**Form10-Q/A**

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**(Amendment No. 1)**

**(Mark One)**

 
| **ý**                                                 | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                       |                                                                                               |
| **For the quarterly period ended November 27,  2004** |
|                                                       |                                                                                               |
| **OR**                                                     |
| ** **                                                 |
| **o**                                                      | **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 asspecified in its charter)

 
| **DELAWARE**                                                              | ** ** | **56-0942963**        |
|---------------------------------------------------------------------------|------------|-----------------------|
| (State or  other jurisdiction of                                          |       | (I.R.S.  Employer     |
| incorporation  or organization)                                           |       | (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 whetherthe registrant (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for the past 90days.**

Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).   Yes ý   No o

 

**Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.**

** **
| **Class**                     | ** ** | **Outstanding at December 31,  2004** |
|-------------------------------|------------|--------------------------------------------|
| Common  Stock, $.10 par value |       | 167,707,288  shares                        |

 

 

----

 

Explanatory Note 

 

This Amendment No. 1 to theFamily Dollar Stores, Inc. (the “Company”) Quarterly Report on Form 10-Q/A forthe quarter ended November 27, 2004(“2005 first quarter”), is being filed in order to correct the Company’spreviously issued condensed consolidated financial statements for the 2005 firstquarter and for the quarter ended November 29, 2003 (“2004 first quarter”). The correctionsare made to properly account for tenant improvement allowances, rent holidaysand leasehold improvement amortization in accordance with generally acceptedaccounting principles in the United States of America. See Note 9 to thecondensed consolidated financial statements for additional discussion. 

 

Except as expressly noted herein, this AmendmentNo. 1 to the Quarterly Report on Form 10-Q/A does not reflect events occurring after theJanuary 6, 2005 filing of our Quarterly Report on Form l0-Q for the 2005 first quarter or modify or updatethe disclosures set forth in that Quarterly Report on Form 10-Q in any way, except as required to reflect theeffects of the restatement of our financial statements for the 2004 firstquarter and 2005 first quarter or as deemed necessary in connection with thecompletion of restated financial statements. All information in this AmendmentNo. 1 toQuarterly Report on Form 10- Q/A is subject to updating and supplementing asprovided in our reports filed with the Securities and Exchange Commissionsubsequent to the date of the original filing of the Quarterly Report on Form 10-Q,including but not limited to our Report on Form 10-Q forthe first half ended February 26, 2005. 

 

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## **FAMILY DOLLAR STORES, INC., ANDSUBSIDIARIES**

 

**INDEX**

 
| Part I – Financial Information                                                                                     |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                    |   |
| Item 1 –  Consolidated Condensed Financial Statements:                                                             |   |
|                                                                                                                    |   |
| Consolidated Condensed Balance Sheets – November 27,  2004 and August 28, 2004                           |   |
|                                                                                                                    |   |
| Consolidated Condensed Statements of Income  – Quarter Ended November 27, 2004 and November 29, 2003     |   |
|                                                                                                                    |   |
| Consolidated Condensed Statements of Cash  Flows – Quarter Ended November 27, 2004 and November 29, 2003 |   |
|                                                                                                                    |   |
| Notes to Consolidated Condensed Financial  Statements                                                                   |   |
|                                                                                                                    |   |
| Item 2 – Management’s Discussion and  Analysis of Financial Condition and Results of Operations               |   |
|                                                                                                                    |   |
| Item 4 – Controls and Procedures                                                                                   |   |
|                                                                                                                    |   |
| Part II – Other Information and Signatures                                                                         |   |
|                                                                                                                    |   |
| Item 1 – Legal Proceedings                                                                                         |   |
|                                                                                                                    |   |
| Item 2 – Unregistered Sales of Equity  Securities and Use of Proceeds                                              |   |
|                                                                                                                    |   |
| Item 5 – Other Information                                                                                         |   |
|                                                                                                                    |   |
| Item  6 – Exhibits                                                                                                 |   |
|                                                                                                                    |   |
| Signatures                                                                                                              |   |

 

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**FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED BALANCE SHEETS******

**(Unaudited)**

 
| **(In thousands, except share amounts)**                                                                                                                                                                                                                                        | ** ** | **November 27,  2004** | ** ** | **August 28,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                      |       | (as restated)               |       | (as restated)             |       |
| Current  assets:                                                                                                                                                                                                                                                                |       |                        |       |                      |       |
| Cash and  cash equivalents (Note 2)                                                                                                                                                                                                                                             |       | $                           | 102,683    |                      | $          | 87,023 |   |
| Investment Securities                                                                                                                                                                                                                                                           |       |                        | 83,075     |                      |       | 120,840 |   |
| Merchandise  inventories                                                                                                                                                                                                                                                        |       | 1,032,754                   |       | 980,124                   |       |
| Deferred  income taxes                                                                                                                                                                                                                                                          |       | 87,543                      |       | 84,084                    |       |
| Income tax  refund receivable                                                                                                                                                                                                                                                   |       | —                      |       | 1,304                     |       |
| Prepayments  and other current assets                                                                                                                                                                                                                                           |       | 25,164                      |       | 16,937                    |       |
| Total  current assets                                                                                                                                                                                                                                                           |       | 1,331,219                   |       | 1,290,312                 |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| Property and  equipment, net                                                                                                                                                                                                                                                    |       | 934,426                     |       | 918,449                   |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| Other assets                                                                                                                                                                                                                                                                    |       | 14,543                      |       | 15,600                    |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
|                                                                                                                                                                                                                                                                            |       | $                           | 2,280,188  |                      | $          | 2,224,361 |   |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                                                                                                  |       |                        |       |                      |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| Current  liabilities:                                                                                                                                                                                                                                                           |       |                        |       |                      |       |
| Accounts  payable and accrued liabilities                                                                                                                                                                                                                                       |       | $                           | 779,525    |                      | $          | 800,585 |   |
| Income taxes  payable                                                                                                                                                                                                                                                           |       | 29,139                      |       | —                    |       |
| Total  current liabilities                                                                                                                                                                                                                                                      |       | 808,664                     |       | 800,585                   |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| Deferred  income taxes                                                                                                                                                                                                                                                          |       | 87,861                      |       | 86,694                    |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| Commitments  and contingencies (Note 7)                                                                                                                                                                                                                                         |       |                        |       |                      |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
| Shareholders’  equity (Notes 5 and 6):                                                                                                                                                                                                                                     |       |                        |       |                      |       |
| Preferred  stock, $1 par; authorized and unissued 500,000 shares                                                                                                                                                                                                                |       |                        |       |                      |       |
| Common  stock, $.10 par; authorized 600,000,000 shares; issued 187,961,963 shares at November 27,  2004 and 187,671,318 shares at August 28, 2004, and outstanding  167,687,643 shares at November 27, 2004  and 167,396,998 shares at August 28, 2004 |       | 18,796                      |       | 18,767                    |       |
| Capital in  excess of par                                                                                                                                                                                                                                                       |       | 113,232                     |       | 106,853                   |       |
| Retained  earnings                                                                                                                                                                                                                                                              |       | 1,539,063                   |       | 1,498,890                 |       |
|                                                                                                                                                                                                                                                                            |       | 1,671,091                   |       | 1,624,510                 |       |
| Less common  stock held in treasury, at cost (20,274,320 shares at November 27, 2004 and  August 28, 2004) (Note 6)                                                                                                                                                   |       | 287,428                     |       | 287,428                   |       |
| Total  shareholders’ equity                                                                                                                                                                                                                                                |       | 1,383,663                   |       | 1,337,082                 |       |
|                                                                                                                                                                                                                                                                            |       |                        |       |                      |       |
|                                                                                                                                                                                                                                                                            |       | $                           | 2,280,188  |                      | $          | 2,224,361 |   |

