UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended August 30, 2014
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.)
10401 Monroe Road, Matthews, North Carolina
28105
(Address of principal executive offices)
(Zip Code)
P.O. Box 1017, Charlotte, North Carolina 28201-1017
(Mailing address)
Registrant's telephone number, including area code: (704) 847-6961
Securities registered pursuant to Section 12(b) of the Act: 
 
Title of each class               
 
Name of each exchange on which registered
 
 
Common Stock, $.10 Par Value
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x     No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨     No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is 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  x
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 Act).  Yes  ¨    No  x
The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last day of the registrant's most recently completed second fiscal quarter, on March 1, 2014, was approximately $6.3 billion. For purposes of this computation only, the assumption is that all of the registrant's directors, executive officers and beneficial owners of 10% or more of the registrant's common stock are affiliates.
The number of shares of the registrant's Common Stock outstanding as of October 4, 2014, was 113,987,605.
DOCUMENTS INCORPORATED BY REFERENCE
None noted.




TABLE OF CONTENTS
 
 
 
Page No.
Part I
 
 
General Information and Cautionary Statement Regarding Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
 
 
Item 15.

1



GENERAL INFORMATION

We have provided information in this Annual Report on Form 10-K (this "Report") regarding the operations of Family Dollar Stores, Inc., and its subsidiaries ("we," "Family Dollar" or the "Company") related to the fiscal years ended on August 30, 2014 ("fiscal 2014"); August 31, 2013 ("fiscal 2013"); August 25, 2012 ("fiscal 2012"); August 27, 2011 ("fiscal 2011"); August 28, 2010 ("fiscal 2010"); and anticipated operations for the fiscal year ending on August 29, 2015 ("fiscal 2015"). You should review the discussion and analysis provided in this Report in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this Report.

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 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, the state of the economy, our capital investment and financing plans, net sales, comparable store sales, store openings and closings, cost of sales, selling, general and administrative ("SG&A") expenses, gross margin, income tax rates, earnings per diluted share, dividends and share repurchases; or statements regarding the outcome or impact of pending or threatened litigation.

The forward-looking statements also include assumptions about the business combination transaction involving Dollar Tree and Family Dollar, the unsolicited tender offer and proposals from Dollar General and any other alternative business combination transactions, the financing of the pending merger, the benefits, results, effects, timing and certainty of the pending transactions, future financial and operating results, expectations concerning the antitrust review process for the pending transactions and the combined company's plans, objectives, expectations (financial or otherwise) and intentions.

Risks and uncertainties related to the pending merger include, among others: the risk that Family Dollar's stockholders do not approve the pending merger; the risk that the Dollar Tree merger agreement (defined below) is terminated as a result of a competing proposal; the risk that regulatory approvals required for the pending merger are not obtained on the terms and schedule contained in the Dollar Tree merger agreement or are obtained subject to conditions that are not anticipated; the risk that the other conditions to the closing of the pending merger are not satisfied; the risk that the financing required to fund the pending transaction is not obtained; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the pending merger; uncertainties as to the timing of the pending merger; competitive responses to the merger; response by activist stockholders to the pending merger; costs and difficulties related to the integration of Family Dollar's business and operations with Dollar Tree's or other potential business combination transaction counterparties' business and operations; the inability to obtain, or delays in obtaining, the cost savings and synergies contemplated by the pending merger; uncertainty of the expected financial performance of the combined company following completion of the pending merger; the calculations of, and factors that may impact the calculations of, the acquisition price in connection with the pending transaction and the allocation of such acquisition price to the net assets acquired in accordance with applicable accounting rules and methodologies; unexpected costs, charges or expenses resulting from the pending merger; litigation relating to the pending merger; the outcome of pending or potential litigation or governmental investigations; the inability to retain key personnel; and any changes in general economic and/or industry specific conditions.

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 below, as well as other factors discussed throughout this Report, including, without limitation, the factors described under "Critical Accounting Policies" in Part II – Item 7 below, 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 the projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described in the Form S-4 filed by Dollar Tree, Inc., and other reports and documents filed by Family Dollar with the Securities and Exchange Commission ("SEC").

