Attached files

file filename
EX-10.1 - EXHIBIT 10.1 - FAMILY DOLLAR STORES INCfdoex-101x201332.htm
EXCEL - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR5.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR7.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR4.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR6.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR9.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR1.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR2.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR3.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR8.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR22.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR20.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR26.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR31.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR24.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR12.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR11.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR10.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR13.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR15.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR27.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR21.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR25.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR30.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR16.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR29.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR17.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR28.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR18.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR19.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR23.htm
EX-32 - EXHIBIT 32 - FAMILY DOLLAR STORES INCfdoex-32x201332.htm
EX-10.2 - EXHIBIT 10.2 - FAMILY DOLLAR STORES INCfdoex-102x201332.htm
EX-31.1 - EXHIBIT 31.1 - FAMILY DOLLAR STORES INCfdoex-311x201332.htm
EX-31.2 - EXHIBIT 31.2 - FAMILY DOLLAR STORES INCfdoex-312x201332.htm
XML - IDEA: XBRL DOCUMENT - FAMILY DOLLAR STORES INCR14.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q 
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 2, 2013
Or 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-6807
 FAMILY DOLLAR STORES, INC.
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
56-0942963
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
P.O. Box 1017, 10401 Monroe Road
Charlotte, North Carolina
 
28201-1017
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (704) 847-6961
 
Indicate by check mark 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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý

  
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding April 3, 2013
Common Stock, $0.10 par value
 
114,953,124 shares

1



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
INDEX
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I — FINANCIAL INFORMATION

Item 1.
Consolidated Condensed Financial Statements
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited) 
(in thousands, except per share and share amounts)
 
March 2,
2013
 
August 25,
2012
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
117,816

 
$
92,333

Short-term investment securities
 
12,783

 
6,271

Restricted cash and investments
 
71,517

 
126,281

Merchandise inventories
 
1,533,954

 
1,426,163

Deferred income taxes
 
71,970

 
69,518

Income tax refund receivable
 
12,872

 

Prepayments and other current assets
 
129,767

 
47,604

Total current assets
 
1,950,679

 
1,768,170

Property and equipment, net
 
1,705,161

 
1,496,360

Investment securities
 
23,444

 
23,720

Other assets
 
92,698

 
84,815

Total assets
 
$
3,771,982

 
$
3,373,065

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term borrowings
 
$
182,223

 
$
15,000

Current portion of long-term debt
 
16,200

 
16,200

Accounts payable
 
736,238

 
674,202

Accrued liabilities
 
338,838

 
328,398

Income taxes
 
8,428

 
31,857

Total current liabilities
 
1,281,927

 
1,065,657

Long-term debt
 
500,199

 
516,320

Other liabilities
 
281,341

 
268,341

Deferred gain
 
218,245

 
156,866

Deferred income taxes
 
65,598

 
68,254

Commitments and contingencies (Note 8)
 

 

Shareholders’ equity (Note 6):
 
 
 
 
Preferred stock, $1 par; authorized 500,000 shares; no shares issued and outstanding
 

 

Common stock, $.10 par; authorized 600,000,000 shares; issued 119,951,954 shares at March 2, 2013, and 119,125,739 shares at August 25, 2012, and outstanding 114,952,909 shares at March 2, 2013, and 115,362,048 shares at August 25, 2012
 
11,995

 
11,913

Capital in excess of par
 
288,225

 
259,189

Retained earnings
 
1,406,262

 
1,234,384

Accumulated other comprehensive loss
 
(1,561
)
 
(1,841
)
Common stock held in treasury, at cost (4,999,045 shares at March 2, 2013, and 3,763,691 shares at August 25, 2012)
 
(280,249
)
 
(206,018
)
Total shareholders’ equity
 
1,424,672

 
1,297,627

Total liabilities and shareholders’ equity
 
$
3,771,982

 
$
3,373,065


See notes to the consolidated condensed financial statements.

3



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
 
 
14 Weeks Ended
 
13 Weeks Ended
(in thousands, except per share amounts)
 
March 2,
2013
 
February 25,
2012
Net sales
 
$
2,893,997

 
$
2,458,636

Cost and expenses:
 
 
 
 
Cost of sales
 
1,926,947

 
1,601,237

Selling, general and administrative
 
750,073

 
642,052

Cost of sales and operating expenses
 
2,677,020

 
2,243,289

Operating profit
 
216,977

 
215,347

Investment income
 
109

 
208

Interest expense
 
6,775

 
6,425

Other income
 
7,426

 
5,781

Income before income taxes
 
217,737

 
214,911

Income taxes
 
77,592

 
78,492

Net income
 
$
140,145

 
$
136,419

Net income per common share — basic
 
$
1.21

 
$
1.16

Weighted average shares — basic
 
115,455

 
117,528

Net income per common share — diluted
 
$
1.21

 
$
1.15

Weighted average shares — diluted
 
115,920

 
118,304

Dividends declared per common share
 
$
0.21

 
$
0.21

See notes to the consolidated condensed financial statements.


4



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
 
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands, except per share amounts)
 
March 2,
2013
 
February 25,
2012
Net sales
 
$
5,315,685

 
$
4,606,923

Cost and expenses:
 
 
 
 
Cost of sales
 
3,521,841

 
2,991,952

Selling, general and administrative
 
1,449,898

 
1,269,635

Cost of sales and operating expenses
 
4,971,739

 
4,261,587

Operating profit
 
343,946

 
345,336

Investment income
 
184

 
442

Interest expense
 
13,897

 
13,137

Other income
 
13,788

 
10,702

Income before income taxes
 
344,021

 
343,343

Income taxes
 
123,597

 
126,574

Net income
 
$
220,424

 
$
216,769

Net income per common share — basic
 
$
1.91

 
$
1.84

Weighted average shares — basic
 
115,486

 
117,588

Net income per common share — diluted
 
$
1.90

 
$
1.83

Weighted average shares — diluted
 
116,057

 
118,447

Dividends declared per common share
 
$
0.42

 
$
0.39

See notes to the consolidated condensed financial statements.



5



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
14 Weeks Ended
 
13 Weeks Ended
(in thousands)
 
March 2,
2013
 
February 25,
2012
Net income
 
$
140,145

 
$
136,419

Other comprehensive income:
 
 
 
 
Unrealized gains on investment securities (net of taxes of $0.1 million and $0.6 million of income tax in the second quarter of fiscal 2013 and the second quarter of fiscal 2012, respectively)
 
227

 
1,056

Other
 
7

 
13

Other comprehensive income
 
234

 
1,069

Comprehensive income
 
$
140,379

 
$
137,488


 
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
March 2,
2013
 
February 25,
2012
Net income
 
$
220,424

 
$
216,769

Other comprehensive income:
 
 
 
 
Unrealized gains on investment securities (net of taxes of $0.1 million and $0.3 million of income tax in the first half of fiscal 2013 and the first half of fiscal 2012, respectively)
 
259

 
747

Other
 
21

 
27

Other comprehensive income
 
280

 
774

Comprehensive income
 
$
220,704

 
$
217,543

See notes to the consolidated condensed financial statements.


6



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
March 2,
2013
 
February 25,
2012
Cash flows from operating activities:
 
 
 
 
Net income
 
$
220,424

 
$
216,769

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
115,973

 
99,957

Amortization of deferred gain
 
(6,971
)
 

Deferred income taxes
 
7,465

 
21,936

Excess tax benefits from stock-based compensation
 
(12,891
)
 
(10,776
)
Stock-based compensation
 
9,436

 
9,705

Loss on disposition of property and equipment, including impairment
 
3,695

 
7,979

Changes in operating assets and liabilities:
 
 
 
 
Merchandise inventories
 
(107,791
)
 
(68,940
)
Prepayments and other current assets
 
(82,158
)
 
(6,112
)
Other assets
 
(1,125
)
 
(3,286
)
Accounts payable and accrued liabilities
 
12,421

 
(44,528
)
Income taxes
 
(36,303
)
 
(363
)
Other liabilities
 
13,197

 
(5,846
)
Net cash provided by operating activities
 
135,372

 
216,495

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of restricted and unrestricted investment securities
 
(20,439
)
 
(22,986
)
Sales of restricted and unrestricted investment securities
 
14,000

 
79,259

Net change in restricted cash
 
48,405

 

Net proceeds from sale-leaseback
 
163,520

 

Capital expenditures
 
(409,735
)
 
(236,268
)
Proceeds from dispositions of property and equipment
 
908

 
393

Net cash used in investing activities
 
(203,341
)
 
(179,602
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Short-term borrowings
 
1,150,223

 
251,300

Repayment of short-term borrowings
 
(983,000
)
 
(251,300
)
Repayment of long-term debt
 
(16,200
)
 
(16,200
)
Repurchases of common stock
 
(74,954
)
 
(72,122
)
Change in cash overdrafts
 
36,726

 
26,103

Proceeds from exercise of employee stock options
 
16,312

 
21,329

Excess tax benefits from stock-based compensation
 
12,891

 
10,776

Payment of dividends
 
(48,546
)
 
(42,335
)
Net cash provided by (used in) financing activities
 
93,452

 
(72,449
)
 
 
 
 
 
Net change in cash and cash equivalents
 
25,483

 
(35,556
)
Cash and cash equivalents at beginning of period
 
92,333

 
141,405

Cash and cash equivalents at end of period
 
$
117,816

 
$
105,849

See notes to the consolidated condensed financial statements.