 

See notes to consolidated condensed financial statements

 

2

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**FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME******

**(Unaudited)**

 
| ** **                                      | ** ** | **Quarter Ended**           | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| **(In thousands, except per share amounts)**    | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
|                                            |       | (as restated)               |       | (as restated) |   |
|                                            |       |                        |       |   |   |
| Net sales                                       |       | $                           | 1,380,245  |   | $ | 1,244,683 |   |
|                                            |       |                        |       |   |   |
| Cost and  expenses:                             |       |                        |       |   |   |
| Cost of  sales                                  |       | 919,893                     |       | 813,358 |   |
| Selling,  general and administrative expenses   |       | 375,187                     |       | 331,429 |   |
| Cost of  sales and operating expenses           |       | 1,295,080                   |       | 1,144,787 |   |
|                                            |       |                        |       |   |   |
| Income  before provision for taxes on income    |       | 85,165                      |       | 99,896 |   |
| Provision  for taxes on income                  |       | 30,736                      |       | 36,459 |   |
|                                            |       |                        |       |   |   |
| Net income                                      |       | $                           | 54,429     |   | $ | 63,437 |   |
|                                            |       |                        |       |   |   |
| Net income  per common share - Basic (Note 6)   |       | $                           | 0.32       |   | $ | 0.37 |   |
|                                            |       |                        |       |   |   |
| Average  shares - Basic (Note 6)                |       | 167,619                     |       | 172,353 |   |
|                                            |       |                        |       |   |   |
| Net income  per common share - Diluted (Note 6) |       | $                           | 0.32       |   | $ | 0.37 |   |
|                                            |       |                        |       |   |   |
| Average  shares - Diluted (Note 6)              |       | 168,008                     |       | 173,641 |   |
|                                            |       |                        |       |   |   |
| Dividends  per common share                     |       | $                           | 0.085      |   | $ | 0.075 |   |

 

See notes to consolidated condensed financialstatements.

 

3

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**FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES**

** **

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS******

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Quarter Ended**           | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(In thousands)**                                                                 | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **                                                                         | ** ** | (as restated)               | ** ** | (as restated) | ** ** |
| Cash flows  from operating activities:                                             |       |                        |       |   |   |
| Net income                                                                         |       | $                           | 54,429     |   | $ | 63,437 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                        |       |   |   |
| Depreciation  and amortization                                                     |       | 26,354                      |       | 25,019 |   |
| Deferred  income taxes                                                             |       | (2,292                      | )          | 384 |   |
| Tax benefit  from stock option exercises                                           |       | 972                         |       | 1,901 |   |
| Loss on  disposition of property and equipment                                     |       | 497                         |       | 1,809 |   |
| Changes in  operating assets and liabilities:                                      |       |                        |       |   |   |
| Merchandise  inventories                                                           |       | (52,630                     | )          | 7,412 |   |
| Income tax  refund receivable                                                      |       | 1,304                       |       | — |   |
| Prepayments  and other current assets                                              |       | (8,227                      | )          | (9,416 | ) |
| Other assets                                                                       |       | 1,057                       |       | (2,028 | ) |
| Accounts  payable and accrued liabilities                                          |       | (18,875                     | )          | (42,555 | ) |
| Income taxes  payable                                                              |       | 29,139                      |       | 30,377 |   |
|                                                                               |       | 31,728                      |       | 76,340 |   |
| Cash flows  from investing activities:                                             |       |                        |       |   |   |
| Purchases of investment securities                                                 |       | (22,835                     | )          | (49,190 | ) |
| Sales of investment securities                                                     |       | 60,600                      |       | 58,119 |   |
| Capital  expenditures                                                              |       | (42,981                     | )          | (27,265 | ) |
| Proceeds  from dispositions of property and equipment                              |       | 153                         |       | 121 |   |
|                                                                               |       | (5,063                      | )          | (18,215 | ) |
| Cash flows  from financing activities:                                             |       |                        |       |   |   |
| Proceeds  from exercise of employee stock options                                  |       | 5,436                       |       | 4,799 |   |
| Change in cash overdrafts                                                          |       | (2,193                      | )          | (14,476 | ) |
| Payment of  dividends                                                              |       | (14,248                     | )          | (12,917 | ) |
|                                                                               |       | (11,005                     | )          | (22,594 | ) |
|                                                                               |       |                        |       |   |   |
| Net change  in cash and cash equivalents                                           |       | 15,660                      |            | 35,531 |   |
|                                                                               |       |                        |       |   |   |
| Cash and  cash equivalents at beginning of period                                  |       | 87,023                      |       | 80,994 |   |
|                                                                               |       |                        |       |   |   |
| Cash and  cash equivalents at end of period                                        |       | $                           | 102,683    |   | $ | 116,525 |   |
|                                                                               |       |                        |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                        |       |   |   |
| Cash paid  during the period for:                                                  |       |                        |       |   |   |
| Interest  paid                                                                     |       | —                      |       | — |   |
| Income taxes  paid                                                                 |       | 1,613                       |       | 3,798 |   |

 

See notes to consolidated condensed financialstatements.

 

4

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**FAMILYDOLLAR STORES, INC., AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

**1.**             In the opinion of FamilyDollar Stores, Inc. (the “Company”), the accompanying unaudited consolidatedcondensed financial statements contain all adjustments (consisting of onlynormal recurring accruals) necessary to present fairly the financial positionas of November 27, 2004, and the results of operations and the cash flowsfor the quarters ended November 27, 2004, and November 29, 2003. Forfurther information, refer to the consolidated financial statements andfootnotes included in the Company’s annual report on Form 10-K for the yearended August 28, 2004, and Note 9 below.

 

**Theresults of operations for the quarter ended November 27, 2004, are notnecessarily indicative of the results to be expected for the full year.**

 

Certain reclassifications of the fiscal 2004amounts have been made to conform to the fiscal 2005 presentation.

 

**TheCompany manages its business on the basis of one reportable segment.**

 

**2.**             The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents.  The carrying amountof the Company’s cash equivalents approximates fair value due to the shortmaturities of these investments and consists primarily of money market funds, and other overnight investments.  TheCompany maintains cash deposits with major banks which from time to time mayexceed federally insured limits.  TheCompany periodically assesses the financial condition of the institutions andbelieves that the risk of any loss is minimal.

