**Form 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**(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 29, 2003** |
|                                                 |
| **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 as specified in itscharter)

 

| **DELAWARE**                                                                                                                                            |   | **56-0942963**       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|
| (State or other jurisdiction of                                                                                                                         |   | (I.R.S. Employer     |
| incorporation or organization)                                                                                                                          |   | (Identification No.) |
|                                                                                                                                                    |   |                 |
| **P.O. Box 1017, 10401 Old 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 13 or15 (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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 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, 2003** |
|------------------------------|--------|--------------------------------------|
| Common Stock, $.10 par value |   | 172,132,688 shares                   |

 

 

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

 

**INDEX**

 
| Part I   –  Financial Information                                                               |   |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                           |   |   |
| Item 1 – Consolidated Condensed Financial Statements:                                                     |   |   |
|                                                                                                           |   |   |
| Consolidated Condensed Balance Sheets –  November 29, 2003 and August 30, 2003                            |   |   |
|                                                                                                           |   |   |
| Consolidated Condensed Statements of Income  –  Quarter Ended November 29, 2003 and November 30, 2002     |   |   |
|                                                                                                           |   |   |
| Consolidated  Condensed Statements of Cash Flows –  Quarter Ended November 29, 2003 and November 30, 2002 |   |   |
|                                                                                                           |   |   |
| 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 6 – Exhibits and Reports on Form 8-K                                                                 |   |   |
|                                                                                                           |   |   |
| Signatures                                                                                                     |   |   |

 

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**FAMILY DOLLARSTORES****, INC., AND SUBSIDIARIES**

** **

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

**(Unaudited)**

** **
|                                                                                                                                               |   | **November  29,** |      | **August 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|----------------|--------|
| **(In  thousands, except share amounts)**                                                                                                          |   | **2003**          |      | **2003**       |   |
| Assets                                                                                                                                             |   |              |      |           |   |
|                                                                                                                                               |   |              |      |           |   |
| Current assets:                                                                                                                                    |   |              |      |           |   |
| Cash and cash equivalents (Note 2)                                                                                                                 |   | $                 | 247,809   |           | $      | 206,731 |   |
| Merchandise inventories                                                                                                                            |   | 846,958           |      | 854,370        |   |
| Deferred income taxes                                                                                                                              |   | 65,628            |      | 61,769         |   |
| Prepayments and other current assets                                                                                                               |   | 43,038            |      | 33,622         |   |
| Total current assets                                                                                                                               |   | 1,203,433         |      | 1,156,492      |   |
|                                                                                                                                               |   |              |      |           |   |
| Property and equipment, net                                                                                                                        |   | 813,399           |      | 812,123        |   |
|                                                                                                                                               |   |              |      |           |   |
| Other assets                                                                                                                                       |   | 19,108            |      | 17,080         |   |
|                                                                                                                                               |   |              |      |           |   |
|                                                                                                                                               |   | $                 | 2,035,940 |           | $      | 1,985,695 |   |
|                                                                                                                                               |   |              |      |           |   |
| Liabilities  and Shareholders’ Equity                                                                                                         |   |              |      |           |   |
|                                                                                                                                               |   |              |      |           |   |
| Current liabilities:                                                                                                                               |   |              |      |           |   |
| Accounts payable and accrued liabilities                                                                                                           |   | $                 | 551,479   |           | $      | 594,660 |   |
| Income taxes payable                                                                                                                               |   | 31,048            |      | 671            |   |
| Total current liabilities                                                                                                                          |   | 582,527           |      | 595,331        |   |
|                                                                                                                                               |   |              |      |           |   |
| Deferred income taxes                                                                                                                              |   | 84,226            |      | 79,395         |   |
|                                                                                                                                               |   |              |      |           |   |
| 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 187,147,543 shares at November 29, 2003, and  186,909,993 shares at August 30, 2003 |   | 18,715            |      | 18,691         |   |
| Capital in excess of par                                                                                                                           |   | 94,133            |      | 87,457         |   |
| Retained earnings                                                                                                                                  |   | 1,367,118         |      | 1,315,600      |   |
|                                                                                                                                               |   | 1,479,966         |      | 1,421,748      |   |
| Less common stock held in treasury, at cost  (14,701,190 shares at November 29, 2003 and 14,701,283 at August 30,  2003)(Note 6)                   |   | 110,779           |      | 110,779        |   |
| Total shareholders’ equity                                                                                                                    |   | 1,369,187         |      | 1,310,969      |   |
|                                                                                                                                               |   |              |      |           |   |
|                                                                                                                                               |   | $                 | 2,035,940 |           | $      | 1,985,695 |   |

