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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-K

(X)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2003

Commission file number 0-4769

DOLLAR GENERAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Securities registered pursuant to Section 12(g) of the Act:  None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X ] No [  ]

Aggregate market value of the voting stock held by non-affiliates of the Registrant as of August 2, 2002, was $4,551,126,040 based upon the last reported sale price on such date by the New York Stock Exchange.

The number of shares of common stock outstanding on February 28, 2003, was 333,340,749.

Documents Incorporated by Reference

The information required in Part III of this Form 10-K is incorporated by reference to the Registrant’s definitive proxy statement to be filed for the Annual Meeting of Shareholders to be held on June 2, 2003.

The following text contains references to years 2003, 2002, 2001, 2000, 1999, and 1998, which represent fiscal years ending or ended January 30, 2004, January 31, 2003, February 1, 2002, February 2, 2001, January 28, 2000, and January 29, 1999, respectively.  This discussion and analysis should be read with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto.

PART I

ITEM 1.

BUSINESS

General

Dollar General Corporation (the “Company” or “Dollar General”) is a leading discount retailer of quality general merchandise at everyday low prices.  Through conveniently located stores, the Company offers a focused assortment of consumable basic merchandise including health and beauty aids, packaged food products, home cleaning supplies, housewares, stationery, seasonal goods, basic clothing and domestics.  Dollar General stores serve primarily low-, middle- and fixed-income families.  

The Company opened its first dollar store in 1955, when the Company was first incorporated as a Kentucky corporation under the name J.L. Turner & Son, Inc.  The Company changed its name to Dollar General Corporation in 1968, and reincorporated as a Tennessee corporation in 1998.  As of February 28, 2003, the Company operated 6,192 stores in 27 states, primarily in the southern, eastern and midwestern United States.

Overall Business Strategy

Dollar General’s mission statement is “Serving Others.” To carry out this mission, the Company has developed a business strategy of providing its customers with a focused assortment of fairly-priced, consumable basic merchandise in a convenient, small-store format.

Our Customers.  The Company serves the consumable basics needs of customers primarily in the low- and middle-income brackets, and customers on fixed incomes.  Research performed by an outside service on behalf of the Company in 2001 indicated that approximately 55% of its customers live in households earning less than $30,000 a year, and approximately 36% earn less than $20,000.  The Company’s merchandising and operating strategies are designed to meet the need for consumable basics of the consumers in this group.

Our Stores.  The average Dollar General store has approximately 6,700 square feet of selling space and serves customers whose homes are usually located within three to five miles of the store.  As of February 28, 2003, the Company had more than 3,900 stores serving communities with populations of 20,000 or less.  The Company believes that its target customers prefer the convenience of a small, neighborhood store.  As the discount store industry continues to move toward larger, “super-center” type stores, which are often built outside of towns, the Company believes that Dollar General’s convenient discount store format will continue to attract customers and provide the Company with a competitive advantage.

Our Merchandise.  The Company is committed to offering a focused assortment of quality, consumable basic merchandise in a number of core categories, such as health and beauty aids, packaged food products, home cleaning supplies, housewares, stationery, seasonal goods, basic clothing and domestics.  Because the Company offers a focused assortment of consumable basic merchandise, customers are able to shop at Dollar General stores for their everyday household needs.  In 2002, the average customer purchase was $8.50.

Our Prices.  The Company distributes quality, consumable basic merchandise at everyday low prices. Its strategy of a low-cost operating structure and a focused assortment of merchandise allows the Company to offer quality merchandise at highly competitive prices.  As part of this strategy, the Company emphasizes even-dollar price points.  The majority of the Company’s products are priced at $10 or less, with approximately 33% of the products priced at $1 or less.  The most expensive items are generally priced around $35.

Our Cost Controls.  The Company emphasizes aggressive management of its overhead cost structure. Additionally, the Company seeks to locate stores in neighborhoods where rental and operating costs are relatively low. The Company attempts to control operating costs by implementing new technology where feasible. Examples of this strategy in 2002 and 2001 include the installation of new IBM registers designed to capture sales, inventory and payroll information, the implementation of a new merchandise planning system designed to assist our merchants with their purchasing and store allocation decisions, and the introduction of loss prevention software designed to identify unusual cash register transactions.

Growth Strategy

The Company has experienced a rapid rate of expansion in recent years, increasing its number of stores from 2,059 as of January 31, 1995, to 6,192 as of February 28, 2003.  In addition to growth from new store openings, the Company recorded same-store sales increases of 5.7%, 7.3% and 0.9% in 2002, 2001 and 2000, respectively.  Same-store sales increases are calculated based on the comparable calendar weeks in the prior year.  Same-store sales calculations include only those stores that were open both at the end of a fiscal year and at the beginning of the preceding fiscal year. Management will continue to seek to grow the Company’s business.  The Company believes this growth will come from a combination of new store openings, infrastructure investments and merchandising initiatives.

New Store Growth.  Management believes that the Company’s convenient, small-store format is adaptable to small towns and neighborhoods throughout the country.  The majority of the Company’s stores are located in communities with populations of 20,000 or less.  In 2002, approximately 50% of the new stores were opened in small towns while the other 50% were opened in more densely populated areas.  The Company expects a similar mix of new store openings between small towns and more densely populated areas in 2003.  New store openings in 2003 will be limited to our existing market area where management believes the Company has the potential to expand its store base.  By opening new stores in its existing market area, the Company takes advantage of brand awareness and maximizes its operating efficiencies.