 

Investmentsecurities comprise principally auction rate securities and variablerate demand notes.  The Companyclassifies all investment  securities as available-for-sale.  Securities accounted for as available-for-sale are required to be reported atfair value with unrealized gains and losses, net of taxes, excluded from netincome and shown separately as a component of accumulated other comprehensiveincome within stockholders' equity.  Thesecurities that the Company has classified as available-for-sale generally trade at par and as a result typically do not have any unrealized gains or losses.    

 

**3.**             The preparation of theCompany’s consolidated financial statements, in conformity with accountingprinciples generally accepted in the United States of America, requiresmanagement to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedate of the financial statements, and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from these estimates.

 

**4.**             The Company has unsecured revolvingcredit facilities with banks for short-term borrowings of up to $200million.  One hundred million dollars ofthe facilities expires on May 26, 2005, and the remaining $100 million expireson May 31, 2009.  The Company expectsthat the facilities expiring on May 26, 2005, will be extended.  Borrowings under these facilities are at avariable interest rate based on short-term market interest rates.

 

**5.**             The Company’s non-qualifiedstock option plan provides for the granting of options to key employees topurchase shares of common stock at prices not less than the fair market valueon the date of grant.  Options expirefive years from the date of grant and are exercisable to the extent of 40%after the second anniversary of the grant and an additional 30% at each of thefollowing two anniversary dates on a cumulative basis.

 

5

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**TheCompany accounts for stock options granted to employees using the intrinsicvalue method, under which no compensation expense is recorded since theexercise price of the stock options is equal to the market price of theunderlying stock on the date of the grant. Had compensation cost for the stock options issued been determinedconsistent with Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation,” net income and net income per share would havebeen reduced to the following pro forma amounts (in thousands, except per shareamounts):**

 
| ** **                               | ** ** | **Quarter Ended**          | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **November 27, 2004** | ** ** | **November 29, 2003** | ** ** |
| ** **                               | ** ** | (as restated)              | ** ** | (as restated) | ** ** |
| Net  income-as reported                  |       | $                          | 54,429     |   | $ | 63,437 |   |
| ** **                               | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Pro forma  stock-based compensation cost |       | (2,180                     | )          | (1,987 | ) |
| Net  income-pro forma                    |       | $                          | 52,249     |   | $ | 61,450 |   |
| ** **                               | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Net income  per share as reported:       | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Basic                                    |       | $                          | .32        |   | $ | .37 |   |
| Diluted                                  |       | $                          | .32        |   | $ | .37 |   |
| ** **                               | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Net income  per share-pro forma:         | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Basic                                    |       | $                          | .31        |   | $ | .36 |   |
| Diluted                                  |       | $                          | .31        |   | $ | .35 |   |

 

**Theassumptions used to calculate the fair value of options granted are evaluatedand revised, as necessary, to reflect market conditions and experience.**

** **

**Thefollowing is a summary of transactions under the plan during the quarters endedNovember 27, 2004 and November 29, 2003 (In thousands, except pershare amounts).**

 
| ** **            | ** ** | **Quarter Ended**                   | ** ** |
|-----------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **November 27, 2004**          | ** ** | **November 29, 2003** | ** ** |
| ** **            | ** ** | **Number of  shares  under option** | ** ** | **Option price  per share** | ** ** | **Number of  shares  under option** | ** ** | **Option price  per share** | ** ** |
| Outstanding-beginning |       | 5,956                               |       | $14.75-$44.00 |   | 5,001 |   | $14.75-$39.00 |   |
| Granted               |       | 1,775                               |       | $26.25-$32.25 |   | 1,780 |   | $38.50-$44.00 |   |
| Exercised             |       | (291                                | )          | $15.50-$28.25 |   | (238 | ) | $15.00-$30.50 |   |
| Cancelled             |       | (85                                 | )          |   |   | (66 | ) |   |   |
| Outstanding-ending    |       | 7,355                               |       | $14.75-$44.00 |   | 6,477 |   | $14.75-$44.00 |   |
|                  |       |                                |       |   |   |   |   |   |   |
| Exercisable  options  |       | 2,195                               |       | $14.75-$35.50 |   | 1,691 |   | $14.75-$30.25 |   |

 

**6.**             Basic net income per common share is computed by dividing net income bythe weighted average number of shares outstanding during each period.  Diluted net income per common share giveseffect to all securities representing potential common shares that weredilutive and outstanding during the period. The exercise prices for certain of the outstanding stock options thatthe Company has awarded exceed the average market price of the Company’s commonstock.  Such stock options are antidilutiveand were not included in the computation of diluted net income per commonshare.  In the calculation of diluted netincome per common share, the denominator includes the number of additionalcommon shares that would have been outstanding if the Company’s outstandingstock options had been exercised.

** **

**Duringthe years ended August 27, 2004 and August 30, 2003, the Companypurchased in the open market 5.6 million and 2.2 million shares, respectively,at a cost of $176.7 million and $65.9 million, respectively.  As of November 27, 2004, 2.2 millionshares were authorized to be purchased.  Noshares were purchased during the quarter ended November 27, 2004.**

 

6

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**The following table setsforth the computation of basic and diluted net income per common share (Inthousands, except per share amounts):**

** **
| ** **                                          | ** ** | **Quarter Ended**           | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **November 27,  2004** | ** ** | **November 29,  2003** | ** ** |
| ** **                                          | ** ** | (as restated)               | ** ** | (as restated) | ** ** |
| Basic Net  Income Per Share:                        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net Income                                          |       | $                           | 54,429     |   | $ | 63,437 |   |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Weighted  Average Number of Shares Outstanding      |       | 167,619                     |       | 172,353 |   |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net Income  Per Common Share – Basic           |       | $                           | .32        |   | $ | 0.37 |   |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Diluted Net  Income Per Share:                      | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net Income                                          |       | $                           | 54,429     |   | $ | 63,437 |   |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Weighted  Average Number of Shares Outstanding      |       | 167,619                     |       | 172,353 |   |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Effect of  Dilutive Securities – Stock Options |       | 389                         |       | 1,288 |   |
| Average  Shares – Diluted                      |       | 168,008                     |       | 173,641 |   |
| ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net Income  Per Common Share – Diluted         |       | $                           | .32        |   | $ | 0.37 |   |

** **

**7.**             On January 30, 2001,Janice Morgan and Barbara Richardson, two individuals who have held theposition of Store Manager for subsidiaries of the Company, filed a Complaintagainst the Company in the United States District Court for the NorthernDistrict of Alabama.  Thereafter,pursuant to the Court’s ruling, notice of the pendency of the lawsuit was sentto approximately 13,000 current and former Store Managers holding the positionon or after July 1, 1999. Based on currently available information,approximately 2,550 of those receiving such notice filed consent forms andjoined the lawsuit as plaintiffs, including approximately 2,300 former StoreManagers and approximately 250 current employees.