2





3



PART I
 

ITEM 1. BUSINESS

General Overview

We operate a chain of more than 8,000 general merchandise retail discount stores in 46 states, providing value-conscious 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 classify the combination of Home Products, Apparel and Accessories, and Seasonal and Electronics as "Discretionary." We sell merchandise at prices that generally range from less than $1 to $10.

The mailing address of our executive offices is P.O. Box 1017, Charlotte, North Carolina 28201-1017, and our telephone number is (704) 847-6961.  Our press releases for the past five years are available on our website, www.familydollar.com. We also make available free of charge through our website all of our reports filed with or furnished to the Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.

On July 27, 2014, we entered into a merger agreement with Dollar Tree, Inc. ("Dollar Tree"). Through the merger process, financial information relevant to our Company has been published within Form S-4's filed by Dollar Tree. Dollar Tree's reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on its website at www.dollartree.com as soon as reasonably practicable after electronic filing of such reports with the SEC. Documents incorporated by reference into the Form S-4 or can be requested free of charge by telephone or written request directed to: Corporate Secretary at Dollar Tree, Inc., 500 Volvo Parkway, Chesapeake, Virginia, 23320, Telephone (757) 321-5000.

In addition, the public may read and copy any of the materials we or Dollar Tree file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Our History

Our company was founded by Leon Levine in 1959 with the opening of the first Family Dollar store in Charlotte, North Carolina. Family Dollar Stores, Inc. was incorporated in Delaware in 1969, and all then-existing corporate entities became its wholly-owned subsidiaries. In 1970, the Company initially offered its common stock to the public, and today the Company's shares are traded on the New York Stock Exchange under the ticker symbol "FDO."

Our Mission and Strategy

Our mission is to provide our customers with a compelling place to shop, our team members with a compelling place to work, and our shareholders with a compelling place to invest. Our strategy is to provide consumers with value and convenience in a small, easy-to-shop environment in the neighborhoods we serve.

Strategic Initiatives

Our growth prospects remain strong; however, our results continue to be pressured. As a result of these pressures, we initiated an in-depth business review to identify opportunities to strengthen our value proposition, increase operational efficiencies, and improve financial performance. In the second half of fiscal 2014, we implemented a series of restructuring initiatives, including investing to lower prices on nearly 1,000 basic items, closing 377 underperforming stores across the chain, and optimized our workforce through a headcount reduction. Although these internal initiatives position us to deliver stronger returns, we continued to evaluate external strategic alternatives, which are summarized below.

Merger and Acquisition Transactions

On July 27, 2014, we entered into a definitive merger agreement (the "Dollar Tree merger agreement") with Dollar Tree, upon the terms and subject to the conditions of which a subsidiary of Dollar Tree will be merged with and into Family Dollar, with Family Dollar continuing as the surviving entity and a wholly-owned subsidiary of Dollar Tree. The transaction is subject to

4



Family Dollar stockholder approval, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and other customary closing conditions.

Upon completion of the merger, each issued and outstanding share of Family Dollar common stock other than shares owned by Dollar Tree or Family Dollar, or by stockholders that have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the Delaware General Corporation Law ("DGCL"), will be converted into the right to receive (i) an amount equal to $59.60 in cash plus (ii) a number of shares of Dollar Tree common stock equal to the exchange ratio. The exchange ratio depends on the volume weighted average of the trading prices of Dollar Tree common stock on the Nasdaq on each of the 20 consecutive Nasdaq trading days ending on the trading day that is three trading days prior to the effective time. If this average stock price is greater than $49.08 and less than $59.98 per share, the exchange ratio will be the quotient of $14.90 divided by the average stock price. If the average stock price is greater than or equal to $59.98, the exchange ratio will be 0.2484. If the average stock price is less than or equal to $49.08, the exchange ratio will be 0.3036. Dollar Tree stated it was prepared to commit to divest up to 500 retail stores in order to achieve the requisite antitrust approvals.