 

See notes to consolidated condensedfinancial statements

 

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

 

**CONSOLIDATEDCONDENSED STATEMENTS OF INCOME**

**(Unaudited)**

 
|                                                 |   | **Quarter  Ended** |      |
|------------------------------------------------------|--------|--------------------|-----------|
|                                                 |   | **November  29,**  |      | **November  30,** |   |
| **(In  thousands, except per share amounts)**        |   | **2003**           |      | **2002** |   |
|                                                 |   |               |      |   |   |
| Net sales                                            |   | $                  | 1,244,683 |   | $ | 1,108,637 |   |
|                                                 |   |               |      |   |   |
| Cost and expenses:                                   |   |               |      |   |   |
| Cost of sales                                        |   | 813,358            |      | 727,805 |   |
| Selling, general and administrative  expenses        |   | 329,826            |      | 290,315 |   |
|                                                 |   | 1,143,184          |      | 1,018,120 |   |
| Income before provision for taxes on income          |   | 101,499            |      | 90,517 |   |
| Provision for taxes on income                        |   | 37,047             |      | 33,039 |   |
|                                                 |   |               |      |   |   |
| Net income                                           |   | $                  | 64,452    |   | $ | 57,478 |   |
|                                                 |   |               |      |   |   |
| Net income per common share – Basic (Note  6)   |   | $                  | 0.37      |   | $ | 0.33 |   |
|                                                 |   |               |      |   |   |
| Average shares – Basic (Note 6)                 |   | 172,353            |      | 173,077 |   |
|                                                 |   |               |      |   |   |
| Net income per common share – Diluted (Note  6) |   | $                  | 0.37      |   | $ | 0.33 |   |
|                                                 |   |               |      |   |   |
| Average shares – Diluted (Note 6)               |   | 173,641            |      | 173,942 |   |
|                                                 |   |               |      |   |   |
| Dividends per common share                           |   | $                  | 0.075     |   | $ | 0.065 |   |

 

See notes to consolidated condensedfinancial statements.

 

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

 

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **Quarter  Ended** |    |
|------------------------------------------------------------------------------------|--------|--------------------|---------|
|                                                                               |   | **November  29,**  |    | **November  30,** |   |
| **(In  thousands)**                                                                |   | **2003**           |    | **2002** |   |
| Cash flows from operating activities:                                              |   |               |    |   |   |
| Net income                                                                         |   | $                  | 64,452  |   | $ | 57,478 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |               |    |   |   |
| Depreciation and amortization                                                      |   | 24,009             |    | 21,424 |   |
| Deferred income taxes                                                              |   | 972                |    | (2,115 | ) |
| Loss on disposition of property and  equipment                                     |   | 1,809              |    | 1,147 |   |
| Changes in operating assets and  liabilities:                                      |   |               |    |   |   |
| Merchandise inventories                                                            |   | 7,412              |    | (43,893 | ) |
| Income tax refund receivable                                                       |   | —             |    | 6,469 |   |
| Prepayments and other current assets                                               |   | (9,416             | )       | (8,202 | ) |
| Other assets                                                                       |   | (2,028             | )       | 119 |   |
| Accounts payable and accrued liabilities                                           |   | (43,198            | )       | (38,113 | ) |
| Income taxes payable                                                               |   | 30,377             |    | 26,844 |   |
|                                                                               |   | 74,389             |    | 21,158 |   |
| Cash flows from investing activities:                                              |   |               |    |   |   |
| Capital expenditures                                                               |   | (27,215            | )       | (28,152 | ) |
| Proceeds from dispositions of property and  equipment                              |   | 121                |    | 125 |   |
|                                                                               |   | (27,094            | )       | (28,027 | ) |
| Cash flows from financing activities:                                              |   |               |    |   |   |
| Net purchases of stock for treasury                                                |   | —             |    | (44,709 | ) |
| Exercise of employee stock options                                                 |   | 6,700              |    | 2,949 |   |
| Payment of dividends                                                               |   | (12,917            | )       | (11,267 | ) |
|                                                                               |   | (6,217             | )       | (53,027 | ) |
|                                                                               |   |               |    |   |   |
| Net change in cash and cash equivalents                                            |   | 41,078             |    | (59,896 | ) |
|                                                                               |   |               |    |   |   |
| Cash and cash equivalents at beginning of  period                                  |   | 206,731            |    | 220,265 |   |
|                                                                               |   |               |    |   |   |
| Cash and cash equivalents at end of period                                         |   | $                  | 247,809 |   | $ | 160,369 |   |
|                                                                               |   |               |    |   |   |
| Supplemental disclosure of cash flow  information:                                 |   |               |    |   |   |
| Cash paid during the period for:                                                   |   |               |    |   |   |
| Interest                                                                           |   | $                  | —  |   | $ | — |   |
| Income taxes                                                                       |   | 3,798              |    | 1,015 |   |

 

See notes to consolidated condensedfinancial statements.