** **

**Pursuant to the Company’s motion, the Court dismissedapproximately 2,200 plaintiffs for failure to respond to discovery.  Plaintiffs asked the Court to reconsider andthe Court reinstated a number of those plaintiffs.  The Court also ruled that plaintiffs whofailed to produce certain records by a deadline would be dismissed.  The total number of plaintiffs allowed toremain as parties remains unsettled and in dispute.  Approximately 990 of the 2,550 original plaintiffshave been dismissed and, subject to the Court’s rulings, approximately 445additional plaintiffs could be dismissed.**

** **

**The case has proceeded as a collective action under theFair Labor Standards Act (“FLSA”).  TheComplaint alleges that the Company violated the FLSA by classifying theplaintiffs and other similarly situated current and former Store Managers as “exempt”employees who are not entitled to overtime compensation.  Plaintiffs seek to recover unpaid overtimecompensation, prejudgment interest, liquidated damages, an award of attorneys’fees, costs and expenses, and such other relief as the Court may deem proper.Discovery is complete, but no trial date is set. The Company’s motion todecertify the case from treatment as a collective action is under submissionfor the Court’s consideration, as is the plaintiff’s motion for summaryjudgment with respect to 34 of the plaintiffs based on arguments regarding thenumber of employees supervised during the relevant time period.**

 

7

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**In general, the Companybelieves that the Store Managers are “exempt” employees under the FLSA and havebeen properly compensated, that this action should not proceed as a collectiveaction and that the Company has meritorious defenses that should enable it toultimately prevail.  However, the outcomeof any litigation is inherently uncertain. The Company bears the burden of proof at trial of establishing itsentitlement to the exemption from the overtime requirements of the FLSA, and noassurances can be given that the Company will be successful in defending thisaction.  The nature of this action andits present procedural posture mean that future rulings by the Court on bothsubstantive and procedural motions and issues, including those now undersubmission, may significantly impact the course and outcome of theseproceedings.  Thus, those rulings maygreatly affect the Company’s efforts to establish the exempt status of theplaintiff Store Managers.  Resolution ofthis matter could have a material adverse effect on the Company’s financialposition, liquidity or results of operation.**

** **

**TheCompany is involved in numerous other legal proceedings and claims incidentalto its business, including litigation related to alleged failures to complywith various state and federal employment laws. While the ultimate outcome cannot be determined, the Company currentlybelieves that these proceedings and claims, both individually and in theaggregate, should not have a material adverse effect on the Company’s financialposition, liquidity or results of operations. However, the outcome of any litigation is inherently uncertain and, ifdecided adversely to the Company, the Company may be subject to liability thatcould have a material adverse effect on the Company’s financial position,liquidity or results of operations.**

** **

**8.**             In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requiresall companies to measure compensation cost for all share-based payments (includingemployee stock options) at fair value, effective for public companies forinterim or annual periods beginning after June 15, 2005.  The FASB concluded that companies can adoptthe new standard in one of two ways: the modified prospective transitionmethod, in which a company would recognize share-based employee compensationcost from the beginning of the fiscal period in which the recognitionprovisions are first applied as if the fair-value-based accounting method hadbeen used to account for all employee awards granted, modified, or settledafter the effective date and to any awards that were not fully vested as of theeffective date; or the modified retrospective transition method, in which acompany would recognize employee compensation cost for periods presented priorto the adoption of SFAS No. 123R in accordance with the original provisions ofSFAS No. 123 “Accounting for Stock-Based Compensation,” pursuant to which acompany would recognize employee compensation cost in the amounts reported inthe pro forma disclosures provided in accordance with SFAS No. 123.  The Company expects to adopt SFAS No. 123Rduring the first quarter of fiscal 2006, and has not made a determination as tothe method it will adopt.  See Note 5 fordisclosure of the pro forma effects of stock option grants as determined usingthe methodology prescribed under SFAS 123.

 

9.             On February 7, 2005, theOffice of the Chief Accountant of the Securities and Exchange Commission("SEC") issued a letter to the American Instituteof Certified Public Accountants expressing its views regarding certainoperating lease accounting issues and their application under general acceptedaccounting principles in the United States of America ("GAAP").  In light of this letter, the Company's managementinitiated a review of its lease-related accounting and determined that itsthen-current method of accounting for leasehold improvements funded by landlordincentives or allowances under operating leases (tenant improvementallowances), its then-current method of accounting for rent holidays and itsthen-current amortization of leasehold improvements were not in accordance withGAAP.  As a result, the Company is restating itsconsolidated condensedfinancial statements for  the quarter ended November 27, 2004, and its consolidated financial statements for thefiscal years 2002 through 2004.

 

The Company previously amortized leaseholdimprovements over their estimated useful economic life of up to ten years.  In some cases this period extended into anoption period for the lease.  The Companywill now amortize leasehold improvements over the shorter of the term of the related lease (generally fiveyears) or the asset's useful economic life. Further, the Company had recognized rent expense for the leasesbeginning on the rent commencement date. This had the effect of excluding the pre-opening period of its storesfrom the calculation of the period over which it expensed rent.  The Company now recognizes straight-lineexpense (including any rent adjustment during the lease term) over a periodthat includes the pre-opening period.  For tenant improvement allowances and rent holidays, theCompany now records a deferred rent liability and amortizes the deferred rent over the terms of the leases as reductions torent expense. Therestatement had no impact on historic or future cash flows or the timing oflease payments.

 

The Company previously recorded auction ratesecurities and variable rate demand notes as cash and cash equivalents and has changed the classification of these investments to investment securities.  Additionally, the Company has changed the classification of outstanding checks in excess of available funds from cash and cash equivalents to accounts payableand accrued liabilities.  The reductionto cash and cash equivalents as of November 27, 2004 and August 28, 2004 as a result of these changes in classification was approximately $27.0 million and $62.6 million respectively.

 

The effect of the restatement described above aswell as the change in classification of investment securities andoutstanding checks in excessof available funds from cashand cash equivalents is as follows (in thousandsexcept per share amounts):

 
| **Consolidated Condensed  Balance Sheets**       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|----------------|------------|
| ** **                                       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** **     | ** ** |
| ** **                                       | ** ** | **As Previously** | ** ** | **As**           | ** ** | **As Previously** | ** ** | **As**         | ** ** |
| ** **                                       | ** ** | **Presented**     | ** ** | **Restated**     | ** ** | **Presented**     | ** ** | **Restated**   | ** ** |
| ** **                                       | ** ** | **November 27,**  | ** ** | **November 27,** | ** ** | **August 28,**    | ** ** | **August 28,** | ** ** |
| ** **                                       | ** ** | **2004**          | ** ** | **2004**         | ** ** | **2004**          | ** ** | **2004**       | ** ** |
| ** **                                       | ** ** | **(unaudited)**   | ** ** | **(unaudited)**  | ** ** | ** **        | ** ** | ** **     | ** ** |
| Cash and  cash equivalents                       |       | 129,690           |       | 102,683          |       | 149,602           |       | 87,023         |       |
| Investment  securities                           |       | —            |       | 83,075           |       | —            |       | 120,840        |       |
| Deferred  income taxes                           |       | 80,681            |       | 87,543           |       | 77,341            |       | 84,084         |       |
| Total  current assets                            |       | 1,268,289         |       | 1,331,219        |       | 1,225,308         |       | 1,290,312      |       |
| Property  and equipment, net                     |       | 944,585           |       | 934,426          |       | 926,514           |       | 918,449        |       |
| Total  assets                                    |       | 2,227,417         |       | 2,280,188        |       | 2,167,422         |       | 2,224,361      |       |
| Accounts  payable and accrued liabilities        |       | 695,316           |       | 779,525          |       | 713,551           |       | 800,585        |       |
| Total  current liabilities                       |       | 724,455           |       | 808,664          |       | 713,551           |       | 800,585        |       |
| Deferred  income taxes                           |       | 95,055            |       | 87,861           |       | 93,471            |       | 86,694         |       |
| Retained  earnings                               |       | 1,563,307         |       | 1,539,063        |       | 1,522,208         |       | 1,498,890      |       |
| Total  shareholders’ equity                 |       | 1,407,907         |       | 1,383,663        |       | 1,360,400         |       | 1,337,082      |       |
| Total  liabilities and shareholders’ equity |       | 2,227,417         |       | 2,280,188        |       | 2,167,422         |       | 2,224,361      |       |