7



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
1.
General Information
In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of March 2, 2013; the results of operations for the 14 and 27 weeks ended March 2, 2013 (“second quarter and first half of fiscal 2013”), and 13 and 26 weeks ended February 25, 2012 (“second quarter and first half of fiscal 2012”); comprehensive income for the second quarter and first half of fiscal 2013 and second quarter and first half of fiscal 2012; and the cash flows for the first half of fiscal 2013 and first half of fiscal 2012. The unaudited Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 25, 2012 (“fiscal 2012”).
The results of operations for the second quarter and first half of fiscal 2013 are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications of the amounts on the Consolidated Condensed Statements of Income for the second quarter and first half of fiscal 2012 have been made to conform to the presentation of the second quarter and first half of fiscal 2013. These reclassifications are not material.
The preparation of the Company’s Consolidated Condensed Financial Statements, in conformity with generally accepted accounting principles in the United States of America (“GAAP”), requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Updated 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  The ASU is effective for annual periods and interim periods within those periods beginning after December 15, 2012.  The ASU will be effective for the Company beginning in the first quarter of fiscal 2014 and is not expected to have a material impact on the Company's Consolidated Financial Statements.
Update to Significant Accounting Policies
Treasury Stock
The Company accounts for treasury stock transactions under the cost method. For each reacquisition of common stock, the number of shares and the acquisition price for those shares is added to the existing treasury stock share count and total value. As a result, the average cost per share is re-averaged each time shares are acquired.
The Company periodically retires treasury shares that it acquires through share repurchases and returns those shares to the status of authorized but unissued. When treasury shares are retired, the Company's policy is to allocate the excess of the repurchase price over the par value of shares acquired to both Retained Earnings and Capital in Excess of Par. The portion allocated to Capital in Excess of Par is determined by dividing the number of shares to be retired by the number of shares issued as of the retirement date. This ratio is applied to the balance of Capital in Excess of Par as of the retirement date.
Other Income
The Company classifies income earned on non-merchandise transactions, which primarily includes fees charged to customers when receiving cash back on debit card transactions, in a line item captioned Other Income below Operating Profit. These amounts were previously classified in Selling, General and Administrative Expenses.

2.
Fair Value Measurements

8



Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3—Inputs that are unobservable for the asset or liability.
The unobservable inputs in Level 3 can only be used to measure fair value to the extent that observable inputs in Level 1 and Level 2 are not available. The following table represents the Company’s fair value hierarchy as of March 2, 2013, and August 25, 2012, for items that are required to be measured at fair value on a recurring basis:
 
 
 
March 2, 2013
(in thousands)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
25,508

 
$
25,508

 
$

 
$

Investment securities:
 
 
 
 
 
 
 
 
Auction rate securities
 
23,444

 

 

 
23,444

Short-term bond mutual fund
 
11,017

 
11,017

 

 

Equity securities
 
1,767

 
1,767

 

 

Restricted cash and investments: (1)
 
 
 
 
 
 
 
 
Money market funds
 
540

 
540

 

 

Municipal debt securities
 
54,987

 

 
54,987

 

Other assets:
 
 
 
 
 
 
 
 
Mutual funds (2)
 
19,112

 
19,112

 

 

 
 
 
August 25, 2012
(in thousands)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
18,902

 
$
18,902

 
$

 
$

Investment securities:
 
 
 
 
 
 
 
 
Auction rate securities
 
23,720

 

 

 
23,720

Short-term bond mutual fund
 
5,000

 
5,000

 

 

Equity securities
 
1,271

 
1,271

 

 

Restricted cash and investments: (1)
 
 
 
 
 
 
 
 
Municipal debt securities
 
55,303

 

 
55,303

 

Other assets:
 
 
 
 
 
 
 
 
Mutual funds (2)
 
17,903

 
17,903

 

 

 
(1) 
As of March 2, 2013, restricted cash and investments of $40.1 million and $15.4 million were included in Restricted Cash and Investments and Other Assets, respectively, in the Consolidated Condensed Balance Sheets. As of August 25, 2012, restricted cash and investments of $45.9 million and $9.4 million were included in Restricted Cash and Investments and Other Assets, respectively, in the Consolidated Condensed Balance Sheets
(2) 
Represents assets held pursuant to a deferred compensation plan for certain key management employees.



9



On a non-recurring basis, the Company adjusts certain Property and Equipment to fair value through impairment charges. Property and Equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The fair value of the Property and Equipment is determined based on a discounted cash flow analysis using Level 3 inputs. The Company estimates future cash flows based on historical experience and its expectations of future performance. Impairment charges were not material during the second quarter or first half of fiscal 2013 or the second quarter or first half of fiscal 2012.

Level 2 Inputs

The majority of the assets classified as Level 2 are valued using matrix pricing. The Company believes that while a majority of the assets valued using Level 2 inputs currently trade in active markets and prices could be obtained for identical assets, the classification of these investments as Level 2 is more appropriate when matrix pricing is used.
Auction Rate Securities

The Company's auction rate securities (“ARS”) are tax-exempt bonds that are collateralized by federally guaranteed student loans and are valued using Level 3 inputs. While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates reset periodically in scheduled auctions (generally every 7-35 days). Due to the continued issues in the global credit and capital markets, specifically as it relates to the ARS market, the Company's ARS portfolio experienced sustained failed auctions. A failed auction typically occurs when the number of securities submitted for sale in the auction exceeds the number of purchase bids. As of March 2, 2013, all of the Company’s $25.7 million par value investments were subject to failed auctions. As a result of the failed auctions, the interest rates on the investments reset to the established rates per the applicable investment offering statements. The Company will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the underlying securities mature.

The Company does not currently expect to liquidate any ARSs going forward through the normal auction process. However, the Company does expect to be able to liquidate substantially all of its remaining ARS portfolio at par through issuer calls, refinancings or upon maturity. The Company liquidated $0.2 million of auction rate securities during the second quarter and first half of fiscal 2013. As of March 2, 2013, all of the Company's ARS portfolio was subject to failed auctions and was classified as long-term assets due to the continued failure of the auction process and the continued uncertainty regarding the timing of future liquidity.
The Company had a temporary gross unrealized loss of $2.3 million ($1.5 million, net of taxes) with respect to its ARS portfolio as of March 2, 2013. Changes in the unrealized loss are included in Accumulated Other Comprehensive Loss within Shareholders’ Equity on the Consolidated Balance Sheets. Because there is no active market for the Company’s ARS portfolio, the fair value of each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The two most significant unobservable inputs used in the analysis are the weighted average expected term to liquidate the securities and the illiquidity factor applied to the discount rate. The weighted average expected term assumption used in the analysis is based on the Company's estimate of the timing of future liquidity, which assumes that the securities will be called or refinanced by the issuer or repurchased by the broker dealers prior to maturity. The discount rates used in the analysis are based on market rates for similar liquid tax-exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, a factor was applied to the discount rates to reflect the illiquidity of the investments. These inputs used in the Company’s analysis are sensitive to market conditions and the Company's valuation of its ARS portfolio can change significantly based on the assumptions used. As of March 2, 2013, a 100 basis point increase or decrease in the illiquidity factor along with a 12-month increase or decrease in the weighted average term could result in a gross unrealized loss ranging from $1.5 million to $4.0 million.

