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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2004

Commission file number: 001-11421

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

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

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

The number of shares of common stock outstanding on December 3, 2004, was 327,668,589.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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See notes to condensed consolidated financial statements.

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DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.

Basis of presentation and accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X.  Such financial statements consequently do not include all of the disclosures normally required by GAAP or those normally made in the Company’s Annual Report on Form 10-K.  Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the year ended January 30, 2004 for additional information.

The accompanying condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices and have not been audited.  In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position and results of operations for the 13-week and 39-week periods ended October 29, 2004 and October 31, 2003 have been made.

Certain prior year amounts have been reclassified to conform to the current period presentation. Ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation.  Because the Company’s business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

Accounting pronouncements

In October 2004, the Financial Accounting Standards Board (“FASB”) concluded that the proposed Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. The FASB has tentatively concluded that companies can adopt the new standard in one of two ways:  the modified prospective transition method, in which a company would recognize share-based employee compensation cost from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date; or the modified retrospective transition method, in which a company would recognize employee compensation cost for periods presented prior to the adoption of SFAS No. 123R in accordance with the original provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” pursuant to which an entity would recognize employee compensation cost in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. As currently proposed, the Company expects to adopt SFAS No. 123R during the third quarter of 2005, and has not made a determination as to the method it will

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adopt. See Note 5 for disclosure of the pro forma effects of stock option grants as determined using the methodology prescribed under SFAS No. 123.

2.

Comprehensive income

Comprehensive income consists of the following (in thousands):

3.

Earnings per share

The amounts reflected below are in thousands except per share data.

Basic earnings per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share was determined based on the dilutive effect of stock options and other common stock equivalents using the treasury stock method.

4.

Commitments and contingencies

Legal proceedings

Restatement-Related Proceedings.  As previously disclosed in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), the Company restated its audited financial statements for fiscal years 1999 and 1998, and certain unaudited financial information for fiscal year 2000, by means of its Form 10-K for the fiscal year ended February 2, 2001, which was filed on January 14, 2002.

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The SEC conducted an investigation into the circumstances giving rise to the restatement, and, on January 8, 2004, the Company received notice that the SEC staff was considering recommending that the SEC bring a civil injunctive action against the Company for alleged violations of the federal securities laws in connection with circumstances relating to the restatement.  The Company subsequently reached an agreement in principle with the SEC staff to settle the matter.  Under the terms of the agreement in principle, the Company, without admitting or denying the allegations in a complaint to be filed by the SEC, will consent to the entry of a permanent civil injunction against future violations of the antifraud, books and records, reporting and internal control provisions of the federal securities laws and related SEC rules and will pay a $10 million non-deduc tible civil penalty. The Company is not entitled to seek reimbursement from its insurers with regard to this settlement.

The agreement with the SEC staff is subject to final approval by the SEC and the court in which the SEC’s complaint is filed.  The Company accrued $10 million with respect to the penalty in its financial statements for the year ended January 30, 2004.  The Company can give no assurances that the SEC or the court will approve this agreement.  If the agreement is not approved, the Company could be subject to different or additional penalties, both monetary and non-monetary, which could materially and adversely affect the Company’s financial statements as a whole. 

Other Litigation.  On March 14, 2002, a complaint was filed in the United States District Court for the Northern District of Alabama (Edith Brown, on behalf of herself and others similarly situated v. Dolgencorp. Inc., and Dollar General Corporation, CV 02-C-0673-W (“Brown”)) to commence a 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.   

On January 12, 2004, the court certified an opt-in class of plaintiffs consisting of all persons employed by the Company as store managers at any time since March 14, 1999, who regularly worked more than 50 hours per week and either: (1) customarily supervised less than two employees at one time; (2) lacked authority to hire or discharge employees without supervisor approval; or (3) sometimes worked in non-managerial positions at stores other than the one he or she managed. The Company’s attempt to appeal this decision on a discretionary basis to the 11^th Circuit Court of Appeals was denied.   

Notice was sent to prospective class members and the deadline for individuals to opt in to the lawsuit was May 31, 2004. Approximately 5,000 individuals opted in. The Court has entered a scheduling order that governs the discovery and remaining phases of the case.