 

4

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## **FAMI**LYDOLLAR STORES, INC., AND SUBSIDIARIES

 

**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

1.                                       Inthe opinion of the Company, the accompanying unaudited consolidated condensedfinancial statements contain all adjustments (consisting of only normalrecurring accruals) necessary to present fairly the financial position as ofNovember 29, 2003, and the results of operations and the cash flows for thequarters ended November 29, 2003, and November 30, 2002. For furtherinformation, refer to the consolidated financial statements and footnotesincluded in the Company’s annual report on Form 10-K for the year ended August30, 2003.

 

The results of operations for the quarter ended November 29, 2003, arenot necessarily indicative of the results to be expected for the full year.

 

The Companymanages its business on the basis of one reportable segment.

 

2.                                       TheCompany considers all highly liquid investments with an original maturity ofthree months or less to be “cash equivalents.” The carrying amount of the Company’s cash equivalents approximates fairvalue due to the short maturities of these investments and consists primarilyof money market funds, U.S. government agency securities and tax exempt notesand bonds.  The Company maintains cashdeposits with major banks which from time to time may exceed federally insuredlimits.  The Company periodicallyassesses the financial condition of the institutions and believes that the riskof any loss is minimal.

 

3.                                       Thepreparation of the Company’s consolidated financial statements, in conformitywith accounting principles generally accepted in the United States of America,requires management to make estimates and assumptions.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

4.                                       TheCompany has unsecured revolving credit facilities with banks for short-termborrowings of up to $200 million.  Onehundred million dollars of the facilities expires on May 27, 2004, and theremaining $100 million expires on May 31, 2005.  The Company expects that the facilities expiring on May 27, 2004,will be extended.  Borrowings underthese facilities are at a variable interest rate based on short-term marketinterest rates.  The Company may convertup to $100 million of the facilities expiring on May 31, 2005, into a five-yearterm loan, at the banks’ variable prime rate.

 

5.                                       TheCompany’s non-qualified stock option plan provides for the granting of optionsto key employees to purchase shares of common stock at prices not less than thefair market value on the date of grant. Options expire five years from the date of grant and are exercisable tothe extent of 40% after the second anniversary of the grant and an additional30% at each of the following two anniversary dates on a cumulative basis.

 

5

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The Company accounts for stockoptions granted to employees using the intrinsic value method, under which nocompensation expense is recorded since the exercise price of the stock optionsis equal to the market price of the underlying stock on the date of thegrant.  Had compensation cost for thestock options issued been determined consistent with Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation,” netincome and net income per share would have been reduced to the following proforma amounts (in thousands, except per share amounts):

 
|                                    |   | **Quarter  Ended** |   |
|-----------------------------------------|--------|-------------------------|--------|
|                                    |   | **November  29, 2003**  |   | **November  30, 2002** |   |
| Net income-as reported                  |   | $                       | 64,452 |   | $ | 57,478 |   |
|                                    |   |                    |   |   |   |
| Pro forma stock-based compensation cost |   | (1,987                  | )      | (1,375 | ) |
| Net income–pro forma               |   | $                       | 62,465 |   | $ | 56,103 |   |
|                                    |   |                    |   |   |   |
| Net income per share as reported:       |   |                    |   |   |   |
| Basic                                   |   | $                       | .37    |   | $ | .33 |   |
| Diluted                                 |   | $                       | .37    |   | $ | .33 |   |
|                                    |   |                    |   |   |   |
| Net income per share–pro forma:    |   |                    |   |   |   |
| Basic                                   |   | $                       | .36    |   | $ | .32 |   |
| Diluted                                 |   | $                       | .36    |   | $ | .32 |   |

 

The assumptions used tocalculate the fair value of options granted are evaluated and revised, asnecessary, to reflect market conditions and experience.