 

 
| **Consolidated  Condensed Statements of Income (unaudited)** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** |
| ** **                                                   | ** ** | **As Previously** | ** ** | **As**            | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                                                   | ** ** | **Presented**     | ** ** | **Restated**      | ** ** | **Presented**     | ** ** | **Restated** | ** ** |
| ** **                                                   | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** |
| ** **                                                   | ** ** | **November 27,**  | ** ** | **November 27,**  | ** ** | **November 29,**  | ** ** | **November 29,** | ** ** |
| ** **                                                   | ** ** | **2004**          | ** ** | **2004**          | ** ** | **2003**          | ** ** | **2003** | ** ** |
| Selling, general and                                         |       |              |       |              |       |              |       |   |   |
| administrative  expenses                                     |       | 373,724           |       | 375,187           |       | 329,826           |       | 331,429 |   |
| Income  before provision                                     |       |              |       |              |       |              |       |   |   |
| for taxes  on income                                         |       | 86,628            |       | 85,165            |       | 101,499           |       | 99,896 |   |
| Provision  for taxes on income                               |       | 31,273            |       | 30,736            |       | 37,047            |       | 36,459 |   |
| Net  income                                                  |       | 55,355            |       | 54,429            |       | 64,452            |       | 63,437 |   |
| Net  income per common share - Basic                         |       | 0.33              |       | 0.32              |       | 0.37              |       | 0.37 |   |
| Net  income per common share - Diluted                       |       | 0.33              |       | 0.32              |       | 0.37              |       | 0.37 |   |

 

 
| **Consolidated  Condensed Statements of Cash Flows (unaudited)** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                       | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **As Previously** | ** ** | **As**            | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                                                       | ** ** | **Presented**     | ** ** | **Restated**      | ** ** | **Presented**     | ** ** | **Restated** | ** ** |
| ** **                                                       | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** |
| ** **                                                       | ** ** | **November 27,**  | ** ** | **November 27,**  | ** ** | **November 29,**  | ** ** | **November 29,** | ** ** |
| ** **                                                       | ** ** | **2004**          | ** ** | **2004**          | ** ** | **2003**          | ** ** | **2003** | ** ** |
|                                                             |       |              |       |              |       |              |       |   |   |
| Net  income                                                      |       | 55,355            |       | 54,429            |       | 64,452            |       | 63,437 |   |
| Depreciation  and amortization                                   |       | 25,216            |       | 26,354            |       | 24,009            |       | 25,019 |   |
| Deferred  income taxes                                           |       | (1,756            | )          | (2,292            | )          | 972               |       | 384 |   |
| Accounts  payable and accrued liabilities                        |       | (18,243           | )          | (18,875           | )          | (43,198           | )          | (42,555 | ) |
| Cash  flows from operating activities                            |       | 32,684            |       | 31,728            |       | 76,290            |       | 76,340 |   |
|                                                             |       |              |       |              |       |              |       |   |   |
| Purchases  of investment securities                              |       | —            |       | (22,835           | )          | —            |       | (49,190 | ) |
| Sales of  investment securities                                  |       | —            |       | 60,600            |       | —            |       | 58,119 |   |
| Capital  expenditures                                            |       | (43,937           | )          | (42,981           | )          | (27,215           | )          | (27,265 | ) |
| Cash  flows from investing activities                            |       | (43,784           | )          | (5,063            | )          | (27,094           | )          | (18,215 | ) |
|                                                             |       |              |       |              |       |              |       |   |   |
| Change in  cash overdrafts                                       |       | —            |       | (2,193            | )          | —            |       | (14,476 | ) |
| Cash  flows from financing activities                            |       | (8,812            | )          | (11,005           | )          | (8,118            | )          | (22,594 | ) |
|                                                             |       |              |       |              |       |              |       |   |   |
| Net  change in cash and cash equivalents                         |       | (19,912           | )          | 15,660            |       | 41,078            |       | 35,531 |   |
| Cash and  cash equivalents at beginning  of period               |       | 149,602           |       | 87,023            |       | 206,731           |       | 80,994 |   |
| Cash and  cash equivalents at end of period                      |       | 129,690           |       | 102,683           |       | 247,809           |       | 116,525 |   |
|                                                                  |            |                   |            |                   |            |                   |            |  |  |  |  |  |  |

 

8

----

 

**MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**The Company has restated the  consolidated condensed balance sheets at November 27, 2004 and August 28,2004, and the condensed consolidated statements of income and condensedconsolidated statements of cash flows for the quarters ended November 27, 2004and November 29, 2003 in this quarterly report on Form 10-Q.  See Note 9 to the accompanying consolidated financialstatements.**

 

**Thisdiscussion summarizes the significant factors affecting the consolidatedresults of operations and financial condition of the Company for the periodsended November 27, 2004 and November 29, 2003.  This discussion should be read in conjunctionwith the Consolidated Condensed Financial Statements and Notes to ConsolidatedCondensed Financial Statements included in this quarterly report.  For further information, refer to theConsolidated Financial Statements and Notes to Consolidated FinancialStatements included in the Company’s annual report on Form 10-K/A for the year ended August 28,2004 (“fiscal 2004”).**

** **

**Liquidity and CapitalResources**

** **

**TheCompany’s working capital increased $32.9 million from $489.7 million at August 28,2004, to $522.6 million at November 27,2004.  Changes in working capital andcash and cash equivalents during the first quarters of each of the years endingAugust 27, 2005 (“fiscal 2005”) and August 28, 2004 were primarilythe result of earnings, changes in merchandise inventories, and capitalexpenditures.  The Company’s inventoriesat November 27, 2004, were approximately 10% higher on a per store basisthan at November 29, 2003, excluding merchandise in transit to the distributioncenters.  The Company aggressively setthe stores to more effectively leverage increased holiday traffic.  Most of this increase was in basic consumablemerchandise but the Company also selectively invested in more toys and otherseasonal merchandise.  Both home decorand hanging apparel inventories at November 27, 2004 were at about thesame levels as at November 29, 2003, as the Company positioned these areasmore defensively to better control markdown exposure.**