Following the execution of the Dollar Tree merger agreement, Dollar General Corporation ("Dollar General") submitted a non-binding, unsolicited proposal to acquire all the outstanding shares of Family Dollar common stock for $78.50 per share in cash, contingent on due diligence, regulatory approval, and termination of the Dollar Tree merger agreement. In its original proposal, Dollar General stated it was prepared to commit to divest up to 700 retail stores in order to achieve the requisite antitrust approvals. Dollar General subsequently revised its proposal to provide for increased consideration of $80.00 per share in cash and stated that Dollar General was willing to agree to divest up to 1,500 retail stores in order to achieve the requisite antitrust approvals and agree to pay a $500 million "reverse termination fee" to Family Dollar in the event the proposed transaction was not completed for antitrust reasons. Our Board of Directors, after consultation with their advisors, unanimously rejected each proposal from Dollar General on the basis of antitrust regulatory considerations and has unanimously reaffirmed its recommendation that shareholders vote to adopt the Dollar Tree merger agreement. On September 4, 2014, Dollar Tree and Family Dollar amended the Dollar Tree merger agreement to include a commitment by Dollar Tree to divest as many stores as necessary or advisable to obtain antitrust clearance for the transaction.

On September 10, 2014, Dollar General commenced an unsolicited conditional tender offer to acquire all the outstanding common shares of Family Dollar for $80.00 per share in cash. On September 19, 2014, Dollar General filed Form PREC 14A, a preliminary solicitation of proxies in opposition to the proposed acquisition of Family Dollar by Dollar Tree. The offer to purchase is scheduled to expire at 5:00 p.m., New York City time, on October 31, 2014, unless the offer is further extended. The tender offer is subject to numerous conditions. On September 15, 2014 and October 13, 2014, our Board of Directors unanimously recommended Family Dollar's shareholders reject Dollar General's unsolicited conditional tender offer and not tender their shares to Dollar General and reaffirmed its prior recommendation, respectively. In conjunction with its rejection of Dollar General's offer, our Board of Directors, after consultation with their advisors, unanimously reaffirmed its recommendation that shareholders vote to adopt the transaction with Dollar Tree.

On August 11, 2014, Dollar Tree filed a Form S-4 Registration Statement, and on September 25, 2014, October 20, 2014, and October 27, 2014, Dollar Tree filed Amendment No. 1, Amendment No. 2, and Amendment No. 3 to the Amended Form S-4 Registration Statement, respectively. The consummation of the merger with Dollar Tree is subject to customary closing conditions including adoption of the Dollar Tree merger agreement by Family Dollar's shareholders and the expiration or termination of all waiting periods applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements Acts of 1976, as amended. The close of the merger is not subject to any financing condition or a vote of Dollar Tree's shareholders. The merger could be in a position to close as early as December 2014.

The Federal Trade Commission ("FTC") issued a "second request" in connection with the merger and Dollar General's unsolicited conditional tender offer. On October 21, 2014, Family Dollar announced that it has certified substantial compliance with the FTC's second requests for both the Dollar Tree transaction and the Dollar General tender offer.

On October 20, 2014, Family Dollar announced that it has established October 30, 2014 as the record date for determining stockholders entitled to receive notice of, and vote at, the special meeting of stockholders, at which Family Dollar stockholders will be asked to adopt the merger agreement, as amended, with Dollar Tree.

The foregoing description of the Dollar Tree merger agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Dollar Tree merger agreement, a copy of which is filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on July 28, 2014, and the terms of which are incorporated herein by reference. The Dollar Tree merger agreement should not be read alone, but should instead be read in conjunction with the other information regarding us that is or will be contained in, or incorporated by reference into, the Forms 10-K, Forms 10-Q and other documents we file with the SEC.

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Our Company Goals

During fiscal 2014, we remained focused on achieving our four corporate goals: deliver profitable sales growth; build customer loyalty and experience; develop diverse, high performing teams; and drive continuous improvement.

Deliver profitable sales growth

Over the past several fiscal years, we executed a number of merchandising initiatives intended to improve our consumables assortment and to drive more trips to our stores. We expanded our assortment of food, increased our selection of health and beauty aids, and added a number of new merchandise categories, including tobacco products. In September 2012, we engaged in a six-year, exclusive partnership with McLane Company, Inc. ("McLane"), a supply chain services company, to allow us to offer an expanded assortment of frozen and refrigerated food, improve our in-stock levels, and distribute tobacco products to our stores. Through these initiatives, we have continued to drive customer traffic in key consumable categories. In fiscal 2014, our consumables sales increased 2.4% to 73.4% of total sales, as compared to fiscal 2013. We will continue to optimize our consumables assortment, and we expect this trend will continue in fiscal 2015.