 

The following is a summary oftransactions under the plan during the quarters ended November 29, 2003 andNovember 30, 2002 (In thousands, except per share amounts).

 
|                  |   | **Quarter  Ended**     |   |
|-----------------------|--------|------------------------|--------|
|                  |   | **November  29, 2003** |   | **November  30, 2002** |   |
|                  |   | **Number of**          |   |   |   | **Number of** |   |   |   |
|                  |   | **shares**             |   | **Option  price** |   | **shares** |   | **Option  price** |   |
|                  |   | **under  option**      |   | **per share** |   | **under  option** |   | **per share** |   |
| Outstanding-beginning |   | 5,001                  |   | $14.75-$39.00 |   | 4,411 |   | $11.38-$35.50 |   |
| Granted               |   | 1,780                  |   | $38.50-$44.00 |   | 1,551 |   | $24.75-$30.00 |   |
| Exercised             |   | (238                   | )      | $15.00-$30.50 |   | (150 | ) | $11.38-$20.75 |   |
| Cancelled             |   | (66                    | )      |   |   | (32 | ) |   |   |
| Outstanding-ending    |   | 6,477                  |   | $14.75-$44.00 |   | 5,780 |   | $12.75-$35.50 |   |
|                  |   |                   |   |   |   |   |   |   |   |
| Exercisable options   |   | 1,691                  |   | $14.75-$30.25 |   | 1,707 |   | $12.75-$24.75 |   |

 

6.                                       Basicnet income per common share is computed by dividing net income by the weightedaverage 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. In the calculation of diluted net income per common share, the denominatorincludes the number of additional common shares that would have beenoutstanding if the Company’s outstanding stock options had been exercised.

 

On October 9,2002, the Company announced that the Board of Directors authorized the purchaseof up to 5 million shares of its outstanding common stock from time to time asmarket conditions warrant.  During theyear ended August 30, 2003, the Company purchased in the open market 2.2million shares at a cost of $65.9 million. No shares were purchased during the

 

6

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quarter endedNovember 29, 2003.  Shares purchasedunder the share repurchase authorization, in general, are constructivelyretired, except for shares reissued under the Family Dollar 2000 OutsideDirectors Plan.  There is no expirationdate governing the period over which the Company can make sharerepurchases.  The share repurchaseauthorization had a remaining authorized balance of 2.8 million shares forfuture Common Stock repurchases as of November 29, 2003.  From the start of the second quarter onNovember 30, 2003, through January 6, 2004, the Company purchased in the openmarket 491,000 shares at a cost of $17.0 million.

 

The followingtable sets forth the computation of basic and diluted net income per commonshare (In thousands, except per share amounts):

 
|                                                |   | **Quarter  Ended** |   |
|-----------------------------------------------------|--------|--------------------|--------|
|                                                |   | **November  29,**  |   | **November  30,** |   |
|                                                |   | **2003**           |   | **2002** | ** ** |
| Basic Net Income Per Share:                         |   |               |   |   |   |
|                                                |   |               |   |   |   |
| Net Income                                          |   | $                  | 64,452 |   | $ | 57,478 |   |
|                                                |   |               |   |   |   |
| Weighted Average Number of Shares  Outstanding      |   | 172,353            |   | 173,077 |   |
|                                                |   |               |   |   |   |
| Net Income Per Common Share – Basic            |   | $                  | 0.37   |   | $ | 0.33 |   |
|                                                |   |               |   |   |   |
| Diluted Net Income Per Share:                       |   |               |   |   |   |
|                                                |   |               |   |   |   |
| Net Income                                          |   | $                  | 64,452 |   | $ | 57,478 |   |
|                                                |   |               |   |   |   |
| Weighted Average Number of Shares  Outstanding      |   | 172,353            |   | 173,077 |   |
|                                                |   |               |   |   |   |
| Effect of Dilutive Securities – Stock  Options |   | 1,288              |   | 865 |   |
| Average Shares – Diluted                       |   | 173,641            |   | 173,942 |   |
|                                                |   |               |   |   |   |
| Net Income Per Common Share – Diluted          |   | $                  | 0.37   |   | $ | 0.33 |   |

 