The Company also evaluated each of its ARS for other-than-temporary impairment. The Company's evaluation was based on an analysis of the credit rating and parity ratio of each security. The parity ratio is the ratio of trust assets available for distribution to creditors to the trust obligations to those creditors. The credit quality of the Company's ARS portfolio remains high and the securities had a weighted average parity ratio of 120.0% as of March 2, 2013. Based on these factors, the Company concluded that there was no other-than-temporary impairment as of March 2, 2013.
The following table summarizes the change in the fair value of the Company’s ARS portfolio measured using Level 3 inputs during the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012:
 

10



 
 
14 Weeks Ended
 
13 Weeks Ended
(in thousands)
 
March 2,
2013
 
February 25,
2012
Beginning Balance
 
$
23,389

 
$
94,543

Net unrealized gains (losses) included in other comprehensive income
 
105

 
972

Sales
 
(50
)
 
(150
)
Ending Balance
 
$
23,444

 
$
95,365

 
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
March 2,
2013
 
February 25,
2012
Beginning Balance
 
$
23,720

 
$
107,458

Net unrealized gains (losses) included in other comprehensive income
 
(126
)
 
1,082

Sales
 
(150
)
 
(13,175
)
Ending Balance
 
$
23,444

 
$
95,365

Additional Fair Value Disclosures
The estimated fair value of the Company’s long-term debt was $559.5 million as of March 2, 2013, and $576.4 million as of August 25, 2012. The Company has both public notes and private placement notes. The fair value for the public notes is determined using Level 1 inputs as quoted prices in active markets for identical assets or liabilities are available. The fair value of the portion of the debt that are private placement notes is determined through the use of a discounted cash flow analysis using Level 3 inputs as there are no quoted prices in active markets for these notes. The discount rate used in the analysis was based on borrowing rates available to the Company for debt of the same remaining maturities, issued in the same private placement debt market. The fair value of the Company’s long-term debt was greater than the carrying value of the debt by $43.1 million as of March 2, 2013, and $43.9 million as of August 25, 2012.

3.
Current and Long-Term Debt
Principal Payment
During the first half of fiscal 2013, the Company made a scheduled principal payment on its private placement notes in the amount of $16.2 million. The next principal payment of $16.2 million is due in September 2013.
Short-term Borrowings
As of March 2, 2013, the Company had $182.2 million of short-term borrowings outstanding. During the first half of fiscal 2013, the Company had net borrowings of $167.2 million and an average daily outstanding balance of $104.3 million at an annualized weighted-average interest rate of 1.5% under its unsecured revolving credit facilities.
The Company's unsecured revolving credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of March 2, 2013, the Company was in compliance with all such covenants. The Company's revolving credit facilities provide the capacity to borrow up to $700 million (less standby letters of credit needed for collateral for our insurance programs of $18.8 million).

4.
Restricted Cash and Investments
The Company has restricted cash and investments that serve as collateral for certain of the Company's insurance obligations. These restricted funds cannot be withdrawn from the Company's account without the consent of the secured party. As of March 2, 2013, the Company held $55.5 million in this restricted account, of which $40.1 million was included in Restricted Cash and Investments and $15.4 million was included in Other Assets in the Consolidated Condensed Balance Sheet. As of August 25, 2012, the Company held $55.3 million in this restricted account, of which $45.9 million was included in Restricted Cash and Investments and $9.4 million was included in Other Assets in the Consolidated Condensed Balance Sheets. The classification between current and non-current is based on the timing of expected payments of the secured insurance obligations.

11



Additionally, in conjunction with the sale-leaseback transactions completed during the first half of fiscal 2013 and the second half of fiscal 2012, certain proceeds from the transactions were placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. The Company uses these proceeds to purchase additional new stores and is required to do so within 180 days of the closing of the transaction to realize the deferral. The Company held $31.4 million in this account as of March 2, 2013, and $80.4 million as of August 25, 2012. These assets are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheet.

5.
Sale-Leaseback Transactions

During the first half of fiscal 2013, the Company completed sale-leaseback transactions under which it sold 127 stores to unrelated third parties. Net proceeds from these sales were approximately $163.5 million. Concurrent with these sales, the Company entered into agreements to lease the properties back from the purchaser over an initial lease term of 15 years. The master leases for the 127 stores have an initial term of 15 years and four, five-year renewal options and provide for the Company to evaluate each store individually upon certain events during the life of the lease, including individual renewal options. The Company classifies these leases as operating leases, actively uses the leased properties and considers the leases as normal leasebacks. Upon closing of the transactions the Company deferred a gain of approximately $73.2 million realized on the sale of the stores and will amortize the gain over the initial lease term.

Additionally, in conjunction with these transactions, $48.1 million of the net proceeds was placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. The Company intends to use these proceeds to purchase additional new stores and is required to do so within 180 days to realize the deferral, which expires in June 2013. These proceeds are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheets.

6.
Shareholders’ Equity
Stock Repurchases
During the first half of fiscal 2013, the Company purchased a total of 1.2 million shares of its common stock at a cost of $75.0 million. All shares are purchased pursuant to share repurchase authorizations approved by the Board of Directors. On September 28, 2011, the Company announced that the Board of Directors authorized the Company to purchase up to $250 million of the Company’s outstanding common stock. On January 17, 2013, the Company announced that the Board of Directors authorized the Company to purchase up to an additional $300 million of the Company’s outstanding common stock. As of March 2, 2013, the Company had $370.8 million remaining under current share repurchase authorizations.
There is no expiration date related to the share repurchase authorizations. Shares purchased under share repurchase authorizations are generally held in treasury or are cancelled and returned to the status of authorized but unissued shares.
Option Exercises
During the first half of fiscal 2013, a total of 0.6 million stock options with a weighted average exercise price of $26.50 were exercised. The total intrinsic value of the options exercised during the period was $25.4 million.
Stockholders’ Rights Plan
On March 2, 2011, the Company adopted a stockholders’ rights plan whereby the Board of Directors of the Company authorized and declared a dividend distribution of one right for each outstanding share of common stock of the Company to stockholders of record at the close of business on March 2, 2011. On February 24, 2012, the Board of Directors approved, and the Company entered into, an amendment to the stockholders' rights plan to extend the expiration date of the rights to March 2, 2013. On November 16, 2012, the Board of Directors approved, and the Company entered into, an amendment to the stockholders' rights plan to accelerate the expiration date of the rights to November 16, 2012, thereby terminating the stockholder's rights plan.

7.
Earnings Per Share
Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per common share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. Certain stock options and performance share rights were excluded from the

12



calculation of diluted net income per common share because their effects were antidilutive (0.5 million shares and 0.4 million shares for the second quarter and first half ended March 2, 2013, respectively, and 0.5 million shares and 0.4 million shares for the second quarter and first half ended February 25, 2012, respectively). In the calculation of diluted net income per common share, the denominator includes the number of additional common shares that would have been outstanding if the Company’s outstanding dilutive stock options and performance share rights had been exercised, as determined pursuant to the treasury stock method.
The following table sets forth the computation of basic and diluted net income per common share:
 
  
14 Weeks Ended
 
13 Weeks Ended
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands, except per share amounts)
March 2,
2013
 
February 25,
2012
 
March 2,
2013
 
February 25,
2012
Basic Net Income Per Share:
 
 
 
 
 
 
 
Net income
$
140,145

 
$
136,419

 
$
220,424

 
$
216,769

Weighted average number of shares outstanding
115,455

 
117,528

 
115,486

 
117,588

Net income per common share — basic
$
1.21

 
$
1.16

 
$
1.91

 
$
1.84

Diluted Net Income Per Share:
 
 
 
 
 
 
 
Net income
$
140,145

 
$
136,419

 
$
220,424

 
$
216,769

Weighted average number of shares outstanding
115,455

 
117,528

 
115,486

 
117,588

Effect of dilutive securities — stock options
247

 
469

 
339

 
524

Effect of dilutive securities — performance share rights
218

 
307

 
232

 
335

Weighted average shares — diluted
115,920

 
118,304

 
116,057

 
118,447

Net income per common share — diluted
$
1.21

 
$
1.15

 
$
1.90

 
$
1.83

 

8.
Litigation

The Company is engaged in a number of legal proceedings. The matters or groups of related matters discussed below, if decided adversely to the Company, or settled by the Company, individually or in the aggregate, may result in liability material to the Company's financial condition or results of operations.

Wage and Hour Class Actions

Since 2004, certain individuals who held the position of store manager for the Company have filed lawsuits alleging that the Company violated the Fair Labor Standards Act (“FLSA”), and/or similar state laws, by classifying them as “exempt” employees who are not entitled to overtime compensation. Some of the plaintiffs also seek to proceed as collective actions under the FLSA or as class actions under state laws. Plaintiffs seek recovery of overtime pay, liquidated damages, attorneys' fees and court costs.

The Multi-District Litigation

Many of the cases asserting claims under the FLSA were consolidated in a Multi-District Litigation (“MDL”) proceeding pending in the Western District of North Carolina, Charlotte Division (the “N.C. Federal Court”). There are presently eleven cases in the MDL proceeding in which plaintiffs are asserting individual, class and/or collective action status. In total, following certain dismissals and summary dispositions, 31 individually named plaintiffs currently have cases pending in the MDL proceeding.