In addition, the Company expects to explore the potential for expansion into new geographic markets as opportunities present themselves.  Specifically, in 2001 the Company opened its first stores in New York and New Jersey.  As of February 28, 2003, the Company had 124 stores in New York, and 20 stores in New Jersey. Consistent with its strategy, the Company is focusing its efforts on smaller communities in these states.

In 2002, 2001 and 2000, the Company opened 622, 602, and 758 new stores, and remodeled or relocated 73, 78 and 237 stores, respectively.  The Company currently expects to open approximately 650 new stores, close 50 to 70 stores, and remodel or relocate approximately 145 stores in 2003.

Infrastructure Investments. In recent years, the Company has made significant investments in its distribution network and management information systems.  In August 2000, the Company opened a 1.0 million square-foot distribution center (“DC”) in Alachua, Florida, and in April 2001, the Company opened a 1.2 million square-foot DC in Zanesville, Ohio. These significant investments in the Company’s distribution network were the result of the Company’s strategy to reduce transportation expenses and effectively support the Company’s growth.  Each DC, on average, services approximately 885 stores with an average distance per delivery of approximately 226 miles.

Recent investments in technology include a new merchandise planning system designed to assist our merchants with their purchasing and store allocation decisions (2001 and 2002); satellite technology that improves communications between the stores and the corporate office and provides faster check authorization for our customers (2001 and 2002); new handheld store-ordering technology to improve the accuracy of store orders (2000 and 2001); new IBM registers that capture sales, inventory and payroll data (2000, 2001 and 2002); improvements to automated DC replenishment systems (2002 and 2003); the establishment of perpetual inventories in all stores (2002); a new order processing system (2002); new loss prevention software (2002); systems for a new import deconsolidation function (2002); the establishment of a business-to-business website for supply chain efficiencies (2002); and systems to enable au tomated store replenishment (2002).

Merchandising Initiatives.  The Company’s merchandising initiatives are designed to promote same-store sales increases.  In recent years, the Company has increased its emphasis on the highly consumable category by adding items in the food, paper, household chemicals, and health and beauty aids categories. In 2001, the Company began offering perishable products.  This perishable program, which includes a selection of dairy products, luncheon meats, frozen foods and ice cream, was expanded from 411 stores at the end of 2001 to 1,367 stores at the end of 2002.  The Company will continue to evaluate the performance of its merchandise mix and make adjustments where appropriate.

Merchandise

Dollar General stores offer a focused assortment of quality, consumable basic merchandise in a number of core categories. The Company separates its merchandise into the following four categories for internal reporting purposes:  (1) highly consumable, (2) seasonal, (3) home products, and (4) basic clothing.

The percentage of total sales of each of the four categories tracked by the Company for the preceding three years is as follows:

Of the four categories, the seasonal category typically records the highest gross profit rate and the highly consumable category typically records the lowest gross profit rate.  

The Company purchases its merchandise from a wide variety of suppliers. Approximately 11% of the Company’s purchases in 2002 were made from Procter and Gamble.  No other supplier accounted for more than 4% of the Company’s purchases in 2002.  Approximately 13% of the Company’s retail receipts in 2002 were imported.

The Company does not run weekly advertising circulars but does advertise to support new store openings. Advertising expenses are less than 1% of sales.

The Company maintains approximately 4,075 core stock-keeping units (“SKUs”) per store. The Company’s average customer purchase in 2002 was $8.50. The average number of items in each customer purchase was 5.7, and the average price of each purchased item was $1.48.

The Company’s business is modestly seasonal in nature.  The only extended seasonal increase in business that the Company experiences is the Christmas selling season.  During the Christmas selling season, the Company carries merchandise that it does not carry during the rest of the year, such as gift sets, trim-a-tree, certain baking items, and a broader assortment of toys and candy.  In 2002, 2001 and 2000, the fourth quarter generated 29%, 30% and 32% of the Company’s total annual revenues, respectively.  

The Dollar General Store

The typical Dollar General store has approximately 6,700 square feet of selling space and is operated by a manager, an assistant manager and two or more sales clerks.  As of February 28, 2003, the Company had more than 3,900 stores serving communities with populations of 20,000 or less. Approximately 58% of the Company’s stores are located in strip shopping centers, 39% are in freestanding buildings and 3% are in downtown buildings.  The Company generally has not encountered difficulty locating suitable store sites in the past, and management does not currently anticipate experiencing material difficulty in finding suitable locations at favorable rents.

The Company’s recent store growth is summarized in the following table:

The Company currently expects to open approximately 650 new stores, close 50 to 70 stores, and remodel or relocate approximately 145 stores in 2003.  As of February 28, 2003, the Company operated 6,192 retail stores.

Employees

As of February 28, 2003, the Company and its subsidiaries employed approximately 53,500 full-time and part-time employees, including divisional and regional managers, area managers, store managers, and DC and administrative personnel, compared with approximately 48,000 employees on March 15, 2002.  Management believes the Company’s relationship with its employees is generally good.

Competition

The Company is engaged in a highly competitive business with respect to price, store location, merchandise quality, assortment and presentation, in-stock consistency, and customer service.  The Company competes with discount stores and with many other retailers, including mass merchandise, grocery, drug, convenience, variety and other specialty stores.  Some of the nation’s largest retail companies operate stores in areas where the Company operates.  The Company’s direct competitors in the dollar store retail category include Family Dollar, Dollar Tree, Fred’s and various local, independent operators.  Competitors from other retail categories include CVS, Rite Aid, Walgreens, Eckerd, Wal-Mart and Kmart.  Some of the Company’s competitors from outside the dollar store segment are better capitalized than the Company.