** **

**Capitalexpenditures for the quarter ended November 27, 2004, were approximately$43.0 million, and are currentlyexpected to be approximately $270 million for fiscal 2005.  The majority of planned capital expendituresfor fiscal 2005 is related to the Company’s new store expansion; existing storeexpansions, relocations and renovations; the completion of construction of aneighth distribution center and start of construction of a ninth full-servicedistribution center; expenditures related to store-focused technologyinfrastructure and the implementation of a cooler program for perishable goodsin selected stores.  The new storeexpansion and eighth distribution center require additional investment inmerchandise inventories.**

** **

**TheCompany currently plans to open 500 to 560 stores and close 60 to 70 stores infiscal 2005, resulting in approximately 8% to 9% net new store growth and 9% to10% net square footage growth.  Urbanmarkets will continue to be the focus with approximately 60% to 65% of the newstores expected to open in urban areas.   The Company also currently plans to expand or relocate approximately 45stores and renovate approximately 110 stores in fiscal 2005. In fiscal 2004,the Company opened 500 stores and closed 61 stores, expanded or relocated 79stores and renovated 116 stores.  In thefirst quarter of fiscal 2005, the Company opened 98 stores, closed 9 stores,expanded or relocated 15 stores and renovated 57 stores.  The Company occupies most of its stores underoperating leases.  Store opening,closing, expansion, relocation, and renovation plans, as well as overallcapital expenditure plans, are continuously reviewed and are subject to change.**

 

9

----

 

**TheCompany had unsecured revolving credit facilities with banks for short-termborrowings of up to $200 million.  Onehundred million dollars of the facilities expires on May 26, 2005, and theremaining $100 million expires on May 31, 2009. The Company had no borrowings against these facilities during thequarter ended November 27, 2004. Cash flow from current operations and available revolving creditfacilities as discussed above are expected to be sufficient to meet plannedliquidity and capital resource needs, including store expansion and othercapital spending programs and any repurchase of the Company’s Common Stock.**

** **

**Duringthe years ended August 27, 2004 and August 30, 2003, the Companypurchased in the open market 5.6 million and 2.2 million shares, respectively,at a cost of $176.7 million and $65.9 million, respectively.  As of November 27, 2004, 2.2 millionshares were authorized to be purchased. No shares were purchased during the quarter ended November 27,2004.**

** **

**Thefollowing table shows the Company’s obligations and commitments as of November 27,2004, to make future payments under contractual obligations (in thousands):**

** **
| ** **                          | ** ** | **Payments Due During One Year  Fiscal Period Ending** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|
| **Contractual Obligations**         | ** ** | **Total**                                              | ** ** | **November  2005** | ** ** | **November  2006** | ** ** | **November  2007** | ** ** | **November  2008** | ** ** | **November  2009** | ** ** | **Thereafter** | ** ** |
|                                |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Merchandise  letters of credit      |       | $                                                      | 76,579     |   | $ | 76,579 |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   |
| Operating  leases                   |       | 970,313                                                |       | 228,136 |   | 198,719 |   | 163,808 |   | 127,529 |   | 88,738 |   | 163,383 |   |
| Construction  obligations           |       | 23,498                                                 |       | 23,498 |   |   |   |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations |       | $                                                      | 1,070,390  |   | $ | 328,213 |   | $ | 198,719 |   | $ | 163,808 |   | $ | 127,529 |   | $ | 88,738 |   | $ | 163,383 |   |

 

Most of theCompany’s operating leases provide the Company with an option to extend theterm of the lease at designated rates.

 

The followingtable shows the Company’s other commercial commitments as of November 27,2004 (in thousands):

 
| **Other Commercial Commitments** | ** ** | **Total  Amounts  Committed** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
|                             |       |                          |       |
| Standby  letters of credit       |       | $                             | 70,000     |   |
| Surety bonds                     |       | 6,233                         |       |
| Total  Commercial Commitments    |       | $                             | 76,223     |   |
|                                  |            |                               |            |  |  |

** **

**At November 27, 2004,approximately $20.0 million of the merchandise letters of credit are includedin accounts payable and accrued liabilities on the Company’s balancesheet.  A substantial portion of theoutstanding amount of standby letters of credit and surety bonds (which areprimarily renewed on an annual basis) are used as surety for future premium anddeductible payments to the Company’s workers’ compensation and generalliability insurance carrier.  The Companyaccrues for these liabilities as described in the “Critical Accounting Policies”section of this discussion.**

 

10

----

 

**Results of Operations**

** **

**Infiscal 2005, the Company is implementing four key initiatives designed toincrease sales and earnings – the urban initiative; the introduction ofadditional “Treasure Hunt” merchandise; the installation of coolers in selectedstores and the continuation of an aggressive store opening program.**

** **

**•**      Urban Initiative –Investments are being made in process changes, technology and people, includingorganizational changes to support a more mobile and flexible workforce, toimprove the operating performance of more than 1,000 high volume stores inthirty large metropolitan markets. During the first quarter ended November 27, 2004, the urbaninitiative was substantially implemented in approximately 300 stores.

** **

**•**      Treasure HuntMerchandise – The Company’s basic assortment of merchandise is beingsupplemented by additional opportunistically purchased goods which are designedto create more excitement in the stores throughout the year, with particularemphasis on the holiday season.

** **

**•**      Coolers – Theinstallation of coolers for the sale of perishable food will begin in thesecond quarter of fiscal 2005 and by the end of fiscal 2005 at least 500 storesare expected to have coolers.  Inaddition, the Company also plans to begin implementation by fiscal year-end ofnew point-of-sale software in selected stores to facilitate the acceptance offood stamps in stores with coolers, simplify cashier training, and speed upcheckout processes.

** **

**•**      New Stores – FamilyDollar’s aggressive store opening program is continuing.  The Company’s current plan is to open 500 to560 stores and close 60 to 70 stores, resulting in about 8% to 9% net storegrowth and 9% to 10% net square footage growth. In the first quarter of fiscal 2005, the Company opened 98 stores, closed9 stores, expanded or relocated 15 stores and renovated 116 stores.