In two of the cases, Grace v. Family Dollar Stores, Inc. and Ward v. Family Dollar Stores, Inc., the N.C. Federal Court determined that the plaintiffs were not similarly situated and, therefore, that neither nationwide notice nor collective treatment under the FLSA was appropriate. The N.C. Federal Court also granted summary judgment against Irene Grace on the merits of her misclassification claim under the FLSA. The plaintiffs appealed certain rulings of the N.C. Federal Court to the United States Court of Appeals for the Fourth Circuit (the “Fourth Circuit”). On March 22, 2011, the Fourth Circuit affirmed the N.C. Federal Court's decision finding that Ms. Grace was exempt from overtime compensation under the FLSA. The Fourth Circuit did not address class certification, finding the issue was moot given that the claims had been dismissed on the merits.

13




In addition to the Grace decision, the N.C. Federal Court has repeatedly ruled in favor of the Company and granted summary judgment, finding that the plaintiffs were properly classified as exempt from overtime pay. Thirty-eight individuals have filed notices of appeal of these dismissals to the Fourth Circuit. The parties have preliminarily resolved all of these appeals and the potential settlement amount is not material.
 

The N.C. Federal Court dismissed all of the putative class action cases in the MDL that were based solely on state law, and transferred them to the appropriate state jurisdiction (see below).

State Law Class Actions

The Company is a defendant in seven class action lawsuits in seven states alleging that store managers should be non-exempt employees under various state laws. The plaintiffs in these cases seek recovery of overtime pay, liquidated damages, attorneys' fees and court costs. The states and cases are:

Colorado - Julie Farley v. Family Dollar Stores of Colorado, Inc., was filed on February 7, 2012, in the United States District Court for the District of Colorado seeking unpaid overtime for a class of current and former Colorado store managers whom plaintiffs claim are not properly classified as exempt from overtime pay under Colorado law. The parties have completed discovery. On February 11, 2013, the Court granted the Company's motion to dismiss state common law claims. On March 21, 2013, the Court granted plaintiffs' motion for class certification.

Connecticut - Cook, et al. v. Family Dollar Stores of Connecticut, Inc., was filed on October 5, 2011, in the Superior Court of the State of Connecticut seeking unpaid overtime pay for a class of current and former Connecticut store managers whom plaintiffs claim are not properly classified as exempt from overtime under Connecticut law. The plaintiffs have filed a motion seeking class certification. A hearing was held on the class certification motion on January 7, 2013, and on March 18, 2013, the Court entered its order denying plaintiff's motion for class certification. The Company has filed for summary judgment seeking dismissal of one of the named plaintiffs. A hearing was held on the dismissal motion on March 4, 2013, and a ruling is pending.

Kentucky - Barker v. Family Dollar, Inc., was filed on February 17, 2010, in Circuit Court in Jefferson County, Kentucky seeking unpaid overtime, compensation for unpaid breaks and for seventh day work under Kentucky law for a class of current and former Kentucky store managers. The Company removed this matter to the United States District Court for the Western District of Kentucky. The parties filed cross-motions for summary judgment. On October 25, 2012, the district court granted the Company's motion for summary judgment and denied the plaintiffs' motion. On November 26, 2012, plaintiffs filed a notice of appeal to the Sixth Circuit Court of Appeals. The parties have preliminarily resolved the case and the potential settlement amount is not material.

Missouri - Twila Walters et. al. v. Family Dollar Stores of Missouri, Inc., was filed on January 26, 2010, seeking unpaid overtime for a class of current and former Missouri store managers who presently reside in Missouri and whom plaintiffs claim are not properly classified as exempt from overtime under Missouri law. This matter is pending in the Circuit Court of Jackson County, Missouri (the “Jackson County Circuit Court”). On May 10, 2011, the Jackson County Circuit Court certified the class under Missouri law. The parties are engaged in a merits discovery. The trial is set to begin in November 2013. The parties are currently involved in an ongoing mediation.

New Jersey - Hegab v. Family Dollar Stores, Inc., was filed in the United States District Court for the District of New Jersey on March 3, 2011, seeking unpaid overtime pay for a class of current and former New Jersey store managers whom plaintiffs claim are not properly classified as exempt from overtime pay under New Jersey law. This matter has been administratively dismissed by the district court.

New York - Youngblood, et al. v. Family Dollar Stores of New York, Inc. et al., was filed in the United States District Court for the Southern District of New York on April 2, 2009. Rancharan v. Family Dollar Stores, Inc., was filed in the Supreme Court of the State of New York, Queens County on March 4, 2009. Rancharan was removed to the United States District Court for the Eastern District of New York on May 6, 2009, and was transferred to the Southern District of New York where the case has been consolidated with Youngblood. The parties have a preliminary agreement to resolve this matter for a maximum payment of $14 million. The Court preliminarily approved the settlement on January 28, 2013. A final Fairness Hearing to approve the final settlement

14



is set for May 23, 2013. The Company believes the liability recorded associated with this action is appropriate based on its estimate of the most likely payout under the preliminary settlement agreement.

Pennsylvania - Itterly v. Family Dollar Stores, Inc., which was formerly pending in the N.C. Federal Court, was remanded back to the United States District Court for the Eastern District of Pennsylvania on February 8, 2012. In Itterly, plaintiffs are seeking unpaid overtime for a class of current and former Pennsylvania store managers whom plaintiffs claim are not properly classified as exempt from overtime pay under Pennsylvania law. Discovery closed in June 2012. The Company has filed a motion for summary judgment seeking dismissal of Itterly's claims in their entirety, which is pending before the court.

In general, the Company continues to believe that its store managers relevant to this litigation are “exempt” employees under the FLSA and have been and are being properly compensated under both federal and state laws. The Company further believes that these actions are not appropriate for collective or class action treatment. The Company intends to vigorously defend the claims in these actions. No assurances can be given that the Company will be successful in the defense of these actions, on the merits or otherwise. The Company cannot reasonably estimate the possible loss or range of loss that may result from these actions with exception of the preliminary settlement of the Barker and Rancharan/Youngblood cases, as described above.

Gender Pay Litigation

On October 14, 2008, a complaint was filed in the U.S. District Court in Birmingham, Alabama, captioned Scott, et al. v. Family Dollar Stores, Inc., alleging discriminatory pay practices with respect to the Company's female store managers. This case was pled as a putative class action or collective action under applicable statutes on behalf of all current and former female store managers. The plaintiffs seek recovery of back pay, compensatory and punitive damages, recovery of attorneys' fees and equitable relief. The case was transferred to the N.C. Federal Court. On January 13, 2012, the N.C. Federal Court denied class certification. The plaintiffs appealed this decision to the Fourth Circuit. Oral arguments are scheduled for May 14, 2013.

At this time, it is not possible to predict whether the Fourth Circuit will affirm the N.C. Federal Court's decision to deny class certification. Although the Company intends to vigorously defend the action, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. For these reasons, the Company is unable to estimate any potential loss or range of loss. The Company has tendered the matter to its Employment Practices Liability Insurance (“EPLI”) carrier for coverage under its EPLI policy. At this time, the Company expects that the EPLI carrier will participate in any potential resolution of some or all of the plaintiffs' claims.

Securities Litigation

The Company and three of its officers are defendants in the case Pipefitters Local No 636 Defined Benefit Pension Fund, Individually and on Behalf of All Others Similarly Situated v. Family Dollar Stores, Inc., Howard R. Levine, Mary A. Winston and Michael Bloom, which was filed on February 21, 2013, in the United States District Court for the Western District of North Carolina. The Complaint alleges that defendants violated the Securities Exchange Act of 1934 and Rule 10b-5 by making false and misleading statements and omissions in SEC filings, press releases, and other public statements regarding sales demand, profitability, and financial results. The Complaint is pled as a class action. The purported class includes certain purchasers of Family Dollar common stock between October 3, 2012, and January 2, 2013 and seeks monetary damages on behalf of the purported class.

While the Company intends to vigorously defend itself and the officers named in the Complaint, no assurances can be given that the Company will be successful in the defense on the merits or otherwise. The Company has tendered the matter to its Directors and Officers (D&O) liability carrier for coverage under its D&O policy.

Other Matters

The Company is involved in numerous other legal proceedings and claims incidental to its business, including litigation related to alleged failures to comply with various state and federal employment laws, some of which are or may be pled as class or collective actions, and litigation related to alleged personal injury or property damage, for which the Company carries insurance coverage and/or has established accrued liabilities as set forth in the Company's financial statements. While the ultimate outcome cannot be determined, the Company currently believes that these proceedings and claims, both individually and in the aggregate, should not have a material effect on the Company's financial position, liquidity or results of operations. However, the outcome of any litigation is inherently uncertain and, if decided adversely to the Company, or, if the Company determines that settlement of such actions is appropriate, the Company may be subject to liability that could have a material effect on the Company's financial position, liquidity or results of operations.