The dollar store category differentiates itself from other forms of retailing by offering consistently low prices in a convenient, small-store format.  The Company’s prices are competitive because of its low cost operating structure and the relatively limited assortment of products offered.  Labor and marketing expenses are minimized by not using circulars, limiting price points and relying on simple merchandise presentation. Occupancy expenses are typically low because the Company attempts to locate in second tier locations, either in small towns or in the neighborhoods of urban areas where such expenses are relatively low. The Company believes that its limited assortment of products allows it to focus its purchasing efforts on fewer SKUs than other retailers, which helps keep its cost of goods relatively low.

Trademarks

The Company, through its affiliate, Dollar General Intellectual Property, L.P., has registered the trademarks Dollar General®, Clover Valley®, DG Guarantee® and the Dollar General price point designs, along with certain other trademarks, with the United States Patent and Trademark Office.  The Company attempts to obtain registration of its trademarks whenever possible and to pursue vigorously any infringement of those marks.

Available Information

Our website address is www.dollargeneral.com. We make available through this address, without charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are electronically filed or furnished to the SEC.

ITEM 2.

PROPERTIES

As of February 28, 2003, the Company operated 6,192 retail stores located in 27 states as follows:

Substantially all of the Company’s stores are located in leased premises.  Individual store leases vary as to their terms, rental provisions and expiration dates.  In 2002, the Company’s aggregate store rental expense averaged $5.34 per square foot of selling space.  The majority of the Company’s leases are low-cost, short-term leases (usually with initial or primary terms of three to five years) with multiple renewal options when available.  The Company also has stores subject to build-to-suit arrangements with landlords, which typically carry a primary lease term of between 7 and 10 years. In 2003, the Company expects approximately 250 to 300 of its new stores to be subject to these arrangements.

As of February 28, 2003, the Company had seven DCs serving Dollar General stores, as described in the following table:

The Company owns the DCs located in Kentucky, Florida, and Ohio and leases the other four DCs.  The Company’s executive offices are located in approximately 302,000 square feet of owned space in Goodlettsville, Tennessee.  During 2003, the Company will begin the process of identifying and selecting a site for its eighth DC, which will be targeted to open in late 2004 or early 2005.

ITEM 3.

LEGAL PROCEEDINGS

Restatement-Related Proceedings

On April 30, 2001, the Company announced that it had become aware of certain accounting issues that would cause it to restate its audited financial statements for fiscal years 1999 and 1998, and to restate the unaudited financial information for fiscal year 2000 that had been previously released by the Company.  The Company subsequently restated such financial statements and financial information by means of its Form 10-K for the fiscal year ended February 2, 2001, which was filed on January 14, 2002.

The Securities and Exchange Commission is conducting an investigation into the circumstances that gave rise to the Company’s April 30, 2001 announcement.  The Company is cooperating with this investigation by providing documents, testimony and other information to the Securities and Exchange Commission.  At this time, the Company is unable to predict the outcome of this investigation and the ultimate effects on the Company, if any.

As previously discussed in the Company’s periodic reports filed with the Securities and Exchange Commission, the Company and the individual current and former Company director and officer defendants settled the lead shareholder derivative action relating to the restatement that had been filed in Tennessee State Court.

The settlement agreement provided for a payment to the Company from a portion of the proceeds of the Company’s director and officer liability insurance policies as well as certain corporate governance and internal control enhancements.  The terms of such agreement required that all of the derivative cases, including the federal derivative cases previously described in the Company’s periodic reports filed with the Securities and Exchange Commission, be dismissed with prejudice by the courts in which they were pending in order for the settlement to be effective.  Following confirmatory discovery, the settlement agreement received final approval by the Tennessee State Court on June 4, 2002.  All other derivative cases pending in the Tennessee State Court were subsequently dismissed.  The federal derivative actions were dismissed on September 3, 2002.

The settlement of the shareholder derivative lawsuits resulted in a net payment to the Company, after attorneys’ fees payable to the plaintiffs’ counsel, of approximately $25.2 million in August 2002, which was recorded as income during the third quarter of 2002.

Also as previously discussed in the Company’s periodic reports filed with the Securities and Exchange Commission, the Company settled the consolidated restatement-related class action lawsuit filed in the United States District Court for the Middle  District of Tennessee on behalf of a class of persons who purchased or otherwise made an investment decision regarding the Company’s securities and related derivative securities between March 5, 1997 and January 14, 2002.  The $162 million settlement was approved by the court on May 24, 2002 and was paid in the first half of 2002.  This amount had been previously expensed by the Company in the fourth quarter of 2000.  The Company received from its insurers $4.5 million in respect of such settlement in July 2002, which was recorded as income during the second quarter of 2002.  In connection with the settlement, plaintif fs representing fewer than 1% of the shares traded during the class period chose to opt out of the class settlement and may elect to pursue recovery against the Company individually.  In the fourth quarter of 2002, the Company reached an agreement to settle, and paid, a claim by one such plaintiff and recognized an expense of $0.2 million in respect of such agreement.  To the Company’s knowledge, no other litigation has yet been filed or threatened by parties who opted out of the class action settlement.  The Company cannot predict whether any additional litigation will be filed or estimate the potential liabilities associated with such litigation, but it does not believe that the resolution of any such litigation will have a material effect on the Company’s financial position or results of operations.

