal 2012 as compared to the first three quarters of fiscal 2011. The decrease was due primarily to an increase in merchandise inventories in fiscal 2012 as noted above, offset partially by changes in prepayments and other current assets and higher net income, all in the ordinary course of business.

Cash Flows From Investing Activities

During the first three quarters of fiscal 2012, we had a cash outflow of $179.6 million compared to a cash outflow of $259.5 million in the first three quarters of fiscal 2011. The change was due to the net proceeds received from the sale-leaseback transaction and a net decrease in the purchases of investment securities, offset partially by an increase in capital expenditures. The capital expenditures during the first three quarters of fiscal 2012 relate primarily to increased new store openings (including stores opened under our Fee Development Program) and the construction of our tenth distribution center.

Cash Flows From Financing Activities

During the first three quarters of fiscal 2012, we had a cash outflow from financing activities of $94.8 million compared to a cash outflow of $263.3 million during the first three quarters of fiscal 2011. During the first three quarters of fiscal 2011, we issued $300 million of 5.00% unsecured senior notes, creating a significant cash inflow from financing activities in fiscal 2011. This cash inflow was offset by increased share repurchases of $420.9 million in the first three quarters of fiscal 2011 as compared to the first three quarters of fiscal 2012. We purchased $91.6 million of our common stock during the first three quarters of fiscal 2012 compared to $512.5 million in the first three quarters of fiscal 2011.

 

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Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The adoption of ASU 2011-04 in the third quarter of fiscal 2012 did not have a material impact on our Consolidated Condensed Financial Statements.

In June 2011, FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 deferred certain aspects of ASU 2011-05. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are not required to adopt this guidance until the first quarter of fiscal 2013. The adoption of ASU 2011-05 and the deferrals in ASU 2011-12 are not expected to have a material impact on our Consolidated Condensed Financial Statements.

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 2011.

 

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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,” “proposed,” 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 2011, 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.

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 three quarters of fiscal 2012 and the first three quarters of fiscal 2011, we did not incur any material interest expense related to our credit facilities. As of May 26, 2012, we had no amounts outstanding on our credit facilities. Our $532.5 million of current and long-term debt related to the Notes bears interest at fixed rates ranging from 5.00% 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 May 26, 2012, we had a $5.1 million unrealized loss ($3.2 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, or upon maturity of the underlying security. 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 May 26, 2012. 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 May 26, 2012.

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 8 to the Consolidated Condensed Financial Statements contained in Part I, Item 1 of the Form 10-Q is incorporated herein by 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 2011.

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 May 26, 2012, 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)
 

March (2/26/12 – 3/31/12)

     358,394       $ 54.27         358,394         3,883,447   

April (4/1/12 – 4/28/12)

     —           —           —           3,561,515   

May (4/29/12 – 5/26/12)

     —           —           —           3,635,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     358,394       $ 54.27         358,394         3,635,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

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 “2010 authorization”). The remaining amounts under previous authorizations were cancelled. On September 28, 2011, the Company announced that the Board of Directors authorized the Company to purchase up to an additional $250 million of the Company’s outstanding common stock (the “2011 authorization”). As of May 26, 2012, the Company had no amounts remaining under the 2010 authorization and $245.7 million remaining under the 2011 authorization.

 

  (2)

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

 

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Item 6.   Exhibits

 

          (a)      Exhibits filed by reference:

  *10.1   

Severance Agreement between Mary A. Winston and Family Dollar Stores, Inc. dated April 5, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 10, 2012)

          (b)      Exhibits filed herewith:

  *10.2   

Family Dollar Stores, Inc. 2006 Incentive Plan Guidelines for Annual Cash Bonus Awards

  *10.3   

Family Dollar Stores, Inc. 2006 Incentive Plan Guidelines for Long Term Incentive Performance Share Rights Awards

    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   

Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended May 26, 2012, filed on June 29, 2012, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Condensed Consolidated Financial Statements

 

  * Exhibit represents a management contract or compensatory plan

 

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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: June 29, 2012

   

/s/ Mary A. Winston

    Mary A. Winston
   

Executive Vice President – Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

28

XNYS:FDO Family Dollar Stores Inc Quarterly Report 10-Q Filling

Family Dollar Stores Inc XNYS:FDO Stock - Get Quarterly Report SEC Filing of Family Dollar Stores Inc XNYS:FDO stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:FDO Family Dollar Stores Inc Quarterly Report 10-Q Filing - 5/26/2012
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