While sales of consumables were strong in fiscal 2014, our sales in higher-margin Discretionary categories continued to be challenged. The holiday season was especially difficult and proved to be an early sign of the challenging operating environment we faced for the remainder of our fiscal year. We believe our consumers continued to face economic hardships, which resulted in increased promotional activity across multiple retail channels. Discretionary sales decreased 2.9% in fiscal 2014, as compared to fiscal 2013, which negatively impacted gross margin.

Private brands remain an opportunity to increase sales and profitability. In fiscal 2014, private brand sales increased approximately 11%, as compared to fiscal 2013, and represented approximately 29% of total sales. This growth was driven by the introduction of over 700 new and converted private brand SKUs to our assortment in fiscal 2014. Building on this momentum, in fiscal 2015 we intend to increase our penetration of private brands even further with a greater focus on quality.

In fiscal 2014, approximately 21% of our merchandise purchases (at cost) were manufactured overseas. Of these purchases (at cost), we imported approximately 13% ourselves through our global sourcing program and the remainder were imported and purchased through our domestic suppliers. To improve efficiencies and execution, we closed our Shanghai and Bangkok offices and increased our focus on our Hong Kong and Shenzhen offices, where more than 80% of our imported products are sourced. We continue to evaluate our global sourcing program to drive further efficiencies.

We opened 526 new stores in fiscal 2014. After a comprehensive review of our business, we also completed an initiative to close 377 underperforming stores in the second half of fiscal 2014, in addition to 23 store closures prior to the implementation of our restructuring initiative. In fiscal 2015, we plan to slow our store growth and open approximately 375 new stores, while closing approximately 40 stores, for a net store growth of 335.

Build customer loyalty and experience

In today's economic environment, value and convenience continues to resonate with consumers. To capitalize on this opportunity, in fiscal 2014 we launched and continued to execute several initiatives designed to increase our relevancy to customers by enhancing their shopping experience and to improve their perception of our value and convenience proposition.

We invested significantly to lower prices on nearly 1,000 basic items to deliver more compelling value to our customers. As a result of customer demand, we have expanded and refined our food and household assortments. In fiscal 2014, we added approximately 400 new food items to expand our assortment of key national brands to attract customers and build customer loyalty. We also reduced shelf space in categories where customer response has not met our expectations, and we improved product adjacencies to make it easier for our customers to shop.

In fiscal 2014, we enhanced our ongoing, comprehensive, multi-year store renovation program based on operational learnings and customer feedback. As a part of this program, we introduced an updated store layout, which repositioned our destination categories to drive more impulse purchases and enhance profitability. We renovated, relocated, or expanded 738 stores in fiscal 2014. Since fiscal 2011, we have renovated, relocated or expanded 3,441 stores.

Develop diverse, high-performing teams

We believe customer satisfaction is strongly linked with employee engagement, which is why we continue to invest in

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developing diverse, high-performing teams. We continue to focus on strengthening Family Dollar culture and engaging Team Members, while also optimizing talent and building leadership capabilities. In fiscal 2014, we made improvements in key leadership roles, programs, and processes, with a focus toward improving the store Team Member experience. As part of our internal strategic initiatives, we optimized the workforce through headcount reduction at the Store Support Center to ensure we have teams well positioned to support our stores, efficiently operate our business, and move key initiatives forward.

During fiscal 2014, we continued to support and strengthen our store teams. We hosted our Annual Leadership Conference, with more than 1,000 of our leaders in this field-focused event to provide an opportunity for leadership messaging, business updates, reinforcement of our strategic plan, recognition, and leadership development. We also continued to reallocate headcount from the Store Support Center in the roll-out of a Field Human Resources Support team consisting of Human Resources Managers to provide our field leadership with support in areas such as talent development, team relations, and retention.