Other Litigation

On March 14, 2002, a complaint was filed in the United States District Court for the Northern District of Alabama to commence a purported collective action against the Company on behalf of current and former salaried store managers.  The complaint alleges that these individuals were entitled to overtime pay and should not have been classified as exempt employees under the Fair Labor Standards Act (“FLSA”).  Plaintiffs seek to recover overtime pay, liquidated damages, declaratory relief and attorneys’ fees.  This action is still in the initial discovery phase and the court has not found that the case should proceed as a collective action.  The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the action is not appropriate for collective action treatment.  The Company intends to vigorously defend the action.  However, no assurances can be given that the Company will be successful in defending this action on the merits or otherwise, and, if not, the resolution could have a material adverse effect on the Company’s financial position or results of operations.

The Company is involved in other legal actions and claims arising in the ordinary course of business.  The Company currently believes that such litigation and claims, both individually and in the aggregate, will be resolved without material effect on the Company’s financial position or results of operations.  However, litigation involves an element of uncertainty.  Future developments could cause these actions or claims to have a material adverse effect on the Company’s financial position or results of operations.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to shareholders during the fourth quarter of the fiscal year ended January 31, 2003.

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON STOCK

AND RELATED SECURITY HOLDER MATTERS

The Company’s common stock is traded on the New York Stock Exchange under the symbol “DG.”  The following table sets forth the range of the high and low sales prices of the Company’s common stock during each quarter in 2002 and 2001, as reported on the New York Stock Exchange, together with dividends.  

The Company’s stock price at the close of the market on February 28, 2003, was $10.39.

There were approximately 12,587 shareholders of record of the Company’s common stock as of February 28, 2003. The Company has paid cash dividends on its common stock since 1975.  The Board of Directors regularly reviews the Company’s dividend plans to ensure that they are consistent with the Company’s earnings performance, financial condition, need for capital and other relevant factors. Consistent with that review, on March 13, 2003, the Board of Directors authorized a dividend of $0.035 for the first quarter of 2003.

Equity Compensation Plan Information

Information about the Company’s equity compensation plans approved by the Company’s shareholders as of January 31, 2003 is set forth below.  As of January 31, 2003, no equity securities were reserved for issuance or could be granted pursuant to any equity compensation plan not approved by the Company’s shareholders.

(a)

Consists of the 1998 Stock Incentive Plan, 1995 Employee Stock Incentive Plan, 1993 Employee Stock Incentive Plan, 1989 Employee Stock Incentive Plan, 1995 Outside Directors Stock Option Plan and 1993 Outside Directors Stock Option Plan.

(b)

Consists of 3,300,693 shares reserved for issuance pursuant to the 1998 Stock Incentive Plan, 631,691 shares reserved for issuance pursuant to the 1995 Employee Stock Incentive Plan and 2,227,958 shares reserved for issuance pursuant to the 1993 Employee Stock Incentive Plan.

 ITEM 6.

SELECTED FINANCIAL DATA

(In thousands except per share and operating data)

(a)

As adjusted to give retroactive effect to all common stock splits

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

General

Accounting Periods.  The following text contains references to years 2003, 2002, 2001, and 2000, which represent fiscal years ending or ended January 30, 2004, January 31, 2003, February 1, 2002, and February 2, 2001, respectively.  There were 53 weeks in the fiscal year ended February 2, 2001.  There were 52 weeks in the fiscal years ended January 31, 2003 and February 1, 2002.  There will be 52 weeks in the fiscal year ended January 30, 2004.  This discussion and analysis should be read with, and is qualified in its entirety by, the Consolidated Financial Statements and the notes thereto included in Item 8.  Please note that, by means of its Annual Report on Form 10-K for the fiscal year ended February 2, 2001 filed on January 14, 2002, the Company restated certain unaudited financial information for fiscal year 2000 that had been previously released by the Co mpany.  The following discussion reflects the results of that restatement.

Overview of 2002.  During 2002, Dollar General increased its net sales by 14.6%, primarily as a result of its continued rapid pace of new store openings.  From 2000 through 2002, the Company had a compounded annual net sales growth rate of 16.2%.  Same-store sales increased 5.7% in 2002, as compared with increases of 7.3% and 0.9% in 2001 and 2000, respectively. Same-store sales increases are calculated based on the comparable calendar weeks in the prior year.  Same-store sales calculations include only those stores that were open both at the end of a fiscal year and at the beginning of the preceding fiscal year.

The year 2002 marked the fifteenth consecutive year that the Company increased its total number of store units.  The Company opened 622 new stores in 2002, compared with 602 in 2001 and 758 in 2000, and remodeled or relocated 73 stores, compared with 78 in 2001 and 237 in 2000.  During the last three years, the Company has opened, remodeled or relocated 2,370 stores, accounting for approximately 39% of its total stores as of January 31, 2003.  The Company ended 2002 with 6,113 stores.

In 2002, new stores, remodels and relocations, net of 49 closed stores, added an aggregate of approximately 3.8 million square feet of selling space to the Company’s total sales space.  As a result, the Company had an aggregate of approximately 41 million square feet of selling space at the end of the year.  The average new store opened in 2002 and 2001 had approximately 6,500 selling square feet.  Virtually all of the new stores opened in 2002 are subject to traditional operating lease arrangements.  

The Company currently expects to open approximately 650 new stores in 2003 within its existing market area, close 50 to 70 stores, and remodel or relocate approximately 145 stores.  The new store openings in 2003 are expected to be divided evenly between small towns and more densely populated areas and generally will be within 250 miles of existing distribution centers.  The Company expects its new stores to be subject to traditional operating lease arrangements.  Capital expenditures related to new store openings will be financed through a combination of cash flows from operations and existing credit facilities.