7.                                       OnJanuary 30, 2001, Janice Morgan and Barbara Richardson, two individuals whohave held the position of Store Manager for subsidiaries of the Company, fileda Complaint against the Company in the United States District Court for theNorthern District of Alabama.  TheComplaint has been amended to add as plaintiffs five more individuals who hadheld the position of Store Manager for subsidiaries of the Company.  Thereafter, pursuant to the Court’s ruling,notice of the pendency of the lawsuit was sent to approximately 13,000 currentand former Store Managers holding the position on or after July 1, 1999.  Based on currently available information,approximately 2,552 of those have filed consent forms and joined the lawsuit asplaintiffs, including approximately 2,297 former Store Managers andapproximately 255 current employees. The case is proceeding as a collective action under the Fair LaborStandards Act (“FLSA”).  The Complaintalleges that the Company violated the FLSA by classifying the plaintiffs andother 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 deemproper.  The lawsuit is near theconclusion of the discovery phase and the Company is vigorously defending thisaction.  The trial is currently expectedto commence in the first half of 2004. In general, the Company believes that the Store Managers are “exempt”employees under the FLSA and have been properly compensated and that theCompany has meritorious defenses that should enable it to ultimatelyprevail.  However, the outcome of anylitigation is inherently uncertain.  TheCompany bears the burden of proof

 

7

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at trial ofestablishing its entitlement to the exemption from the overtime requirements ofthe FLSA, and no assurances can be given that the Company will be successful indefending this action; moreover, as a collective action, the determination ofliability with respect to each individual plaintiff depends in large part onthe facts and circumstances which relate solely to that plaintiff.  The nature of this action and its presentprocedural posture mean that future rulings by the Court on both substantiveand procedural motions and issues may significantly impact the course ofproceedings, the issues in dispute, the number of plaintiffs who are allowed toproceed to trial, and the presentation of evidence supporting the Company’sposition.  Thus, those rulings maygreatly affect the Company’s effort to establish the exempt status of theplaintiff Store Managers.  If there isan adverse verdict on the merits, particularly regarding the issue generallyapplicable to the collective claims, the Company may be subject to liabilitythat could have a material adverse effect on the Company’s financial positionor results of operation.

 

The Company isinvolved in numerous other legal proceedings and claims, including employment,tort, consumer and other litigation. While the ultimate outcome cannot be determined, the Company currentlybelieves that the proceedings and claims, both individually and in theaggregate, should not have a material adverse effect on the Company’s financialposition 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 or resultsof operations.

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Thisdiscussion summarizes the significant factors affecting the consolidatedresults of operations and financial condition of the Company for the periodsended November 29, 2003 and November 30, 2002. This discussion should be read in conjunction with the ConsolidatedCondensed Financial Statements and Notes to Consolidated Condensed Financial Statementsincluded in this quarterly report.  Forfurther information, refer to the Consolidated Financial Statements and Notesto Consolidated Financial Statements included in the Company’s annual report onForm 10-K for the year ended August 30, 2003.

 

**Liquidity and Capital Resources**

 

The Company’sworking capital increased $59.7 million from $561.2 million at August 30, 2003,to $620.9 million at November 29, 2003. Changes in working capital and cash and cash equivalents during thefirst quarter of fiscal 2004 and fiscal 2003 were primarily the result ofearnings, changes in merchandise inventories, capital expenditures and, infiscal 2003, repurchases of the Company’s Common Stock.  The Company continued to plan its sales ofseasonal goods conservatively and at the end of the first quarter of fiscal2004, per store inventories were slightly below the per store inventory levelat the end of the first quarter of fiscal 2003.  Continued improvement in planning and allocation processes haveenabled the Company to increase inventory turnover by reducing quantities ofapparel and other seasonal merchandise while maintaining adequate inventorylevels to support sales.  Cash and cashequivalents at the end of the first quarter of fiscal 2004 were also favorablyimpacted by increased accounts payable leverage (accounts payable as apercentage of merchandise inventory) resulting from the improved inventoryturnover as compared to the end of the first quarter of fiscal 2003.

Capitalexpenditures for the quarter ended November 29, 2003, were approximately $27.2million, and are currently expected to be approximately $275 million for fiscal2004.  The majority of planned capitalexpenditures for fiscal 2004 is related to the Company’s new store expansionincluding construction of an increased number of stores; existing storeexpansion, relocation and renovation; the start of construction of a eighthfull-service distribution center and expenditures related to store-focusedtechnology infrastructure.  The newstore expansion and eighth distribution center require additional investment inmerchandise inventories.  In fiscal2004, the Company currently expects to open approximately 565 stores and closeapproximately 60 stores for a net addition of approximately 505 stores, comparedwith the opening of 475 stores and closing of 64 stores for a net addition of411 stores in fiscal 2003.  The Companyalso currently plans to expand or relocate approximately 125 stores andrenovate approximately 130 stores in fiscal 2004, compared with the expansionor relocation of 103 stores and renovation of 42 stores in fiscal 2003.  In the first quarter of fiscal 2004, theCompany opened 101 stores, closed 26 stores, expanded or relocated 22 storesand renovated 13 stores.  The Companyoccupies most of its stores under operating leases.  Store opening, closing, expansion, relocation, and renovationplans, as well as overall capital expenditure plans, are continuously reviewedand are subject to change.