15





16



9.
Segment Information
The Company operates a chain of more than 7,600 general merchandise retail discount stores in 45 states, serving the basic needs of customers primarily in the low- and middle-income brackets. The stores are supported by ten distribution centers and one Store Support Center. All of the stores operate under the Family Dollar name and are substantially the same in terms of size, merchandise, customers, distribution and operations. The Company has no franchised locations or other lines of business. All of the Company’s operations are located in the United States with the exception of certain sourcing entities located in Asia and Europe. The foreign operations are not material. The Company manages the business on the basis of one operating segment and therefore, has only one reportable segment. The following table presents net sales by classes of similar products.
 
  
14 Weeks Ended
 
13 Weeks Ended
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands)
March 2,
2013
 
February 25,
2012
 
March 2,
2013
 
February 25,
2012
Classes of similar Products:
 
 
 
 
 
 
 
Consumables
$
2,011,502

 
$
1,588,242

 
$
3,800,784

 
$
3,097,778

Home Products
322,229

 
326,885

 
564,565

 
572,885

Apparel and Accessories
206,889

 
205,933

 
384,916

 
392,147

Seasonal and Electronics
353,377

 
337,576

 
565,420

 
544,113

Net sales
$
2,893,997

 
$
2,458,636

 
$
5,315,685

 
$
4,606,923

The following table describes the Company’s product categories in more detail:
 
 
 
 
Consumables
  
Household chemicals
 
  
Paper products
 
  
Food
 
  
Health and beauty aids
 
  
Hardware and automotive supplies
 
  
Pet food and supplies
 
 
Tobacco
 
 
Home Products
  
Domestics, including blankets, sheets and towels
 
  
Housewares
 
  
Giftware
 
  
Home décor
 
 
Apparel and Accessories
  
Men’s clothing
 
  
Women’s clothing
 
  
Boys’ and girls’ clothing
 
  
Infants’ clothing
 
  
Shoes
 
  
Fashion accessories
 
 
Seasonal and Electronics
  
Toys
 
  
Stationery and school supplies
 
  
Seasonal goods
 
  
Personal electronics, including pre-paid cellular phones and services


17



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the 14-week period ended March 2, 2013, and the 13-week period ended February 25, 2012 (“second quarter of fiscal 2013” and “second quarter of fiscal 2012”, respectively), and the 27-week period ended March 2, 2013, and the 26-week period ended February 25, 2012 ("first half of fiscal 2013" and "first half of fiscal 2012", respectively). This discussion should be read in conjunction with, and is qualified by, the financial statements included in this Report, the financial statements for the fiscal year ended August 25, 2012 (“fiscal 2012”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our Annual Report on Form 10-K for fiscal 2012. This discussion also should be read in conjunction with the “Cautionary Statement Regarding Forward Looking Statements” set forth following this MD&A, and the “Risk Factors” set forth in Part I—Item 1A of our Annual Report on Form 10-K for fiscal 2012.
Executive Overview
We operate a chain of more than 7,600 general merchandise retail discount stores in 45 states, providing consumers with a selection of competitively priced merchandise in convenient neighborhood stores. Our merchandise assortment includes Consumables, Home Products, Apparel and Accessories, and Seasonal and Electronics. We sell merchandise at prices that generally range from less than $1 to $10.
During the first half of fiscal 2013, as compared with the first half of fiscal 2012, our net sales increased 15.4% to $5.3 billion, our net income increased 1.7% to $220.4 million, and our diluted net income per common share increased 3.8% to $1.90 per share. Comparable store sales (stores open more than 13 months) for the first half of fiscal 2013 increased 4.5% compared with the first half of fiscal 2012. During the second quarter of fiscal 2013, as compared with the second quarter of fiscal 2012, our net sales increased 17.7% to $2.9 billion, our net income increased 2.7% to $140.1 million, and our diluted net income per common share increased 5.2% to $1.21 per share. Comparable store sales (stores open more than 13 months) for the second quarter of fiscal 2013 increased 2.9% compared with the second quarter of fiscal 2012. Consistent with the National Retail Federation Calendar, the second quarter and first half of fiscal 2013 included an extra week. The additional week accounted for approximately $189 million in sales and $0.07 earnings per diluted share for both the second quarter and the first half of fiscal 2013.
Our results during the second quarter and first half of fiscal 2013 were driven primarily by our sales performance, particularly in the Consumables category. Many of the initiatives we launched over the past several years continue to deliver results, including the expansion of our global sourcing efforts, increased investment in our private brands assortment, our multi-year comprehensive store renovation program, and the expansion of our key consumables categories, including tobacco. During fiscal 2013, we remain focused on increasing our relevancy with customers, delivering profitable sales growth, and strengthening our value and convenience proposition. Additionally, in fiscal 2012, we formed a six-year, exclusive partnership with McLane Company, Inc. ("McLane"), a highly successful supply chain services company. This partnership allows us to carry a more consistent assortment, improve in-stock levels of refrigerated and frozen merchandise, consolidate a fragmented network of regional wholesalers to one national wholesaler, and distribute tobacco products to our stores efficiently. McLane also distributes selected categories outside of refrigerated and frozen merchandise, providing flexibility to our distribution network for new items. McLane began delivering this broad assortment of merchandise to our stores in September 2012.
During the first half of fiscal 2013, we opened 251 stores and closed 18 stores for a net addition of 233 stores, compared with the opening of 184 stores and closing of 36 stores for a net addition of 148 stores during the first half of fiscal 2012. During the second quarter of fiscal 2013, we opened 126 stores and closed 17 stores for a net addition of 109 stores, compared with the opening of 83 stores and closing of 32 stores for a net addition of 51 stores during the second quarter of fiscal 2012. We plan to open approximately 500 new stores during fiscal 2013.
Leveraging our concept renewal efforts, enhanced merchandising and supply chain capabilities, a refreshed store technology platform, and a better trained and more productive workforce, we continue to deliver on our multi-year comprehensive renovation program intended to re-energize the Family Dollar brand. During the first half of fiscal 2013, we renovated, relocated or expanded 328 stores under this new format. During the second quarter of fiscal 2013, we renovated, relocated or expanded 159 stores under this new format. We plan to renovate, relocate or expand approximately 850 stores in this new format in fiscal 2013. The renovations address both the interior and exterior of the stores and create more customer-focused assortments and layouts and more customer-centric teams.
In today’s uncertain economic environment, we continue to invest aggressively in our business, and our strategy of providing customers with value and convenience continues to attract more customers with greater frequency. During the second quarter of fiscal 2013, our customers faced increased financial pressures including delays in tax refunds, increased payroll taxes, and volatility in gasoline prices.

18



Over the prior two fiscal years, to provide our customers with value and convenience and respond to customer demand, we executed significant, chain-wide expansions in key consumable categories. Additionally, in fiscal 2012 we added tobacco to our assortment in the majority of our stores and in the first quarter of fiscal 2013, McLane began delivering a broad assortment of merchandise to our stores. As a result, in the first half and second quarter of fiscal 2013, our Consumables sales increased by 22.7% and 26.6%, respectively, as compared to the first half and second quarter of fiscal 2012. In the first half and second quarter of fiscal 2013, Consumables increased to 71.5% and 69.5% of net sales, respectively, from 67.2% and 64.6% in the first half and second quarter of fiscal 2012, respectively. This acceleration of sales of lower-margin Consumables, combined with softer sales of higher-margin discretionary items, has pressured gross profit, as a percentage of net sales, in the first half and second quarter of fiscal 2013 as compared to the first half and second quarter of fiscal 2012. The investments we are making in global sourcing, private brands and price management capabilities have created favorable purchase markups that continue to help to offset some of the pressure created by the shift in sales mix to lower margin Consumables.
Results of Operations
Second Quarter Results    
Our results of operations for the second quarter of fiscal 2013 and the second quarter of fiscal 2012 are highlighted in the table below and discussed in the following paragraphs:
 
 
 
14 Weeks Ended
 
13 Weeks Ended
(in thousands)
 
March 2,
2013
% of Net Sales
 
February 25,
2012
% of Net Sales
Net sales
 
$
2,893,997

 
 
$
2,458,636

 
Cost and expenses:
 
 
 
 
 
