Family Dollar Announces Second Quarter Earnings Per Share of $0.45

Family Dollar Stores, Inc. (NYSE: FDO), today reported net income of $63.3 million for the second quarter of fiscal 2008 ended March 1, 2008, a 13-week period, compared with $90.5 million for the second quarter of fiscal 2007 ended March 3, 2007, a 14-week period. Net income per diluted share in the second quarter of fiscal 2008 was $0.45 compared with $0.60 per diluted share in the second quarter of fiscal 2007. "Our customers continue to react to the current economic environment by limiting their discretionary spending. This was particularly apparent in our stores during this past holiday season. In addition, our second quarter performance was pressured by both the loss of one week of holiday sales and one less week of sales as compared with the second quarter of fiscal 2007. Despite these challenges, I am pleased with our expense control and inventory management this quarter, especially within such a volatile economic environment,” said Howard R. Levine, Chairman and Chief Executive Officer. "While we continue to expect that our customers will be financially challenged near-term, we believe that the impending government stimulus package will bring some much needed relief later this year. Continued growth in our consumable business, along with our intense focus on controlling expenses and mitigating inventory risk are expected to result in better performance in the second half of fiscal 2008.” Second Quarter Results As previously reported, net sales for the second quarter of fiscal 2008 were $1.833 billion, or 5.9% below sales of $1.947 billion for the second quarter of fiscal 2007. As a reminder, the second quarter of fiscal 2008 included one less week of holiday sales and one less week of sales compared with the second quarter of fiscal 2007. Comparing results for the same 13-week period year over year, net sales increased 3.2%, and sales in comparable stores were approximately flat. An increase in the average customer transaction offset lower customer traffic, as measured by the number of register transactions. Gross profit, as a percentage of sales, was 32.7% in the second quarter of fiscal 2008 compared to 33.5% in the second quarter of fiscal 2007. Higher seasonal markdowns contributed to lower gross profit, as a percentage of sales, in the second quarter of fiscal 2008. In addition, lower net sales during the quarter resulted in the de-leverage of many costs, including freight expense and inventory shrinkage. Selling, general and administrative ("SG&A”) expenses declined 1.3% to $502.6 million compared to $509.2 million in the second quarter of fiscal 2007. As a percentage of sales, SG&A expenses were 27.4% in the second quarter of fiscal 2008 compared with 26.1% in the second quarter of fiscal 2007. The increase in SG&A expenses, as a percentage of sales, was primarily a result of lower net sales during the quarter. In addition, higher store occupancy expenses more than offset lower insurance expense and lower professional fees. First Half Results As previously reported, sales for the first half of fiscal 2008 were $3.516 billion, or 0.9% below sales of $3.548 billion for the first half of fiscal 2007. As a reminder, the first half of fiscal 2008 included one less week of sales compared with the first half of fiscal 2007. Sales in comparable stores (for the comparable 26-week period in both years) decreased 0.5%. The decrease in comparable store sales during the 26-week period was a result of lower customer traffic, as measured by the number of register transactions. The average customer transaction increased slightly during the period. During the first half of fiscal 2008, the Company opened 123 new stores and closed 44 stores. Gross profit, as a percentage of sales, was 33.4% in the first half of fiscal 2008 compared to 34.0% in the first half of fiscal 2007. Higher seasonal markdowns and higher inventory shrinkage resulted in lower gross profit, as a percentage of sales, in the first half of fiscal 2008. SG&A expenses, as a percentage of sales, were 28.3% in the first half of fiscal 2008 compared with 27.4% in the first half of fiscal 2007. The increase in SG&A expenses, as a percentage of sales, was primarily a result of low comparable store sales performance and higher occupancy costs. The effect of these factors more than offset lower insurance expense and lower professional fees. The Company’s inventories at March 1, 2008, were $998.3 million, or 0.3% below inventories of $1,001.4 million at March 3, 2007. Excluding in-transit inventory, inventory per store at March 1, 2008, declined approximately 1% compared with inventory per store at March 3, 2007. At March 1, 2008, the Company had approximately $317.0 million cash and investment securities, including $237.0 million of investments ($240.9 million at par) in tax exempt auction rate securities ("ARS”) that had or have subsequently experienced failed auctions. Substantially all of the Company’s ARS portfolio includes AAA rated bonds that are collateralized by student loans guaranteed by the federal government. At this time, the Company has no reason to believe that any of the issuers of the ARS are presently at risk or that the credit quality of the ARS investments has been impacted by the reduced liquidity of these investments. The Company believes that the current lack of liquidity relating to the ARS investments will have no impact on its ability to fund its ongoing operations and growth initiatives. During the first half of fiscal 2008, the Company repurchased approximately 3.7 million shares of its common stock