The Company focused on the following key initiatives in 2002:  standardizing work processes to improve the execution of basic retail tasks; completing the roll-out of store perpetual inventories; executing an effective disposition program for certain excess inventory identified in the fourth quarter of 2000; and implementing the Arthur merchandise planning system to improve its merchandise planning process.  The Company made substantial progress in 2002 on each of these initiatives.  The Company launched the “seven habits of a highly effective Dollar General store,” which is a program designed to improve store level execution in the areas of ordering, receiving, stocking, presentation, selling, support and staffing.  As of January 31, 2003, all of the Company’s stores are on a perpetual inventory system, which allows the Company to track store level inventory at t he SKU level. During 2002, the Company liquidated all but approximately $25 million (at cost) of the aforementioned excess inventory, and the Company implemented the product and location planning, channel clustering, demand forecasting, and performance analysis modules of the Arthur merchandise planning system.

Critical Accounting Policies

Merchandise inventories. Merchandise inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out (“LIFO”) method.  Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories.  RIM is an averaging method that has been widely used in the retail industry due to its practicality.  Also, it is recognized that the use of the RIM will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories.

Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, initial markups, markdowns, and shrinkage, which significantly impact the ending inventory valuation at cost as well as resulting gross margins.  These significant estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted or inaccurate cost figures.  Factors that can lead to distortion in the calculation of the inventory balance include:

•

applying the RIM to a group of products that is not fairly uniform in terms of its cost and selling price relationship and turnover

•

applying RIM to transactions over a period of time that include different rates of gross profit, such as those relating to seasonal merchandise

•

inaccurate estimates of inventory shrinkage between the date of the last physical inventory at a store and the financial statement date

•

inaccurate estimates of LIFO reserves

To reduce the potential of such distortions in the valuation of inventory from occurring, the Company’s RIM utilizes 10 departments in which fairly homogenous classes of merchandise inventories having similar gross margins are grouped.  The Company estimates its shrink provision based on historical experience and utilizes an outside statistician to assist in the LIFO sampling process and index formulation.  On a periodic basis, the Company reviews and evaluates its inventory and records an adjustment, if necessary, to reflect its inventory at the lower of cost or market.

Management believes that the Company’s RIM provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market.

As previously discussed, the Company collected SKU level inventory information at each of its stores during 2002 in connection with its establishment of an item-based perpetual inventory system.  In conjunction with this undertaking, in an effort to improve inventory valuation and cost of goods sold estimates, the Company will be refining estimates of its retail ownership mix and expanding the number of departments it utilizes for its gross margin calculations.  The Company has not established a date for these changes, which may result in an inventory adjustment and may also impact the RIM calculation results in the year of adoption and in subsequent years.  The impact of such changes on the Company’s Consolidated Financial Statements cannot currently be estimated.

The implementation of the item-based perpetual inventory system in 2002 has improved our ability to identify items where we are carrying more inventory than our sales information would suggest is necessary.  The Company intends to evaluate such information on an ongoing basis and take periodic markdowns to ensure the salability of our inventory.

Property and Equipment.  Property and equipment are recorded at cost. The Company provides for depreciation on a straight-line basis over the estimated useful lives of the assets. The valuation and classification of these assets and the assignment of useful depreciable lives involves significant judgments and the use of estimates. Property and equipment are reviewed for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Self-Insurance Liability.  The Company retains a significant portion of the risk for its workers’ compensation, employee health insurance, general liability, property loss and automobile coverage. These costs are significant primarily due to the large employee base and number of stores. Provisions are made to this insurance liability on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed by outside actuaries utilizing historical claim trends.   If future claim trends deviate from recent historical patterns, the Company may be required to record additional expense or expense reductions which could be material to the Company’s results of operations.

Results of Operations

The following discussion of the Company’s financial performance is based on the Consolidated Financial Statements set forth herein.

Net Sales.  Net sales totaled $6.10 billion for 2002, $5.32 billion for 2001 and $4.55 billion for 2000, representing annual increases of 14.6% in 2002, 17.0% in 2001 and 17.0% in 2000.  The increases resulted primarily from 573 net new stores and a same-store sales increase of 5.7% in 2002; 540 net new stores and a same-store sales increase of 7.3% in 2001; and 706 net new stores and a same-store sales increase of 0.9% in 2000.  

The Company tracks its sales internally by four major categories:  highly consumable, seasonal, home products and basic clothing.  Total sales in the highly consumable category increased by 19.1%, 22.5% and 26.1% in 2002, 2001 and 2000, respectively.  Total sales in the seasonal category increased by 11.9%, 25.8% and 10.2% in 2002, 2001 and 2000, respectively.  Total sales in the home products category experienced annual changes of 5.3%, (0.6%) and 0.5% in 2002, 2001 and 2000, respectively.  Total sales in the basic clothing category increased by 7.0%, 5.0% and 14.9% in 2002, 2001 and 2000, respectively.  

The Company’s 2002 same-store sales increase of 5.7% was due to a number of factors, including but not limited to: the introduction of approximately 400 new items in the highly consumable category; a strong performance of seasonal merchandise in the first half of 2002 due in part to the introduction of new outdoor items and the staging of warm weather items in our stores earlier than in prior years; an increase in the number of stores offering perishable products from 411 at the end of 2001 to 1,367 at the end of 2002; and improved ordering practices by our store employees.