 

9

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The Companyhad unsecured revolving credit facilities with banks for short-term borrowingsof up to $200 million.  One hundredmillion dollars of the facilities expires on May 27, 2004, and the remaining$100 million expires on May 31, 2005. The Company had no borrowings against these facilities during thequarter ended November 29,2003.  Cashflow from current operations is 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 CommonStock.  In addition, the Company hasavailable revolving credit facilities as discussed above.

On October 9,2002, the Company announced that the Board of Directors authorized the purchaseof up to 5 million shares of its outstanding Common Stock from time to time asmarket conditions warrant.  During theyear ended August 30, 2003, the Company purchased in the open market 2.2million shares at a cost of $65.9 million. No shares were purchased during the quarter ended November 29,2003.  Shares purchased under the sharerepurchase authorization, in general, are constructively retired, except forshares reissued under the Family Dollar 2000 Outside Directors Plan.  There is no expiration date governing theperiod over which the Company can make share repurchases.  The share repurchase authorization had aremaining authorized balance of 2.8 million shares for future Common Stockrepurchases as of November 29, 2003. From the start of the second quarter on November 30, 2003, throughJanuary 6, 2004, the Company purchased in the open market 491,000 shares at acost of $17.0 million.

 

The followingtable shows the Company’s obligations and commitments as of November 29, 2003,to make future payments under contractual obligations (in thousands):

 
|                                     |   | **Payments  Due During One Year Fiscal Period Ending** |    |
|------------------------------------------|--------|--------------------------------------------------------|---------|
|                                     |   |                                                   |    | **November** |   | **November** |   | **November** |   | **November** |   | **November** |   |   |   |
| **Contractual Obligations**              |   | **Total**                                              |    | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   |
|                                     |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Merchandise letters of credit            |   | $                                                      | 69,071  |   | $ | 69,071 |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   |
| Operating leases                         |   | 830,478                                                |    | 199,654 |   | 173,900 |   | 141,724 |   | 106,641 |   | 72,034 |   | 136,525 |   |
| Construction obligations                 |   | 14,076                                                 |    | 14,076 |   |   |   |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations  |   | $                                                      | 913,625 |   | $ | 282,801 |   | $ | 173,900 |   | $ | 141,724 |   | $ | 106,641 |   | $ | 72,034 |   | $ | 136,525 |   |

 

The following table shows the Company’s other commercial commitments asof November 29, 2003 (in thousands):

 
|                              |   | **Total**     |   |
|-----------------------------------|--------|---------------|--------|
|                              |   | **Amounts**   |   |
| **Other  Commercial Commitments** |   | **Committed** |   |
|                              |   |          |   |
| Standby letters of credit         |   | $             | 55,600 |   |
| Surety bonds                      |   | 6,018         |   |
| Total Commercial Commitments      |   | $             | 61,618 |   |

 

A substantialportion of the outstanding amount of standby letters of credit and surety bonds(which are primarily renewed on an annual basis) are used as surety for futurepremium and deductible payments to the Company’s workers’ compensation andgeneral liability insurance carrier. The Company accrues for these liabilities as described in the “CriticalAccounting Policies” section of this discussion.

 

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**Results of Operations**

**Net sales**

 

Net salesincreased 12.3% in the quarter ended November 29, 2003, as compared with anincrease of 13.5% in the quarter ended November 30,2002.  The increase was attributable to increasedsales in existing stores and to sales from new stores opened as part of theCompany’s store expansion program. Sales in existing stores in the first quarter ended November 29, 2003,increased approximately 5.3% in the September reporting period, 1.6% in theOctober reporting period and 0.7% in the November reporting period.  Sales of apparel were favorably impacted bycooler weather this September compared to last September, and adverselyimpacted by warmer weather this October and November compared to last Octoberand November.  Sales of consumables inthe first quarter ended November 29, 2003, continued to perform well; however,sales of seasonal merchandise were below the Company’s plan, particularly inthe November Thanksgiving holiday period, and adversely impacted overallhardlines sales.  As some retailers havebecome more promotional during this period, the Company has followed itseveryday low price policy and has had no special Thanksgiving relatedadvertising or promotional events in its stores.