for a total cost of $97.7 million. As of March 1, 2008, the Company had authorization to purchase up to an additional $133.0 million of its common stock. Outlook Since the Company provided annual earnings guidance three months ago, economic conditions have continued to deteriorate. Low and lower-middle income customers continue to focus on basic consumables while constraining purchases of more discretionary items. While the Easter shift creates comparability issues for the March and April periods, the Company expects that comparable store sales will be flat to up slightly in the third quarter. Reflecting trends month-to-date, the Company expects that comparable store sales for the March period will decrease 4% to 5%. Although sales of consumable products continue to be strong, sales of more discretionary categories, especially apparel and lawn and garden, are softer than the March period last year. The Company expects earnings per diluted share for the third quarter of fiscal 2008 will be between $0.39 and $0.44, compared with $0.40 per diluted share in the third quarter of fiscal 2007. While the federal stimulus package is expected to benefit the Company’s target customer, predicting the magnitude of the impact is difficult. The Company expects that earnings per diluted share in the fourth quarter will be between $0.29 and $0.34, compared with $0.26 per diluted share in the fourth quarter of fiscal 2007. Reflecting current assumptions for the third and fourth quarters, the Company now expects that earnings per diluted share for fiscal 2008 will be between $1.50 and $1.60, compared with $1.62 per diluted share in fiscal 2007. For the full year, the Company expects to open approximately 200 new stores and close approximately 75 stores and expects that comparable store sales will be flat or increase slightly. Cautionary Statements Certain statements contained in this report are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company’s plans, activities or events which the Company expects will or may occur in the future. Various risks, uncertainties and other factors could cause actual results to differ materially from those expressed in any forward-looking statement. Such risks, uncertainties and other factors include, but are not limited to: general economic conditions that could adversely impact consumer spending, including the impact of the federal stimulus package; economic conditions, including inflation and energy prices, that could affect our profitability; competitive factors that could limit our sales, growth or profitability; increases in comparable store sales and the success of our new store opening program; failure of existing or new technology to provide anticipated benefits; unusual weather, natural disaster, pandemic outbreaks, political events, war or acts of terrorism; our ability to select, obtain and market merchandise attractive to our customers at prices that allow us to profitably sell such merchandise; operational difficulties; our ability to operate distribution facilities; changes in regulations; changes in legal, regulatory or accounting guidance that could adversely affect our financial performance; higher costs or failure to achieve targeted results associated with the implementation of new programs or initiatives; adverse impacts associated with legal proceedings; our ability to attract and retain employees; and risks associated with our investment of funds in auction rate securities. Consequently, all of the forward-looking statements made by the Company in this and other documents or statements are qualified by these and other factors, risks and uncertainties, including those set forth under "Cautionary Statement Regarding Forward-Looking Statements” or "Risk Factors” in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed or to be filed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. Second Quarter Earnings Conference Call Information The Company will host a conference call with investors today at 10:00 A.M. EDT to discuss these results. If you wish to participate, please call (888) 215-0829 for domestic US calls and (706) 634-8796 for international calls at least 10 minutes before the call is scheduled to begin. The conference ID for the conference call is 37916264. There will also be a live webcast of the conference call that can be accessed at the following link: http://www.familydollar.com/investors.aspx?p=irhome. A replay of the webcast will be available at the same address noted above after 2:00 P.M. ET, April 4, 2008. About Family Dollar Operating small store locations, Family Dollar is one of the fastest growing discount retail chains in the United States. Family Dollar offers a core assortment of name-brand and quality consumable merchandise supplemented by fashion and seasonal merchandise at everyday low prices. Beginning with one store in 1959 in Charlotte, North Carolina, the Company currently operates more than 6,500 stores in 44 states. Family Dollar Stores, Inc., a Fortune 500 company, is based in Matthews, North Carolina, just outside of Charlotte and is a publicly held company with common stock traded on the New York Stock Exchange under the symbol FDO. For more information, please visit www.familydollar.com. FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)           For the Second Quarter Ended (in thousands, except per share amounts)   March 1, 2008   % of Net Sales March 3, 2007   % of Net Sales   Net sales $ 1,832,611 100.0 % $ 1,947,380 100.0 %   Cost of sales   1,233,528 67.3 %   1,294,870 66.5 %   Gross margin 599,083 32.7 % 652,510 33.5 %   Selling, general and administrative