The Company attributes the 7.3% same-store sales increase that it achieved in 2001 to a number of factors, including but not limited to:  an improved in-stock position; an increase in the number of stores offering perishable products from 20 in 2000 to 411 by the end of 2001; strong sales of seasonal merchandise resulting in part from additional floor space dedicated to such items as part of the store reset program, described below, that was undertaken in 2000; and expanded offerings in certain highly consumable categories including home cleaning, paper products and pet supplies.

The Company believes that the lower same store sales increase in 2000 was due primarily to the disruptive effect of a comprehensive store reset program designed to improve the product mix and appearance of its stores, which affected the vast majority of the store base.  Other factors that may have had an impact on the lower same store sales increase in 2000 include a change in store ordering procedures from a manual process to a new automated system relying on the scanning of shelf tags, which may have been an additional cause of the sporadic out-of-stock conditions experienced by the Company during this period, and a general softening of economic conditions.

Gross Profit.  Gross profit for 2002 was $1.72 billion, or 28.3% of sales, compared with $1.51 billion, or 28.4% of sales, in 2001 and $1.25 billion, or 27.5% of sales, in 2000.

The slight decline in the gross profit rate in 2002 as compared with 2001 is due primarily to an increase in the Company’s shrinkage provision as further described below.  The Company improved its initial margin on inventory purchases in all four of its major categories in 2002 as compared against 2001.  However, the continued shift in the Company’s sales mix to lower margin highly consumable items limited the year over year increase in the total initial margin rate to 7 basis points.  The Company recorded an $8.9 million adjustment and a $3.5 million adjustment in the fourth quarters of 2002 and 2001, respectively, pertaining to its LIFO valuation, which had the effect of increasing gross profit in both years.  These adjustments are primarily the result of the Company’s ability to lower its product costs through effective purchasing methods and the general lack o f inflation in the current economic environment.

The improvement in the gross profit rate in 2001 as compared to 2000 was due primarily to the $21.5 million effect of a markdown recorded in 2000.  As described in Note 3 to the Consolidated Financial Statements, the markdown in 2000 resulted from the identification by the Company of certain excess inventories that it believed would require a markdown to assist with their disposition by the conclusion of 2002.   The Company also improved its initial margin on inventory purchases by 48 basis points in 2001 as compared against 2000.  The Company was able to make particular improvements in its inventory margin in the housewares, seasonal and mens and boys clothing product lines.

Inventory shrinkage calculated at the retail value of the inventory, as a percentage of sales, was 3.52% in 2002, 2.90% in 2001, and 2.80% in 2000.  Some of the actions taken by the Company in 2002 to combat shrink include the hiring of an asset protection professional, the development of an asset protection monthly scorecard, the installation of loss prevention software that identifies unusual cash register transactions, increasing the emphasis of shrink in the store bonus plan and the establishment of a multi-disciplinary shrink task force that has developed a comprehensive shrink reduction action plan.  Some of the components of the action plan include increased use of closed circuit television monitors and burglar alarms, a specific high shrink store action plan, the creation of various shrink awareness tools and the production of various exception reports to identify high risk stores .

Distribution and transportation costs decreased by 13 basis points as a percentage of sales in 2002 as compared to 2001.  The reduction in distribution and transportation costs as a percentage of sales was due primarily to freight, occupancy and depreciation expenses that grew at a rate less than the sales increase.  Factors contributing to this result in 2002 include lower fuel costs during the first half of the year, an effective freight revenue sharing program whereby the Company picks up product directly from its vendors as opposed to having it shipped, and the fact that distribution center occupancy costs are relatively fixed in comparison with the growth in our sales base.

Distribution and transportation costs decreased by 35 basis points as a percentage of sales in 2001 as compared to 2000.  The reduction in distribution and transportation costs as a percentage of sales in 2001 was due primarily to a relatively modest increase in transportation costs during a period of increased sales.  Factors contributing to this result in 2001 included the opening of the Zanesville, Ohio DC, which supported continued expansion in the number of stores with only a modest increase in store delivery miles, increased trailer utilization as a result of improved routing, and lower fuel costs.  

Selling, General and Administrative Expense.  Total selling, general and administrative (“SG&A”) expense as a percentage of net sales was 21.3% in 2002 and 2001 compared with 20.5% in 2000.  SG&A expense in 2002 was $1.30 billion, an increase of 14.2% compared to 2001.  SG&A expense in 2001 was $1.14 billion, an increase of 21.5% compared to 2000.

In 2002 the Company incurred $6.4 million in expenses, primarily professional fees, related to the restatement of the Company’s financial statements as described above in Item 3.  The Company incurred $28.4 million of such expenses in 2001.  Excluding restatement-related expenses from both years, SG&A expenses in 2002 would have been $1.29 billion, or 21.1% of sales, as compared with $1.11 billion, or 20.8% of sales, in 2001, an increase of 16.5%.  The increase in SG&A expense as a percentage of sales, excluding restatement expenses, in 2002 was due to a number of factors including but not limited to increases in the following expense categories that were in excess of the percentage increase in sales: store labor, workers’ compensation claims, store occupancy and store repairs and maintenance.