Sales inexisting stores increased 2.6% in the quarter ended November 29, 2003, abovethe comparable period in the prior fiscal year, with sales of hardlinesmerchandise increasing approximately 3.0%, and sales of softlines merchandiseincreasing approximately 1.1%.  In thefirst quarter of fiscal 2004, the customer count, as measured by the number ofregister transactions in existing stores increased approximately 2.3%, and theaverage transaction increased approximately 0.2% to $8.72.  Hardlines as a percentage of total salesincreased to approximately 77.4% in the first quarter of fiscal 2004 comparedto approximately 77.1% in the first quarter of fiscal 2003.  Softlines as a percentage of sales decreasedto 22.6% in the first quarter of fiscal 2004 (with hanging apparel and shoesrepresenting 11.7%, basic apparel 4.1% and domestics 6.8%) compared to 22.9% inthe first quarter of fiscal 2003 (with hanging apparel and shoes representing12.0%, basic apparel 4.4% and domestics 6.5%). In the five weeks ended January 3, 2004, sales in existing storesincreased approximately 0.7%.  Whenconsumers begin to focus again on basic consumable merchandise after theholiday season, the Company believes that with its everyday low pricing policy,sales will rebound to levels that generally were achieved prior to the holidayselling season.  Accordingly, theCompany’s current plan is for sales in existing stores in the second quarterending February 28, 2004, to increase in the 2% to 3% range and in the 3% to 5%range for the second half of the fiscal year ending August 28, 2004.

Hardlinesmerchandise includes primarily household chemical and paper products, healthand beauty aids, candy, snack and other food, electronics, housewares and giftware,toys, school supplies, hardware and automotive supplies.  Softlines merchandise includes men’s,women’s, boy’s, girl’s and infant’s clothing and accessories, shoes, anddomestic items such as blankets, sheets and towels.

The averagenumber of stores open during the first quarter of fiscal 2004 was 9.1% morethan during the first quarter of fiscal 2003. The Company had 5,102 stores in operation at November 29, 2003, ascompared with 4,678 stores in operation at November 30, 2002, representing anincrease of approximately 9.1%.

 

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**Costof Sales**

 

Cost of salesincreased 11.8% in the quarter ended November 29 2003, as compared with thequarter ended November 30, 2002.  Thisincrease primarily reflected the additional sales volume between years.  Cost of sales, as a percentage of net sales,was 65.3% in the quarter ended November 29, 2003, compared with 65.6% in thequarter ended November 30, 2002.  Thedecrease in the cost of sales percentage was due primarily to improved initialmargins on merchandise through better sourcing of goods and the continuedfavorable impact of supply chain initiatives. This was offset slightly by increased markdowns.  A change in the treatment of certain vendorallowances in conformity with a recent accounting pronouncement alsocontributed to the decrease in the first quarter cost of sales this year as apercent to sales.  This change isexpected to continue to favorably impact the cost of sales as a percent tosales in the second and third quarters of fiscal 2004.  Even excluding the impact of this change,the Company’s plan is for the cost of sales percentages to be slightly lowerfor fiscal year 2004 compared to fiscal year 2003, primarily due to continuingimprovements in initial margins on merchandise and the favorable impact ofsupply chain initiatives.

 

**Selling, general and administrative**

 

Selling,general and administrative expenses increased 13.6% in the quarter endedNovember 29, 2003, as compared with the quarter ended November 30, 2002.  The increase in these expenses was dueprimarily to additional costs arising from the continued growth in the numberof stores in operation.  Selling, generaland administrative expenses, as a percentage of net sales, were 26.5% in thequarter ended November 29, 2003, as compared with 26.2% in the quarter endedNovember 30, 2002.  Sales that werebelow the Company’s plan and continued increases in workers’ compensation costscontributed to the deleveraging of expenses. The change in the treatment of certain vendor allowances mentionedpreviously also contributed to this increase. For fiscal 2004, the Company’s plan is for selling, general andadministrative expenses as a percentage of sales to increase slightly ascompared to the percentage for fiscal 2003, primarily as a result of theaccounting change which impacts the first three quarters of fiscal 2004.

 

**Provision for taxes on income**

 

The effectivetax rate was 36.5% for the quarters ended November 29, 2003, and November 30,2002.  For fiscal 2004, the Company’splan is for the effective tax rate to remain at approximately the same level asthe rate in fiscal 2003.