 
Cost of sales
 
1,926,947

66.6
%
 
1,601,237

65.1
%
Selling, general and administrative
 
750,073

25.9
%
 
642,052

26.1
%
Cost of sales and operating expenses
 
2,677,020

92.5
%
 
2,243,289

91.2
%
Operating profit
 
216,977

7.5
%
 
215,347

8.8
%
Investment income
 
109

0.0
%
 
208

0.0
%
Interest expense
 
6,775

0.2
%
 
6,425

0.3
%
Other income
 
7,426

0.3
%
 
5,781

0.2
%
Income before income taxes
 
217,737

7.5
%
 
214,911

8.7
%
Income taxes
 
77,592

2.7
%
 
78,492

3.2
%
Net Income
 
$
140,145

4.8
%
 
$
136,419

5.5
%
Net Sales
Net sales increased 17.7% in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 Consistent with the National Retail Federation Calendar, the second quarter of fiscal 2013 includes an extra week. The additional week accounted for approximately $189 million in sales, or approximately 7.7% of the sales increase. Additionally, the net sales increase in the second quarter of fiscal 2013 reflects an increase in comparable store sales of 2.9%, with the balance of the increase due primarily to sales from new stores opened as part of our store growth program. Comparable store sales growth describes the change in net sales in any period for stores that are considered comparable to the prior period. Comparable store sales include net sales at stores that have been open more than 13 months. A store becomes comparable the first calendar week it has sales after 13 months of being opened. Stores that have been renovated, relocated, or expanded are included in the comparable store sales calculation to the extent they had sales during comparable weeks in each year. The method of calculating comparable store sales varies across the retail industry. As a result, our comparable store sales calculation may not be comparable to similarly titled measures reported by other companies.
The 2.9% increase in comparable store sales (for the 14 weeks ended March 2, 2013, as compared to the 14 weeks ended March 3, 2012), resulted from both an increase in customer traffic and higher average customer transaction values, as measured by the number of register transactions in comparable stores. Sales during the second quarter of fiscal 2013, on a comparable store basis, were strongest in the Consumables category.
The average number of stores in operation during the second quarter of fiscal 2013 was 6.7% higher than the average number of stores in operation during the second quarter of fiscal 2012. We had 7,675 stores in operation at the end of the second quarter of fiscal 2013 compared with 7,171 stores in operation at the end of the second quarter of fiscal 2012,

19



representing an increase of 7.0%. As of March 2, 2013, we had, in the aggregate, approximately 55.0 million square feet of selling space compared to 51.2 million as of February 25, 2012.

Cost of Sales
Cost of sales increased 20.3% in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. The increase was due primarily to additional sales volume and the additional week during the second quarter of fiscal 2013. Cost of sales, as a percentage of net sales, was 66.6% in the second quarter of fiscal 2013 and 65.1% in the second quarter of fiscal 2012. Cost of sales, as a percentage of net sales, was negatively impacted by the significant shift in sales mix to lower-margin consumable merchandise and an increase in inventory shrinkage. These pressures were partially offset by lower freight expense and an increase in the markups on the sales of merchandise.
The growth in sales of lower-margin consumables (69.5% of net sales in the second quarter of fiscal 2013 compared with 64.6% of net sales in the second quarter of fiscal 2012) as well as the softness in sales of discretionary items continues to pressure cost of sales as a percentage of net sales. Inventory shrinkage increased during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2012 as a result of increased activities in the stores including renovations and significant merchandise expansions in fiscal 2012 as well as increased inventory levels in our stores. The decrease in freight expense was a result of changes in our supply chain as it relates to our newly formed relationship with McLane, which results in less merchandise being handled through our own distribution network. We continue to focus on improving our purchase markups through the continued development of our private brand assortment, the expansion of our global sourcing efforts, and improved price management capabilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) increased 16.8% in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. The increase in these expenses was due in part to additional sales volume, additional costs arising from the continued growth in the number of stores in operation, and the extra week during the second quarter of fiscal 2013. SG&A expenses, as a percentage of net sales, were 25.9% in the second quarter of fiscal 2013 and 26.1% in the second quarter of fiscal 2012. Most expenses in the second quarter of fiscal 2013 were leveraged as a result of a 2.9% increase in comparable store sales. In addition, SG&A expenses, as a percentage of net sales, were leveraged as a result of lower non-store payroll costs, including incentive compensation expense (approximately 0.3% of net sales), in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. These improvements were partially offset by increased marketing expense (approximately 0.2% of net sales) in the second quarter of fiscal 2013, as compared to the second quarter of fiscal 2012.
Reflecting our pay-for-performance philosophy, incentive compensation costs decreased as a percentage of net sales as a result of our relative performance against our target in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012. Our marketing expense increased as a percentage of net sales as we expanded our customer communications, leveraged various marketing vehicles and enhanced our marketing and promotional materials in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012.
Investment Income
The change in investment income in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 was not material.
Interest Expense
The change in interest expense in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 was not material.
Other Income
The change in other income in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 was not material.
Income Taxes
The effective tax rate was 35.6% for the second quarter of fiscal 2013 compared with 36.5% for the second quarter of fiscal 2012. The decrease in the effective tax rate was due primarily to an increase in federal jobs tax credits and foreign tax benefits associated with our global sourcing efforts.

20



Year-to-date Results    
Our results of operations for the first half of fiscal 2013 and the first half of fiscal 2012 are highlighted in the table below and discussed in the following paragraphs:
 
 
 
27 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
March 2,
2013
% of Net Sales
 
February 25,
2012
% of Net Sales
Net sales
 
$
5,315,685

 
 
$
4,606,923

 
Cost and expenses:
 
 
 
 
 
 
Cost of sales
 
3,521,841

66.3
%
 
2,991,952

64.9
%
Selling, general and administrative
 
1,449,898

27.3
%
 
1,269,635

27.6
%
Cost of sales and operating expenses
 
4,971,739

93.5
%
 
4,261,587

92.5
%
Operating profit
 
343,946

6.5
%
 
345,336

7.5
%
Investment income
 
184

0.0
%
 
442

0.0
%
Interest expense
 
13,897

0.3
%
 
13,137

0.3
%
Other income
 
13,788

0.3
%
 
10,702

0.2
%
Income before income taxes
 
344,021

6.5
%
 
343,343

7.5
%
Income taxes
 
123,597

2.3
%
 
126,574

2.7
%
Net Income
 
$
220,424

4.1
%
 
$
216,769

4.7
%
Net Sales
Net sales increased 15.4% in the first half of fiscal 2013 compared to the first half of fiscal 2012. Consistent with the National Retail Federation Calendar, the second quarter of fiscal 2013 includes an extra week. The additional week accounted for approximately $189 million in sales, or approximately 4.1% of the sales increase. Additionally, the net sales increase in the first half of fiscal 2013 reflects an increase in comparable store sales of 4.5%, with the balance of the increase due primarily to sales from new stores opened as part of our store growth program.
The 4.5% increase in comparable store sales (for the 27 weeks ended March 2, 2013, as compared to the 27 weeks ended March 3, 2012), resulted from both an increase in customer traffic and higher average customer transaction values, as measured by the number of register transactions in comparable stores. Sales during the first half of fiscal 2013, on a comparable store basis, were strongest in the Consumables category.
The average number of stores in operation during the first half of fiscal 2013 was 6.4% higher than the average number of stores in operation during the first half of fiscal 2012.

Cost of Sales
Cost of sales increased 17.7% in the first half of fiscal 2013 compared to the first half of fiscal 2012. The increase was due primarily to additional sales volume and the additional week during the first half of fiscal 2013. Cost of sales, as a percentage of net sales, was 66.3% in the first half of fiscal 2013 and 64.9% in the first half of fiscal 2012. Cost of sales, as a percentage of net sales, was negatively impacted by the significant shift in sales mix to lower-margin consumable merchandise, higher markdowns, and an increase in inventory shrinkage. These pressures were partially offset by lower freight expense and an increase in the markups on the sales of merchandise.
The growth in sales of lower-margin consumables (71.5% of net sales in the first half of fiscal 2013 compared with 67.2% of net sales in the first half of fiscal 2012) as well as the softness in sales of discretionary items continues to pressure cost of sales as a percentage of net sales. We continue to use markdowns in our stores to drive revenue growth in a challenging macro-economic environment as well as increase market share. Inventory shrinkage increased during the first half of fiscal 2013 as compared to the first half of fiscal 2012 as a result of increased activities in the stores including renovations and significant merchandise expansions in fiscal 2012 as well as increased inventory levels. The decrease in freight expense was a result of changes in our supply chain as it relates to our newly formed relationship with McLane, which results in less merchandise being handled through our own distribution network. We continue to focus on improving our purchase markups through the continued development of our private brand assortment, the expansion of our global sourcing efforts, and improved price management capabilities.