Three “copycat” lawsuits, Tina Depasquales v. Dollar General Corp., (Southern District of Georgia, Savannah Division, CV 404-096, filed May 12, 2004), Karen Buckley v. Dollar General Corp., (Southern District of Ohio, C-2-04-484, filed June 8, 2004), and Sheila Ann Hunsucker v. Dollar General Corp. et al., (Western District of Oklahoma, Civ-04-165-R, filed February 19, 2004), were filed asserting the same claims as the Brown case.  The Company moved the Judicial Panel on Multidistrict Litigation (“MDL Panel”) to consolidate the three

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lawsuits with the Brown litigation and to then transfer the consolidated action to the Western District of Oklahoma.  The MDL Panel granted the motion to consolidate, but transferred the consolidated action to the Northern District of Alabama, the forum where the Brown case was pending.  The Company has not been notified if the consolidation will impact the scheduling order or extend any of the deadlines in the Brown case.

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 statements as a whole.

The Company is involved in other legal actions and claims arising in the ordinary course of business.  The Company currently believes that such other litigation and claims, both individually and in the aggregate, will be resolved without a material effect on the Company’s financial statements as a whole. 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 statements as a whole.

5.

Stock-based compensation

The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations because the Company believes the alternative fair value accounting provided for under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” requires the use of option valuation models that were not developed for use in valuing employee stock options. See Note 1 for a proposed accounting pronouncement related to this issue. Under APB No. 25, compensation expense is generally not recognized for plans in which the exercise price of the stock options equals the market price of the underlying stock on the date of grant and the number of shares subject to exercise is fixed. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table:

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The fair value of options granted during the 13 weeks ended October 29, 2004 and October 31, 2003 was $6.38 and $6.34 per share, respectively. The fair value of options granted during the 39 weeks ended October 29, 2004 and October 31, 2003 was $6.36 and $5.42 per share, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

The Black-Scholes option model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

6.

Income taxes

The Company’s effective income tax rates for the 13 weeks ended October 29, 2004 and October 31, 2003 were 33.9% and 36.9%, respectively, and for the 39 weeks ended October 29, 2004 and October 31, 2003 were 34.2% and 36.2%, respectively.

During the current quarter, the Company lowered its estimated annualized effective income tax rate by 57 basis points, which had the effect of reducing its effective tax rate in the current quarter by 111 basis points. This reduction was primarily the result of the retroactive reinstatement during the current quarter of certain federal jobs credits for employees hired after December 31, 2003.  In addition, the Company recorded a favorable adjustment, net of the federal income tax effect, of approximately $1.9 million, or 173 basis points, primarily as the result of the Company filing its income tax returns in October 2004 and its related reconciliation of previously recorded tax accruals.

As previously disclosed, during the 13-week period ended July 30, 2004, the Company recorded a net reduction in certain contingent income tax-related liabilities and the related interest accruals due to a change in its probability assessment (as described in SFAS No. 5, “Accounting for Contingencies”) that the likelihood of certain potential income tax-related exposure items would translate into actual future liabilities. These adjustments resulted in favorable impacts of approximately $6.2 million, net of the federal income tax effect, and $2.0 million to pre-tax interest expense, net, in the accompanying condensed consolidated statements of income for the 39-week period ended October 29, 2004.

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The adjustments discussed above ($1.9 million, $6.2 million and $2.0 million), had the effect of increasing fully diluted earnings per share by approximately $0.03 per share in the 39-week period ended October 29, 2004.

7.

Capital stock

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. The objective of the share repurchase program is to enhance shareholder value by purchasing shares at a price that produces a return on investment that is greater than the Company's cost of capital. Additionally, share repurchases generally will be undertaken only if such purchases result in an accretive impact on the Company's fully diluted earnings per share calculation. This authorization expires March 13, 2005. During the first 39 weeks of 2004, the Company purchased approximately 10.5 million shares at a total cost of $198.4 million. As of October 29, 2004, approximately 12.0 million shares had been purch ased, substantially completing this share repurchase authorization.

On November 30, 2004, the Board of Directors authorized the Company to repurchase up to an additional 10 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. The objective of the share repurchase program is consistent with the March 2003 repurchase program as described above. This authorization expires November 30, 2005.

8.

Segment reporting

The Company manages its business on the basis of one reportable segment. As of October 29, 2004 and October 31, 2003, all of the Company’s operations were located within the United States, with the exception of an immaterial Hong Kong subsidiary formed to assist in the process of importing certain merchandise that began operations in early 2004.  The following data is presented in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”