In fiscal 2014, we also continued to strengthen our management team, with key changes in Merchandising, Marketing, Store Operations, Finance, Information Technology, and Supply Chain. We continued to improve programs and practices to reduce Store Manager turnover, which decreased approximately 18% from fiscal 2013. We continued to enhance benefits for our Team Members, such as launching a discounted employee stock purchase program and increasing our matching contributions for our employee 401(k) plan.

Drive continuous improvement

In fiscal 2014, we continued to improve our operational efficiency and effectiveness through a number of initiatives. We continued our ongoing cross-functional effort to simplify store-level tasks and improve execution, primarily through technology initiatives.

We deployed a new security tagging program to 65% of the chain, which has contributed to lower inventory shrinkage over fiscal 2013, in comparison to stores without the new system.

We upgraded the point-of-sale ("POS") system in more than 1,100 stores and combined our voice, data, and security monitoring services into a service from one provider in approximately 1,000 stores. As stores convert to this model, they receive better bandwidth, voice and security services, wireless network connections, and back-up network capabilities.

We successfully re-implemented our Enterprise Resource Planning ("ERP") system and introduced new business intelligence capabilities for Finance, Human Resources, and department management across the Company.

We converted two of our distribution centers, and began conversion of a third distribution center, to a pallet delivery process to enable store teams to unload and process freight faster and more easily than traditional door-to-shelf processes.

We introduced a mobility platform and deployed iPads to enable leaders to easily access information and allow for better informed decisions and support for store teams.

Overview of our Business Operations

Our Customers

Our strategy of providing customers with value and convenience continues to attract customers in a wide range of income brackets, ethnicity groups, and life stages. Our offerings are particularly attractive to consumers in the low to lower-middle income brackets or fixed income households. Depending on their financial situation and geographic proximity, customers rely on Family Dollar for weekly fill-in shopping trips for essential needs or for periodic trips to stock up on household items. To attract new and retain existing customers, we continue to focus on product quality and selection, value, convenient locations, improved store standards, and a pleasant overall customer experience.

Our Stores

A Family Dollar store is typically between 7,500 and 9,500 square feet, with an average of approximately 7,150 square feet of selling space. Our stores generally serve customers who live within three to five miles of the store. At the end of fiscal 2014, we operated 8,042 stores, totaling 58.1 million selling square feet. Approximately 24% of our stores were located in large

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urban markets, and approximately 20% of our stores were located in small urban markets or suburban areas. Approximately 55% of our stores were in strip malls, 43% were in freestanding buildings and 2% were in downtown buildings.
 
The relatively small size of a Family Dollar store allows us to select store locations in neighborhoods convenient to our customers in each of these market areas. Family Dollar stores are generally open seven days a week and typically operate between the hours of 8:00 a.m. and 10:00 p.m. Our stores accept cash, checks, debit cards, credit cards, and other electronic payment types, including food stamps.

Our Merchandise

We provide customers with a quality assortment of basic necessities and seasonal merchandise at everyday low prices. While the number of SKUs in a given store can vary based upon the store's size, geographic location, merchandising initiatives, and other factors, our typical store generally carries approximately 6,500 to 7,500 basic SKUs, with fluctuations in seasonal items throughout the year. The majority of our products are priced at $10 or less, with approximately 22% priced at $1 or less. Our stores operate on a self-service basis, and our low overhead enables us to sell merchandise at a relatively moderate markup. In fiscal 2014, the number of customer transactions in comparable stores decreased, as compared to fiscal 2013; however, the amount customers spent during each trip increased.

We offer a focused assortment of merchandise in a number of core categories, such as health and beauty aids, packaged food and refrigerated products, tobacco products, home cleaning supplies, housewares, stationery, seasonal goods, apparel, and home fashions. Reflecting trends in customer demand and diversity of our store base, we are launching a multi-year initiative to cluster assortments based on market dynamics. 

We manage the business on the basis of one operating segment and therefore, have only one reportable segment. All 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 solely support domestic operations and are not material. The following table summarizes the percentage of net sales attributable to each product category over the last three fiscal years.
 