21



Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) increased 14.2% in the first half of fiscal 2013 compared to the first half of fiscal 2012. The increase in these expenses was due in part to additional sales volume, additional costs arising from the continued growth in the number of stores in operation, and the extra week during the first half of fiscal 2013. SG&A expenses, as a percentage of net sales, were 27.3% in the first half of fiscal 2013 and 27.6% in the first half of fiscal 2012. Most expenses in the first half of fiscal 2013 were leveraged as a result of a 4.5% increase in comparable store sales. In addition, SG&A expenses, as a percentage of net sales, were leveraged as a result of a decrease in non-store payroll costs, including incentive compensation expense (approximately 0.2% of net sales) and a decrease in store payroll costs (approximately 0.2% of net sales), in the first half of fiscal 2013 compared to the first half of fiscal 2012. These improvements were offset by increased insurance expense (approximately 0.2% of net sales) and an increase in marketing expense (approximately 0.2% of net sales) in fiscal 2013, as compared to fiscal 2012.
Reflecting our pay-for-performance philosophy, incentive compensation costs decreased as a percentage of net sales as a result of our relative performance against our target in the first half of fiscal 2013 as compared to the first half of fiscal 2012. The decrease in store payroll costs was a result of the continued benefit from improvements implemented to re-engineer many of our core store processes, which has increased workforce productivity. Over the past several years, we have improved our risk management programs and managed worker's compensation and general liability claims better. As a result of positive trends in overall claim frequency and the cost of each claim, we have reduced our liabilities related to prior year claims, which lowered our overall insurance expense. In the first half of fiscal 2012, our insurance expense benefited from these reductions in our liabilities related to prior year claims. While we continued to see reductions in our liabilities related to prior year claims in the first half of fiscal 2013, we did not receive as much of a benefit as compared to the first half of fiscal 2012, which led to the increase in insurance expense, as a percentage of net sales. Our marketing expense increased as a percentage of net sales as we expanded our customer communications, leveraged various marketing vehicles and enhanced our marketing and promotional materials.
Investment Income
The change in investment income in the first half of fiscal 2013 compared to the first half of fiscal 2012 was not material.
Interest Expense
The change in interest expense in the first half of fiscal 2013 compared to the first half of fiscal 2012 was not material.
Other Income
The change in other income in the first half of fiscal 2013 compared to the first half of fiscal 2012 was not material.
Income Taxes
The effective tax rate was 35.9% for the first half of fiscal 2013 compared with 36.9% for the first half of fiscal 2012. The decrease in the effective tax rate was due primarily to foreign tax benefits associated with our global sourcing efforts and a decrease in liabilities for uncertain tax positions.
Liquidity and Capital Resources
General
We have consistently maintained a strong liquidity position. During the first half of fiscal 2013, our cash and cash equivalents increased $25.5 million. Our operating cash flows and credit facilities are sufficient to fund our regular operating needs, capital expenditure program, share repurchases, cash dividend payments, and principal and interest payments. We have availability under our two credit facilities to borrow up to $700 million (less standby letters of credit needed for collateral for our insurance programs of $18.8 million) to supplement operating cash flows. During the first half of fiscal 2013, to help supplement our operating cash flows and to support the build of inventory for the holiday season and other growth initiatives, we borrowed a net amount of $167.2 million under short-term borrowing facilities. Working capital at the end of the first half of fiscal 2013 was $668.8 million compared to $519.4 million at the end of the first half of fiscal 2012. We believe operating cash flows and capacity under existing credit facilities will continue to provide sufficient liquidity for our ongoing operations and growth initiatives.

Credit Facilities
On November 17, 2010, we entered into a new four-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $400 million. The credit facility matures on November 17, 2014, and provides for two, one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The credit facility replaced our previous 364-day $250 million unsecured revolving credit facility.

22



On August 17, 2011, we entered into a new five-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $300 million. The credit facility matures on August 17, 2016, and provides for two, one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The credit facility replaced our previous five-year $200 million unsecured credit facility.
As of March 2, 2013, we had the capacity to borrow an additional $513.2 million under our credit facilities. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of March 2, 2013, we were in compliance with all such covenants.
Short-term Borrowings
As of March 2, 2013, the Company had $182.2 million of short-term borrowings outstanding. During the first half of fiscal 2013, the Company had net borrowings of $167.2 million and an average daily outstanding balance of $104.3 million at an annualized weighted-average interest rate of 1.5% under its unsecured revolving credit facilities.
Principal Payment
During the first quarter of fiscal 2013, we made a scheduled principal payment on our private placement notes in the amount of $16.2 million. The next principal payment of $16.2 million is due in September 2013.

Restricted Cash and Investments
We have restricted cash and investments that serve as collateral for certain of our insurance obligations that are held at our wholly owned captive insurance subsidiary. These restricted funds cannot be withdrawn from the Company's account without the consent of the secured party. As of March 2, 2013, the Company held $55.5 million in this restricted account, of which $40.1 million was included in Restricted Cash and Investments and $15.4 million was included in Other Assets in the Consolidated Condensed Balance Sheet. The classification between current and non-current is based on the timing of expected payments of the secured insurance obligations.
Additionally, in conjunction with the sale-leaseback transactions completed during the first half of fiscal 2013, $48.1 million of the net proceeds were placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. We intend to use these proceeds to purchase additional new stores and are required to do so within 180 days to realize the deferral. We held $31.4 million in this account as of March 2, 2013. These assets are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheets.

Fee Development Program

We occupy most of our stores under operating leases. As part of our new store growth strategy, we have created a Fee
Development Program (“Fee Development Program”), intended to provide us with a more cost effective means to finance the
construction of new and relocated store locations.

Under the Company's previous model for opening newly constructed stores, once a viable store site was located, a developer would acquire the land and construct a store. Store construction was funded by the developer through construction loans. Upon completion of the construction, the store would be leased to the Company. The total construction cost of the store, and ultimate lease cost to the Company, would be impacted by the developer's construction and financing costs. Under the Fee Development Program, once a viable store site is located, the Company acquires the land and funds the construction with its own capital and pays the developer a fee for its work on the project. This program results in a lower total construction cost of the store because the Company's weighted average borrowing rate, based on its investment grade credit rating, is lower than interest rates on construction loans its developers could obtain. Under this program, the Company owns the store throughout the construction phase and upon completion of construction.

As the Company's current real estate strategy is to not own store locations, the Company has used, and intends to continue to use, sale-leaseback transactions to sell the stores it owns as a result of the Fee Development Program and concurrently lease them back. By completing sale-leaseback transactions, the Company monetizes the value of the stores it sells. The Company then intends to re-invest the proceeds into the Fee Development Program to construct more stores. During the first half of fiscal 2013, we constructed stores at a cost of $171.8 million under this program.

During the first half of fiscal 2013, we completed sale-leaseback transactions under which we sold 127 stores to unrelated third parties, with net proceeds from the sales of approximately $163.5 million. We realized a gain of approximately

23



$73.2 million on the sale of the stores, which we deferred and will amortize over the initial lease term of 15 years. In conjunction with the transaction, $48.1 million of the net proceeds was placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. We intend to use these proceeds to purchase additional new stores and are required to do so within 180 days to realize the deferral, which expires in June 2013. The remaining proceeds are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheets.
Other Considerations
Our merchandise inventories at the end of the first half of fiscal 2013 were 25.4% higher than at the end of the first half of fiscal 2012. Average inventory per store at the end of the first half of fiscal 2013 was 17.1% higher than average inventory per store at the end of the first half of fiscal 2012. The increases were due primarily to the expansion of our assortment of consumables merchandise, including tobacco. We expect the growth in inventory to stabilize in the third quarter of fiscal 2013, as compared to the third quarter of fiscal 2012, as we cycle the significant expansion of merchandise we executed in the third quarter of fiscal 2012.
    
Capital expenditures for the first half of fiscal 2013 were $409.7 million compared with $263.3 million in the first half of fiscal 2012. During the first half of fiscal 2013, the Company spent $219.7 million on new store locations (including $153.2 million for stores constructed under the Fee Development Program), $69.5 million on renovated, relocated or expanded stores (including $18.6 million for stores constructed under the Fee Development Program), and $51.6 million on supply-chain projects (including partial construction of the Company's 11th distribution center). The increase in gross property and equipment, before depreciation, does not directly correspond with capital expenditures due to the significant amount of assets sold under sale-leaseback transactions.

During the first half of fiscal 2012, the Company spent $69.7 million on new store locations (including $28.7 million for stores constructed under the Fee Development Program), $65.2 million on renovated, relocated or expanded stores (including $2.9 million for stores constructed under the Fee Development Program), and $51.2 million on supply-chain projects (including the construction of the Company's 10th distribution center).