The 80 basis point increase in SG&A expense as a percentage of net sales experienced in 2001 was due in part to the $28.4 million in restatement-related expenses referred to above.  There were no such expenses in 2000, and such expenses recorded in 2001 were in addition to the litigation settlement expense described below that was recorded in 2000.  The increase in SG&A expense in 2001 was also attributable in part to a 19.4% increase in labor expenses at the Company’s retail stores, which was in excess of the Company’s sales increase of 17.0%.  The increased labor expenses incurred in 2001 resulted from a decision by the Company’s management to spend additional funds in this area in order to attract and retain the talented employees necessary to improve store conditions.  The restatement-related expenses and the increased store labor costs together accoun ted for a 69 basis point increase in SG&A expense.  Excluding the restatement-related expenses, SG&A expense in 2001 would have increased 18.4% over the prior year.

Litigation Settlement Expense and Related Proceeds. The Company recorded $29.5 million in net restatement litigation proceeds during 2002, which amount included $29.7 million in insurance proceeds associated with the settlement of the restatement-related class action and shareholder derivative litigation offset by a $0.2 million settlement of a shareholder class action opt-out claim related to the Company’s restatement. No litigation settlement expense was recorded in 2001.  The Company recorded $162.0 million of expense in 2000 for the settlement of the restatement-related shareholder class action litigation.  (See Item 3).  

Interest Expense.  In 2002, interest expense was $42.6 million, compared with $45.8 million in 2001 and $45.4 million in 2000.  The decrease in interest expense in 2002 as compared to 2001 is due primarily to debt reduction achieved during 2002.  

The average daily total debt outstanding in 2002 was $575.7 million at an average interest rate of 6.6%.  The average daily total debt outstanding in 2001 was $738.8 million at an average interest rate of 6.3%.  The average daily total debt outstanding in 2000 was $710.3 million at an average interest rate of 7.2%.  

Provision for Taxes on Income.  The effective income tax rates for 2002, 2001 and 2000 were 36.1%, 36.7% and 35.0%, respectively.  The lower effective tax rate in 2002 was primarily due to recording higher work opportunity tax credits than in 2001 and the favorable resolution of certain state tax related items during 2002. The lower effective tax rate in 2000 was due to the 38.9% marginal tax rate applied against the litigation settlement expense.  Excluding the tax impact of the litigation settlement expense, the effective tax rate in 2000 was 37.3%.

Net income.  Net income in 2002 was $264.9 million, or 4.3% of sales, versus $207.5 million, or 3.9% of sales, in 2001, and $70.6 million, or 1.6% of sales in 2000.  Diluted earnings per share in 2002 were $0.79 versus $0.62 in 2001 and $0.21 in 2000.   Excluding the restatement-related expenses and the litigation settlement expense and related proceeds noted above, diluted earnings per share in 2002 were $0.75 versus $0.67 in 2001 and $0.51 in 2000.

Liquidity and Capital Resources

Current Financial Condition / Recent Developments.  At January 31, 2003, the Company’s total debt (including the current portion of long-term obligations and short-term borrowings) was $346.5 million, and the Company had $121.3 million of cash and cash equivalents and $1.29 billion of shareholders’ equity, compared to $735.1 million of total debt, $261.5 million of cash and cash equivalents and $1.04 billion of shareholders’ equity at February 1, 2002.

The Company has a $450 million revolving credit facility consisting of a $300 million three-year revolving credit facility and a $150 million 364-day revolving credit facility (the “Credit Facilities”).  The Company pays interest on funds borrowed under the Credit Facilities at rates that are subject to change based upon the rating of the Company’s senior debt by independent agencies.  The Company has two interest rate options, base rate (which is usually equal to prime rate) and LIBOR.  At the Company’s current ratings, the facility fees are 37.5 basis points and 32.5 basis points on the two facilities, respectively.  The all-in drawn margin under the LIBOR option is LIBOR plus 237.5 basis points on both facilities.  The all-in drawn margin under the base rate option is the base rate plus 125 basis points and the base rate plus 120 basis points on the t wo facilities, respectively.  The Credit Facilities are secured by approximately 400 of the Company’s retail stores, its headquarters and two of its DCs.  As of January 31, 2003, the Company had no outstanding borrowings and $15 million of standby letters of credit under the Credit Facilities.  The standby letters of credit reduce the borrowing capacity of the Credit Facilities. The Credit Facilities contain financial covenants which include the ratio of debt to cash flow, fixed charge coverage, asset coverage, minimum allowable consolidated net worth and maximum allowable capital expenditures.  As of January 31, 2003, the Company was in compliance with all of these covenants.  See Note 7 to the Consolidated Financial Statements for further discussion of the Credit Facilities.

The Company has $200 million (principal amount) of 8 5/8% unsecured notes due June 15, 2010.  Interest on the notes is payable semi-annually on June 15 and December 15 of each year.  The holders of the notes may elect to have their notes repaid on June 15, 2005, at 100% of the principal amount plus accrued and unpaid interest. The Company may seek, from time to time, to retire its outstanding notes through cash purchases on the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

The Company received waivers during 2001 and 2002 with respect to the leases of its DCs in Indianola, Mississippi and Fulton, Missouri. These waivers cured any alleged default of covenants under the leases as a result of the Company’s representations regarding its previous audited financial statements and the restatement of such financial statements. The Company reached agreement with all relevant parties to effect such waivers and in 2002 incorporated certain amendments in the lease documents, as a material inducement to obtain such waivers. The amendments to the leases involve the Company’s agreeing to comply with all obligations under its revolving credit agreements, as in effect from time to time, including, without limitation, all affirmative and financial covenants and to not violate any negative covenants set forth in such agreements.