 

**Critical Accounting Policies**

 

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

 

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MerchandiseInventories:

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 adjustmentto inventory through cost of goods sold when permanent retail price reductions,or markdowns, are taken against on-hand inventory.  In addition, management makes estimates and judgments regarding,among other things, initial markups, markdowns, future demand for specificproduct categories and market conditions, all of which can significantly impactinventory valuation.  If actual demandor market conditions are different than those projected by management,additional markdowns may be necessary. This risk is generally higher for seasonal merchandise than fornon-seasonal goods.  The Company alsoprovides for estimated inventory losses for damaged, lost or stolen inventoryfor the period from the physical inventory to the financial statementdate.  These estimates are based onhistorical experience and other factors.

 

Property and equipment:

Property andequipment is stated at cost. Depreciation for financial reporting purposes is being providedprincipally by the straight-line method over the estimated useful lives of therelated assets.  The valuation andclassification of these assets and the assignment of useful depreciable livesinvolves 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,impairment losses on fixed assets have not been material to the Company’sfinancial position and results of operations.

 

Insurance Liabilities:

The Company isprimarily self-insured for health care, property loss, workers’ compensationand general liability costs.  Thesecosts are significant primarily due to the large number of the Company’s retaillocations and employees.  The Company’sself-insurance liabilities are based on the total estimated costs of claimsfiled and estimates of claims incurred but not reported, less amounts paidagainst such claims, and are not discounted. Management reviews current and historical claims data in developing itsestimates.  The Company also usesinformation provided by outside actuaries with respect to workers’ compensationand general liability claims.  If theunderlying facts and circumstances of the claims change or the historical trendis not indicative of future trends, then the Company may be required to recordadditional expense or a reduction to expense which could be material to thereported financial condition and results of operation.

 

**Forward-Looking Statements**

 

Certainstatements contained herein and elsewhere in this Form 10-Q which are nothistorical facts are forward-looking statements made pursuant to the safeharbor provisions 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, the outcome of legal proceedingsand other aspects of the Company’s business and operations.  A number of important factors could causeactual results to differ

 

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materially from those expressedin any forward-looking statements, whether written or oral, made by or onbehalf of the Company.  Such factorsinclude, but are not limited to, competitive factors and pricing pressures,general economic 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 or realestate, costs and delays associated with building, opening and operating newdistribution facilities and stores, costs and potential problems associatedwith the implementation of new systems and technology, including supply chainsystems and electronic commerce, changes in energy prices and the impact onconsumer spending and the Company’s costs, legal proceedings and claims,changes in health care and other insurance costs, and the effects oflegislation on wage levels and entitlement programs.  Consequently, all of the forward-looking statements made arequalified by these and other factors, risks and uncertainties.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this Form 10-Q.  The Company does notundertake to publicly update or revise its forward-looking statements even ifexperience or future changes make it clear that projected results expressed orimplied in such statements will not be realized.

 

**Item4****.****           Controls andProcedures**

 

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 have 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”)) are effective to providereasonable assurance that information required to be disclosed by the Companyin 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 rules and forms.  Consistent with the suggestion of theSecurities and Exchange Commission, the Company has formed a DisclosureCommittee consisting of key Company personnel designed to review the accuracyand completeness of all disclosures made by the Company.  There was no change in the Company’sinternal control over financial reporting during the Company’s first fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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**PARTII****-OTHER INFORMATION**

 

**Item 1****.****           Legal Proceedings**

Theinformation contained in Note 7 to the Consolidated Condensed FinancialStatements contained in Part I, Item 1 of this Form 10-Q is incorporated hereinby this reference.

 

**Item 6****.****           Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibitsfiled herewith:

 

31.1                           Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of Chief Executive Officer

 

31.2                           Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of Chief Financial Officer

 

32.1                           Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer

 

32.2                           Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer

 

(b)                                 Reportson Form 8-K

 

 

1.                                       Form8-K dated October 1, 2003, with news release dated October 1, 2003, reportingsales and earnings for the fourth quarter and fiscal year ended August 30,2003, and other matters relating to the Company’s operations and financial condition.

 

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**SIGNATURES**

 

 

 

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

 
|                   |   | FAMILY DOLLAR STORES, INC.     |
|------------------------|--------|--------------------------------|
|                   |   | (Registrant)                   |
|                   |   |                           |
|                   |   |                           |
| Date:  January 8, 2004 |   | /s/ R. James  Kelly            |
|                   |   | R. James  Kelly                |
|                   |   | Vice  Chairman                 |
|                   |   |                           |
|                   |   |                           |
| Date:  January 8, 2004 |   | /s/ C.  Martin Sowers          |
|                   |   | C. Martin  Sowers              |
|                   |   | Senior Vice  President-Finance |

 

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