 

**Net sales**

** **

**Netsales increased 10.9% ($135.6 million) in the quarter ended November 27,2004, as compared with an increase of 12.3% ($136.0 million) in the quarterended November 29, 2003.  Theincrease was attributable to an increase in sales in existing stores (storesopened more than 13 months) of approximately 2.5% ($30.3 million) with thebalance of the increase primarily relating to sales from new stores opened aspart of the Company’s store expansion program. The existing stores sales increase of approximately 2.5% includedincreases of 1.5% in the September reporting period, 0.9% in the October reportingperiod and 5.2% in the November reporting period.  The Company estimates that approximately 1%of this existing stores sales increase is attributable to an advertisingcircular that was distributed in the first week of November.  The Company did not distribute a circular inthe first quarter of fiscal 2004.**

** **

**Salesof basic consumables, such as household chemicals, paper products and food, inthe first quarter ended November 27, 2004, were good.  However, sales of more discretionarymerchandise, including hanging apparel and home décor, were below the Company’splan.  The 2.5% increase in sales inexisting stores includes an increase of approximately 4.5% in sales ofhardlines and a decrease of approximately 4.6% in sales of softlines.  Hardlines merchandise includes primarilyhousehold chemical and paper products, health and beauty aids, food,electronics, housewares and giftware, toys, school supplies, hardware andautomotive supplies.  Softlinesmerchandise includes men’s, women’s, boy’s, girl’s and infant’s clothing andaccessories, shoes, and domestic items such as blankets, sheets and towels.**

 

11

----

 

**Inthe first quarter of fiscal 2005, the customer count, as measured by the numberof register transactions in existing stores increased approximately 0.3% andthe average transaction increased approximately 2.2% to $8.91.  Hardlines as a percentage of total salesincreased to approximately 79.0% in the first quarter of fiscal 2005 comparedto approximately 77.0% in the first quarter of fiscal 2004.  Softlines as a percentage of sales decreasedto 21.0% in the first quarter of fiscal 2005 (with hanging apparel and shoesrepresenting 10.5%, basic apparel 4.0% and domestics 6.5%) compared to 23.0% inthe first quarter of fiscal 2004 (with hanging apparel and shoes representing12.0%, basic apparel 4.0% and domestics 7.0%).**

** **

**Salesin existing stores for the five week period ending January 1, 2005increased approximately 4.0% above existing store sales for the similar periodin the prior fiscal year.  The Company’splan is for sales in existing stores in the four weeks ending January 29,2005, to increase in the 2% to 3% range. As the fiscal 2005 initiatives are implemented, the Company continues toexpect that increases in sales in existing stores will be in the 3% to 5% rangein the fourth quarter ending August 27, 2005.**

** **

**Theaverage number of stores open during the first quarter of fiscal 2005 was 8.7%more than during the first quarter of fiscal 2004.  The Company had 5,555 stores in operation at November 27,2004, as compared with 5,102 stores in operation at November 29, 2003, representingan increase of approximately 8.9%.**

** **

**Cost of Sales**

** **

**Costof sales increased 13.1% in the quarter ended November 27, 2004, ascompared with the quarter ended November 29, 2003.  This increase primarily reflected theadditional sales volume between years. Cost of sales, as a percentage of net sales, was 66.6% in the quarterended November 27, 2004, compared with 65.3% in the quarter ended November 29,2003.  The increase in the cost of salespercentage was due primarily to the continuing shift in the merchandise mix ofsales to more lower margin basic consumables and less higher margindiscretionary goods, increased shrinkage and increased freight costs due tohigher fuel expense.  Sales of sharplypriced merchandise in the advertising circular in the first week of November alsocontributed to the increase in cost of sales percentage.  These increases in the cost of salespercentage were partially offset by lower markdowns during the quarter ended November 27,2004.  The Company is addressing the issueof shrinkage by implementing new loss prevention reports that provide morevisibility to store level issues and by adding personnel to its Loss PreventionDepartment.  In addition, as part of itsurban initiative, the Company is modifying its field management structure toincrease management presence and the frequency of inspections in its urbanmarkets.  The opening of the eighthdistribution center in January 2005 will reduce the average distancebetween the stores and a distribution center and that reduction is expected tooffset, to some degree, the higher fuel costs.**

** **

**Forfiscal 2005, the Company’s plan is for the cost of sales percentage to increaseas compared to the percentage in fiscal 2004 due to the continuing effect ofthe factors discussed above.  Theseimpacts should be most pronounced during the first half of fiscal 2005 and theshrink initiatives and new distribution center are expected to mitigate theseimpacts during the second half of fiscal 2005.**

** **

**Selling, general and administrative**

 

**Selling,general and administrative expenses increased 13.2%in the quarter ended November 27, 2004, as compared with the quarter endedNovember 29, 2003.**

 

12

----

 

**Theincrease in these expenses was due primarily to additional costs arising fromthe continued growth in the number of stores in operation.  Selling, general and administrative expenses,as a percentage of net sales, were 27.2% in the quarter ended November 27,2004, compared with 26.6% in the quarter ended November 29,2003.  The percentage was adverselyimpacted by planned expenses incurred in connection with the urban initiativeand other previously announced initiatives which are expected to positivelyimpact sales later in the fiscal year (approximately 0.25%); and by insurancecosts driven primarily by above normal hurricane damages (approximately0.15%).  The incremental costs todistribute an advertising circular in November 2004 also impacted thispercentage slightly (approximately 0.1%).**

** **

**Forfiscal 2005, the Company’s plan is for the selling, general and administrativeexpense percentage to increase as compared to the percentage in fiscal2004.  The Company expects the funding ofits various growth initiatives as previously mentioned to negatively impact itsexpense leverage for the year by approximately 0.4% of sales.**

** **

**Provision for taxes on income**

** **

**Theeffective tax rate was 36.1% for the quarter ended November 27, 2004, and36.5% for the quarter ended November 29, 2003.  A retroactive reinstatement of certainfederal jobs tax credits for employees hired after December 31, 2003favorably impacted the effective tax rate in the first quarter of fiscal2005.  For the remainder of fiscal 2005,the Company’s plan is for the effective tax rate to increase slightly comparedto the rate in fiscal 2004 due to the effect of changes in state income taxes.**

----

**Basedon the operating results for the first quarter ended November 27, 2004,and the Company’s plan for sales, cost of sales, selling, general and administrativeexpenses and tax rate, the Company’s current plan is for net income per dilutedshare of Common Stock to be between $1.53 and $1.55 in fiscal 2005.**

** **

**Critical AccountingPolicies**

** **

**Managementbelieves the following accounting principles are critical because they involvesignificant judgments, assumptions, and estimates used in the preparation ofthe Company’s consolidated financial statements.**

** **

**Merchandise Inventories:**

**Inventoriesare valued using the retail method, based on retail prices less markonpercentages, which approximates the lower of first-in, first-out (FIFO) cost ormarket.  The Company records adjustmentsto inventory through cost of goods sold when permanent retail price reductions,or markdowns, are taken against on-hand inventory.  In addition, management makes estimates andjudgments regarding, among other things, initial markups, markdowns, futuredemand for specific product categories and market conditions, all of which cansignificantly impact inventory valuation. If actual demand or market conditions are different than those projectedby management, additional markdowns may be necessary.  This risk is generally higher for seasonalmerchandise than for non-seasonal goods. The Company also provides for estimated inventory losses for damaged,lost or stolen inventory for the period from the physical inventory to thefinancial statement date.  Theseestimates are based on historical experience and other factors.**

 

13

----

 