expenses   502,620 27.4 %   509,204 26.1 %   Operating profit 96,463 5.3 % 143,306 7.4 %   Interest income 3,344 0.2 % 3,508 0.2 %   Interest expense   3,355 0.2 %   4,667 0.2 %   Income before income taxes 96,452 5.3 % 142,147 7.4 %   Income taxes   33,149 1.8 %   51,604 2.6 %   Net income $ 63,303 3.5 % $ 90,543 4.8 %   Net income per common share - basic $ 0.45 $ 0.60 Weighted average shares - basic 140,439 150,656   Net income per common share - diluted $ 0.45 $ 0.60 Weighted average shares - diluted 140,617 150,925   Dividends declared per common share $ 0.125 $ 0.115 FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)           For the First Half Ended (in thousands, except per share amounts)   March 1, 2008   % of Net Sales March 3, 2007   % of Net Sales   Net sales $ 3,515,654 100.0 % $ 3,547,644 100.0 %   Cost of sales   2,340,546 66.6 %   2,342,252 66.0 %   Gross margin 1,175,108 33.4 % 1,205,392 34.0 %   Selling, general and administrative expenses   993,505 28.3 %   970,959 27.4 %   Operating profit 181,603 5.1 % 234,433 6.6 %   Interest income 5,429 0.2 % 4,955 0.1 %   Interest expense   7,966 0.2 %   10,173 0.3 %   Income before income taxes 179,066 5.1 % 229,215 6.4 %   Income taxes   63,817 1.8 %   84,548 2.4 %   Net income $ 115,249 3.3 % $ 144,667 4.0 %   Net income per common share - basic $ 0.82 $ 0.96 Weighted average shares - basic 140,688 150,562   Net income per common share - diluted $ 0.82 $ 0.96 Weighted average shares - diluted 140,970 151,185   Dividends declared per common share $ 0.24 $ 0.22 FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)             (in thousands, except per share and share amounts) March 1, 2008 March 3, 2007 Assets Current assets: Cash and cash equivalents $ 79,944 $ 83,715 Investment securities 237,025 331,853 Merchandise inventories 998,261 1,001,373 Deferred income taxes 87,859 145,419 Income tax refund receivable 2,671 — Prepayments and other current assets   61,252     55,733 Total current assets 1,467,012 1,618,093   Property and equipment, net 1,045,205 1,055,317 Other assets   25,731     24,785   Total assets $ 2,537,948   $ 2,698,195   Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 554,905 $ 546,441 Accrued liabilities 483,528 451,468 Income taxes   1,264     36,268 Total current liabilities 1,039,697 1,034,177   Long-term debt 250,000 250,000 Deferred income taxes 42,972 74,040 Income taxes 41,208 — Commitments and contingencies   Shareholders' equity: Preferred stock, $1 par; authorized and — — unissued 500,000 shares Common stock, $.10 par; authorized 600,000,000 shares 14,412 17,916 Capital in excess of par 159,032 160,848 Retained earnings 1,085,814 1,657,872 Accumulated other comprehensive loss   (2,398 )   — 1,256,860 1,836,636 Less: common stock held in treasury, at cost   92,789     496,658   Total shareholders' equity   1,164,071     1,339,978   Total liabilities and shareholders' equity $ 2,537,948   $ 2,698,195 FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)         For the First Half Ended (in thousands) March 1, 2008   March 3, 2007 Cash flows from operating activities: Net income $ 115,249 $ 144,667 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 76,789 71,299 Deferred income taxes (23,010 ) (16,436 ) Stock-based compensation 4,880 4,832 Loss on disposition of property and equipment 2,753 1,736 Changes in operating assets and liabilities: Merchandise inventories 67,637 36,486 Income tax refund receivable 41,723 2,397 Prepayments and other current assets (8,547 ) (26,841 ) Other assets 771 1,788 Accounts payable and accrued liabilities (48,996 ) 4,754 Income taxes payable   45,429     36,268     274,678     260,950   Cash flows from investing activities: Purchases of investment securities (1,071,270 ) (709,727 ) Sales of investment securities 1,027,865 514,379 Capital expenditures (64,414 ) (50,942 ) Proceeds from dispositions of property and equipment   345     198     (107,474 )   (246,092 ) Cash flows from financing activities: Revolving credit facility borrowings 557,300 — Repayment of revolving credit facility borrowings (557,300 ) — Payment of debt issuance costs (304 ) — Repurchases of common stock (97,674 ) — Changes in cash overdrafts (44,002 ) 5,478 Proceeds from employee stock options 81 14,597 Excess tax benefits from stock-based compensation (55 ) 649 Payment of dividends   (32,482 )   (31,594 )   (174,436 )   (10,870 )   Net increase (decrease) in cash and cash equivalents (7,232 ) 3,988 Cash and cash equivalents at beginning of period   87,176       79,727   Cash and cash equivalents at end of period $ 79,944     $ 83,715   FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES Selected Additional Information           NET SALES BY DIVISION: For the Second Quarter Ended (in thousands) March 1, 2008 March 3, 2007 % Change   Consumables $ 1,049,620 $ 1,083,049 -3.1 % Home products 296,337 326,088 -9.1 % Apparel and accessories 239,089 259,455 -7.8 % Seasonal and electronics   247,565     278,788   -11.2 % TOTAL $ 1,832,611 $ 1,947,380 -5.9 %   For the First Half Ended (in thousands) March 1, 2008 March 3, 2007 % Change   Consumables $ 2,072,895 $ 2,047,993 1.2 % Home products 544,990 568,501 -4.1 % Apparel and accessories 455,557 482,357 -5.6 % Seasonal and electronics   442,212     448,793   -1.5 % TOTAL $ 3,515,654 $ 3,547,644 -0.9 %     STORES IN OPERATION: For the First Half Ended March 1, 2008 March 3, 2007 Beginning Store Count 6,430 6,173 New Store Openings 123 170 Store Closings   (44 )   (24 ) Ending Store Count 6,509 6,319 Total Square Footage (000s) 55,359 53,587 Total Selling Square Footage (000s) 46,018 44,507