In 2002, the Company disbursed $162 million in settlement of the restatement-related class action litigation.  The $162 million was accrued as an expense in the Company’s 2000 Consolidated Financial Statements.  In July of 2002, the Company received from its insurers $4.5 million pursuant to the settlement of the restatement-related class action lawsuits. In August of 2002, the Company received $25.2 million in insurance settlement proceeds pursuant to the settlement of the restatement-related shareholder derivative litigation. The Company recognized income of $4.5 million in the second quarter of 2002 and $25.2 million in the third quarter of 2002 to reflect the receipt of these proceeds. See Note 9 to the Company’s Consolidated Financial Statements.

The Company believes that its existing cash balances, cash flows from operations, the Credit Facilities and its ongoing access to the capital markets will provide sufficient financing to meet the Company’s currently foreseeable liquidity and capital resource needs.

In July 2002, the Company filed amended federal income tax returns for 1998 and 1999.  In October of 2002 the Company filed its federal income tax returns for 2000 and 2001.  The Internal Revenue Service is currently conducting a normal examination of the Company’s 1998 and 1999 federal income tax returns.  The results of the examination, and any other issues discussed with the IRS in the course of the examination, may result in changes to the Company’s future tax liability.

The Company plans to open approximately 650 stores during the fiscal year ending January 30, 2004.  The Company anticipates funding the costs associated with such openings by cash flows from operations and/or by existing credit facilities.

On March 13, 2003, the Board of Directors authorized the Company to repurchase up to 12 million shares of its outstanding common stock. Purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. This authorization expires March 13, 2005.

Cash flows provided by operating activities.  Net cash provided by operating activities for fiscal 2002 was $434.0 million, as compared to $265.6 million for fiscal 2001 and $215.5 million for fiscal 2000.  Cash flow from operations for fiscal 2002 compared to fiscal 2001 increased by $168.4 million due principally to the increase in net income described above and improved inventory productivity.  Inventory turns, calculated using the retail value of the inventory, improved in 2002 to 3.55 times from 3.24 times in 2001.  As a result, the change in inventory in 2002 was an $8.0 million source of cash as compared against a $118.8 million use of cash in 2001.  In 2002, the Company paid $162.0 million in settlement of the restatement-related class action lawsuit (see Note 9 to the Consolidated Financial Statements). Partially offsetting this cash outflow were tax benefit s totaling approximately $139.3 million, of which approximately $121 million either directly or indirectly related to the Company’s financial restatement and subsequent litigation settlement. These tax benefits consist of approximately $57 million, reflecting the 2002 deduction for the $162 million litigation settlement expense recorded in the Company’s 2000 income statement, and approximately $64 million resulting from the deferral of our 2002 estimated federal income taxes until early 2003. Cash flow from operations for 2001 compared to 2000 increased by $50.1 million due principally to the improvement in operating performance in 2001 as described above (see “Results of Operations—Net Sales”).

Cash flows used in investing activities.  Net cash used in investing activities equaled $133.8 million in 2002, versus $124.1 million in 2001 and $119.0 million in 2000.  Capital expenditures for 2002 totaled $134.3 million, compared with $125.4 million for 2001 and $216.6 million for 2000.  The Company opened 622 new stores and relocated or remodeled 73 stores at a cost of $50.9 million in 2002.  The Company opened 602 new stores and relocated or remodeled 78 stores at a cost of $55.8 million in 2001.  In 2000, the Company opened 758 new stores and relocated or remodeled 237 stores at a cost of $112.7 million.  The decline in store-related capital expenditures in 2002 and 2001 as compared to 2000 was due to the smaller number of projects completed in 2002 and 2001 and the construction of approximately 72 Company-owned stores in 2000 versus no such construction in 2002 and 2001.  

The Company spent approximately $30.2 million on systems-related capital projects in 2002 including $15.0 million for satellite technology and $3.0 million for point-of-sale cash registers.  In 2001, the Company spent approximately $31.7 million on systems-related capital projects including $10.0 million for satellite technology and $8.3 million for new point-of-sale cash registers.  Systems-related capital projects totaled $7.4 million in 2000.

The Company spent approximately $21.3 million on distribution and transportation-related capital expenditures in 2002 as compared to $6.6 million in 2001 and $58.1 million in 2000.  The 2002 expenditures consisted in part of $8.3 million for the purchase of new trailers and $5.0 million related to the installation of a dual sortation system in the Fulton, Missouri DC.  The 2000 expenditures related primarily to costs associated with the DCs in Alachua, Florida, and Zanesville, Ohio.  

Capital expenditures during 2003 are projected to be approximately $165 million.  The Company anticipates funding its 2003 capital requirements with cash flows from operations and its existing credit facilities.

Cash flows provided by (used in) financing activities.  Net cash provided by (used in) financing activities was $(440.4) million, $(42.3) million and $11.0 million in 2002, 2001 and 2000, respectively.  The use of cash in 2002 reflects the net repayment of $397.1 million in outstanding debt and the payment of $42.6 million of cash dividends.  The net repayment of debt was accomplished by utilizing cash flow from operations and existing cash balances.  Cash used in 2001 for financing activities primarily reflected the payment of $42.5 million of cash dividends.  Cash provided in 2000 from financing activities reflected the $200 million of notes issued in June 2000 and $34.1 million of proceeds from the exercise of stock options, partially offset by the payment of $42.2 million of cash dividends, the repurchase of $63.0 million of common stock, and the repayment of $11 2.3 million of long-term obligations related primarily to two of the Company’s DCs.

The following table summarizes the Company’s significant contractual obligations as of January 31, 2003, which excludes the effect of imputed interest (in thousands):