**Property and equipment:**

**Propertyand equipment is stated at cost. Depreciation for financial reporting purposes is being provided by the straight-linemethod over the estimated useful lives of the related assets.  Forleasehold improvements, this depreciation is over the shorter of the termof the related lease (generally five years) or the assets useful economic life.  Thevaluation and classification of these assets and the assignment of usefuldepreciable lives involves significant judgments and the use of estimates.  The Company generally assigns no salvagevalue to property and equipment. Property and equipment is reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Historically, impairmentlosses on fixed assets have not been material to the Company’s financialposition, liquidity or results of operations.**

** **

**Insurance Liabilities:**

**TheCompany is primarily self-insured for health care, property loss, workers’compensation and general liability costs. These costs are significant primarily due to the large number of theCompany’s retail locations and employees. Because the nature of these claims is such that there can be asignificant lag from the incurrence of the claim (which is when the expense isaccrued) until payment is made, the percentage increase in the accrual can bemuch more pronounced than the percentage increase in the expense.  The Company’s self-insurance liabilities arebased on the total estimated costs of claims filed and estimates of claimsincurred but not reported, less amounts paid against such claims, and are notdiscounted.  Management reviews currentand historical claims data in developing its estimates.  The Company also uses information provided byoutside actuaries with respect to workers’ compensation and general liabilityclaims.  If the underlying facts andcircumstances of the claims change or the historical trend is not indicative offuture trends, then the Company may be required to record additional expense ora reduction to expense which could be material to the reported financialcondition, liquidity or results of operations.**

** **

**Forward-LookingStatements**

** **

**Certainstatements contained herein and elsewhere in this Form 10-Q which are not historicalfacts are forward-looking statements made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements address theCompany’s plans and activities or events which the Company expects will or mayoccur in the future such as future capital expenditures, store openings,closings, renovations, expansions and relocations, additional distributionfacilities, sales, cost of sales, expenses, inventory levels, the outcome oflegal proceedings and other aspects of the Company’s business andoperations.  A number of importantfactors could cause actual results to differ materially from those expressed inany forward-looking statements, whether written or oral, made by or on behalfof the Company.  Such factors include,but are not limited to, competitive factors and pricing pressures, generaleconomic conditions, the impact of acts of war or terrorism, changes inconsumer demand and product mix, unusual weather that my temporarily impactsales, inflation, merchandise supply constraints, general transportation delaysor interruptions, dependence on imports, changes in currency exchange rates,trade restrictions, tariffs, quotas, and freight rates, availability of realestate, costs and delays associated with building, opening and operating newdistribution facilities and stores, costs, potential problems and achievementof results associated with the implementation of new programs, systems andtechnology, including supply chain systems, store technology, coolerinstallations and urban initiative programs, changes in food and energy pricesand the impact on consumer spending and the Company’s costs, legal proceedingsand claims, changes in**

 

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**shrinkage,changes in health care and other insurance costs, and the effects oflegislation on wage levels and entitlement programs.  Consequently, all of the forward-lookingstatements made are qualified by these and other factors, risks anduncertainties.  Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date of this Form 10-Q.  TheCompany does not undertake to publicly update or revise its forward-looking statementseven if experience or future changes make it clear that projected resultsexpressed or implied in such statements will not be realized.**

** **

**Item 4.****    Controlsand Procedures**

 

Based on an evaluation bymanagement of the Company (with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer), as of the end of the periodcovered by this report, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures (as defined in Rules 13a-15 (e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) were effective toprovide reasonable assurance that information required to be disclosed by theCompany in reports that the Company files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission (“SEC”) rules and forms and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosures.Consistent with the suggestion of the SEC, the Company has formed a DisclosureCommittee consisting of key Company personnel designed to review the accuracyand completeness of all disclosures made by the Company.

 

In March 2005, afterconsulting with its Audit Committee, the Company concluded that its financialstatements for the first quarter of fiscal 2005 and for the years ended August28, 2004, August 30, 2003 and August 31, 2002 should be restated to correctcertain errors relating to accounting for leased properties and thereforeshould no longer be relied upon. The Company has discussed this restatementwith its independent registered public accountants. On March 22, 2005, theCompany issued a press release announcing the intended restatement of theCompany’s historical financial statements and filed a report on Form 8-K withthe SEC advising that the Company’s prior financial statements should no longerbe relied upon.

 

The Company does notconsider the impact of correcting the previously issued financial statements tobe material with respect to any individual reporting period.  However,because the cumulative effect of such change, if recorded in the current quarterlyperiod, would be material to that period, the Company determined that arestatement of prior period financial statements was appropriate.  See Note 9 to the consolidated condensedfinancial statements.

 

There was no change in theCompany’s internal control over financial reporting during the fiscal quarterto which this report relates that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

****

****

****

****

****

****

****

****

****

****

 

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**PART II – OTHER INFORMATION**

** **

**Item1.**                    Legal Proceedings

** **

**Theinformation in Note 7 to the Consolidated Condensed Financial Statementscontained in Part 1, Item 1 of this Form 10-Q is incorporated herein by thisreference.**

** **

**Item2.**                    UnregisteredSales of Equity Securities and Use of Proceeds

** **

**Duringthe years ended August 27, 2004 and August 30, 2003, the Companypurchased in the open market 5.6 million and 2.2 million shares, respectively,at a cost of $176.7 million and $65.9 million, respectively.  As of November 27, 2004, 2.2 millionshares were authorized to be purchased. No shares were purchased during the quarter ended November 27,2004.  All shares have been purchased inopen market transactions.  Sharespurchased under the share repurchase authorization are held in treasury andcurrently a portion of such shares are reissued under the Family Dollar 2000Outside Directors Plan.  There is noexpiration date governing the period during which the Company can make sharerepurchases.  There are no otherrepurchase programs under which the Company is authorized to repurchaseoutstanding shares.**

** **

**Item5.**                    Other Information

** **

**On January 6, 2005, theCompany issued a news release with respect to the reporting of sales for thefive-week period ended January 1, 2005, and the current plan for sales inexisting stores in the four-week period ending January 29, 2005.  A copy of the news release is attached heretoas Exhibit 99 and is incorporated herein by reference.**

** **

**Item6.**                    Exhibits

** **
| **(a)**    | ** ** | **Exhibits  filed herewith:**                                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                         |
| **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** |
| ** ** | ** ** | ** **                                                                                                                                                                                                         |
| **32.1**   | ** ** | **Certification  of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                         |
| **32.2**   | ** ** | **Certification  of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                         |
| **99**     | ** ** | **News  Release dated January 6, 2005**                                                                                                                                                                       |

 

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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 undersignedthereunto duly authorized.

 
|                      | FAMILY DOLLAR STORES, INC.            |                 |
|---------------------------|---------------------------------------|----------------------|
|                      | (Registrant)                          |
|                      |                                  |
|                      |                                  |
| Date: April 15, 2005 |                                  | /s/ R. James Kelly   |   |
|                      | R. James Kelly                        |
|                      | Vice Chairman-Chief Financial Officer |
|                      |                                  |
|                      |                                  |
| Date: April 15, 2005 |                                  | /s/ C. Martin Sowers |   |
|                      | C. Martin Sowers                      |
|                      | Senior Vice President-Finance         |

 

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