Capital expenditures for fiscal 2013 are expected to be between $650 and $700 million. The planned increase in capital expenditures in fiscal 2013 is primarily made up of continued investments in new stores, including expenditures related to our Fee Development Program; investments related to renovations, relocations and expansions; and the completion of the construction of our 11th distribution center. We plan to open approximately 500 new stores and renovate, relocate or expand approximately 850 stores in fiscal 2013.

In the first half of fiscal 2013 we opened 251 stores, closed 18 stores, and renovated, relocated or expanded 328 stores. The renovations are part of our multi-year comprehensive store renovation program intended to re-energize the Family Dollar brand. The renovations address both the interior and exterior of the stores, create more customer-focused assortments and layouts, and position more customer-centric teams. Store opening, closing, relocation, expansion, and renovation plans, as well as overall capital expenditure plans, are continually reviewed and may change.
During the first half of fiscal 2013, we purchased a total of 1.2 million shares of our common stock at a cost of $75.0 million, compared to 1.3 million shares at a cost of $72.1 million in the first half of fiscal 2012. On September 28, 2011, we announced that the Board of Directors authorized the Company to purchase up to $250 million of the Company’s outstanding common stock. On January 17, 2013, the Company announced that the Board of Directors authorized the Company to purchase up to an additional $300 million of the Company’s outstanding common stock. As of March 2, 2013, the Company had $372.6 million remaining under current authorizations.
The timing and amount of any shares repurchased have been and will continue to be determined by management based on its evaluation of market conditions and other factors. Our share repurchase program does not have a stated expiration date, and purchases may be made through open market purchases, private market transactions or other structured transactions.
In addition to the Restricted Cash and Investments noted in Note 4, our wholly-owned captive insurance subsidiary maintains additional balances in cash and cash equivalents and investment securities that are used in connection with our retained workers’ compensation, general liability and automobile liability risks and are not designated for general corporate purposes. As of the end of the first half of fiscal 2013, these cash and cash equivalents and investment securities balances (including Restricted Cash and Investments) were $10.0 million, and $92.1 million, respectively.
Cash Flows From Operating Activities

24



During the first half of fiscal 2013, we had a cash inflow from operating activities of $135.4 million compared to a cash inflow of $216.5 million in the first half of fiscal 2012. The change was due primarily to increases in prepayments and other current assets, changes in income taxes payable and increases in merchandise inventories, offset by changes in accounts payable and accrued liabilities and other liabilities, all in the ordinary course of business.
Cash Flows From Investing Activities
During the first half of fiscal 2013, we had a cash outflow from investing activities of $203.3 million compared to a cash outflow of $179.6 million in the first half of fiscal 2012. The change was due primarily to an increase in capital expenditures, offset partially by proceeds from sale-leaseback transactions. The increase in capital expenditures during the first half of fiscal 2013 was due primarily to the expansion of our Fee Development Program.
Cash Flows From Financing Activities
During the first half of fiscal 2013, we had a cash inflow from financing activities of $93.5 million compared to a cash outflow of $72.4 million during the first half of fiscal 2012. The change was due primarily to net proceeds from short-term borrowings.
Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Updated 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  The ASU is effective for annual periods and interim periods within those periods beginning after December 15, 2012.  The ASU will be effective for the Company beginning in the first quarter of fiscal 2014 and is not expected to have a material impact on our Consolidated Financial Statements.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ from these estimates.
There have been no material changes to the Critical Accounting Policies disclosed in our Annual Report on Form 10-K for fiscal 2012.
Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Report, or in other public filings, press releases, or other written or oral communications made by Family Dollar or our representatives, which are not historical facts, are forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things, our plans, activities or events which we expect will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance, including, but not limited to, investment and financing plans, net sales, comparable store sales, cost of sales, selling, general and administrative (“SG&A”) expenses, earnings per diluted share, dividends and share repurchases; or statements regarding the outcome or impact of pending or threatened litigation. These forward-looking statements may be identified by the use of the words “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties and other factors may cause our actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in Part I – Item 1A of our Annual Report on Form 10-K for fiscal 2012, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Critical Accounting Policies” in Part I – Item 2 above, or in other filings or statements made by us. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

You should not place undue reliance on the forward-looking statements included in this Report. We assume no obligation to update any 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. In evaluating forward-looking

25



statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission (“SEC”).

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We maintain unsecured revolving credit facilities at variable rates of interest to meet the short-term needs of our expansion program and seasonal inventory increases. During the first half of fiscal 2013 and the first half of fiscal 2012, we did not incur any material interest expense related to our revolving credit facilities. As of March 2, 2013, we had $182.2 million of short-term borrowings outstanding. Our $516.4 million of current and long-term debt related to the $250 million of unsecured senior notes due September 27, 2015 and the $300 million of unsecured senior notes due February 1, 2021 bear interest at fixed rates ranging from 5.00% to 5.41%.
We are also subject to market risk from exposure to changes in the fair value of our investment securities. Our investment securities currently include auction rate securities that are subject to failed auctions and are not currently liquid. As of March 2, 2013, we had a $2.3 million unrealized loss ($1.5 million net of taxes) related to these investments. We do not expect to liquidate any ARSs going forward through the normal auction process. However, we do expect to be able to liquidate substantially all of our remaining ARS portfolio at par through issuer calls, refinancings or upon maturity. However, volatility in the credit markets could continue to negatively impact the timing of future liquidity related to these investments and lead to additional adjustments to their carrying value. See Note 2 to the Consolidated Financial Statements included in this Report for more information.

Item 4.
Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We evaluated the design and operating effectiveness of our disclosure controls and procedures as of March 2, 2013. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 2, 2013.
There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

26



PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
The information in Note 8 to the Consolidated Condensed Financial Statements contained in Part I, Item 1 of the Form 10-Q is incorporated herein by this reference.
 
Item 1A.
Risk Factors
There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for fiscal 2012.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended March 2, 2013, by us, on our behalf, or by any “affiliated purchaser” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934.
 
Period
 
Total Number
of  Shares
Purchased
 
Average Price
Paid Per  Share
 
Total Number of
Shares  Purchased as
Part of Publicly
Announced Plans or
Programs (1)
 
Maximum Number
of Shares  that May
Yet Be Purchased
Under the Plans or
Programs (1) (2)
December (11/25/12 - 12/29/12)
 

 
$

 

 
1,926,067

January (12/30/12 - 2/2/13)
 
743,430

 
57.14

 
743,430

 
6,744,209

February (2/3/13 - 3/2/13)
 
130,800

 
57.28

 
130,800

 
6,347,953

Total
 
874,230

 
$
57.16

 
874,230

 

 
(1)
On September 28, 2011, we announced that the Board of Directors authorized the purchase of up to $250 million of our outstanding common stock. On January 17, 2013, we announced that the Board of Directors authorized the purchase of up to $300 million of the Company’s outstanding common stock. As of March 2, 2013, the Company had $370.8 million remaining under current authorizations.

(2)
Remaining dollar amounts are converted to shares using the closing stock price as of the end of the fiscal month.

27



Item 6.
Exhibits

(a) Exhibits incorporated by reference:
10.3

*
 Family Dollar Stores, Inc. Employee Stock Purchase Plan (filed as Appendix B to Amendment No. 1 to the Company's Definitive Proxy Statement, filed with the SEC on December 21, 2012).
 
 
 
10.4

*
Employment Agreement dated December 28, 2012, between the Company and Howard R. Levine (filed as Exhibit 10.1 to the Company's Report on Form 8-K filed with the SEC on January 3, 2013).
 
 
 
*
 
Exhibit represents a management contract or compensatory plan





(b) Exhibits filed herewith:
10.1

 
First Amendment dated as of February 20, 2013, to the $300 Million Credit Agreement dated August 17, 2011, by and among Family Dollar Stores, Inc., as Borrower, and Wells Fargo Bank, National Association as Administrative Agent and the lenders party thereto
 
 
 
10.2

 
Second Amendment dated as of February 20, 2013, to the $400 Million Credit Agreement dated November 17, 2010, by and among Family Dollar Stores, Inc., as Borrower, and Wells Fargo Bank, National Association, as Administrative Agent, and the lenders party thereto
 
 
 
31.1

  
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2

  
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32

  
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101

  
Financial statements from the quarterly report on Form 10-Q of the Company for the quarter and first half ended March 2, 2013, filed on April 10, 2013, formatted in XBRL: (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Cash Flows and (iv) the Notes to Consolidated Condensed Financial Statements

28



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
FAMILY DOLLAR STORES, INC.
 
 
(Registrant)
 
 
Date: April 10, 2013
 
/s/ Mary A. Winston
 
 
Mary A. Winston
 
 
Executive Vice President – Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

29