Product Category
 
2014
 
2013
 
2012
Consumables
 
73.4
%
 
72.4
%
 
69.0
%
Home Products
 
9.6
%
 
10.1
%
 
11.4
%
Apparel and Accessories
 
7.3
%
 
7.6
%
 
8.8
%
Seasonal and Electronics
 
9.7
%
 
9.9
%
 
10.8
%

The following table describes our product categories in more detail.
 

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Consumables
Batteries
 
Diapers
 
Food
 
Hardware and automotive supplies
 
Health and beauty aids
 
Household chemicals
 
Paper products
 
Pet food and supplies
 
Tobacco
 
 
Home Products
Domestics, including blankets, sheets and towels
 
Giftware
 
Home décor
 
Housewares
 
 
Apparel and Accessories
Boys' and girls' clothing
 
Fashion accessories
 
Infants' clothing
 
Men's clothing
 
Shoes
 
Women's clothing
 
 
Seasonal and Electronics
Personal electronics, including pre-paid cellular phones and services
 
Seasonal goods
 
Stationery and school supplies
 
Toys

We sell high-quality national brands from leading manufacturers including Procter & Gamble, Coca-Cola, Unilever, Nestle, Kimberly Clark, Clorox, Colgate Palmolive, Georgia Pacific, Frito-Lay, Inc., and PepsiCo, which are typically sold at higher prices elsewhere. During fiscal 2014, nationally advertised brand name merchandise accounted for approximately 71% of sales.  Merchandise sold under our private brands program, across all merchandise categories, accounted for approximately 29% of sales. During fiscal 2014, closeout merchandise accounted for approximately 3% of total sales.

We purchase merchandise from a wide variety of suppliers and generally have not experienced difficulty in obtaining adequate quantities of merchandise.  In fiscal 2014, no single supplier accounted for more than 9% of the merchandise we sold. We purchased approximately 17% of our merchandise (at cost) through our relationship with McLane, which distributes Consumables merchandise from multiple manufacturers.

In fiscal 2014, approximately 21% of our merchandise purchases (at cost) were manufactured overseas. Of these purchases (at cost), we imported approximately 13% ourselves through our global sourcing program and the remainder were imported and purchased through our domestic suppliers. Our vendor arrangements provide for payment in U.S. dollars. 

We maintain a substantial variety and depth of merchandise inventory in stock in our stores, and in our distribution centers for weekly store replenishment, to attract customers and meet their shopping needs. We negotiate vendors' trade payment terms to help finance the cost of carrying this inventory. We balance the value of maintaining high inventory levels required to meet customer demand with the potential risk of having inventories at levels exceeding such demand that may need to be marked down in price in order to sell.

Store Operations

We independently manage and operate all of our 8,042 stores in 46 states. For each store, a store manager is responsible for hiring and training store employees, managing the financial performance of the store, and providing quality customer service. The store manager reports to a district manager or area operations manager. A district manager or area operations manager is typically responsible for 15 to 20 stores. During fiscal 2014, no single store accounted for more than one-tenth of one percent of total sales.

Distribution and Logistics

During fiscal 2014, manufacturers or distributors shipped approximately 23% of our merchandise purchases directly to stores.  The balance of the merchandise was shipped to one of our eleven distribution centers.  To provide consistent, cost-effective service, we enlist the services of several national transportation companies throughout the United States as well as our own

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private fleet of trucks to deliver merchandise to stores from our distribution centers.  During fiscal 2014, approximately 94% of the merchandise delivered to our stores from the distribution centers was delivered by common or contract carriers.

At the end of fiscal 2014, each distribution center served an average of 730 stores, as compared to 720 stores in fiscal 2013. Our tenth distribution center in Ashley, Indiana, began operations in June 2012, and our eleventh distribution center in St. George, Utah, began operations in July 2013. With the current footprint of stores and the opening of the eleventh distribution center in July 2013, the average store distance from distribution center declined approximately 2% at the end of fiscal 2014, as compared to the end of fiscal 2013, and approximately 7% at the end fiscal 2013, as compared to the end of fiscal 2012.

Competition

Our industry is highly competitive on the basis of store locations, convenience, price and quality of merchandise, in-stock consistency, merchandise assortment and presentation, and customer service. We compete for sales and store locations in varying degrees with international, national, regional and local retailing establishments, other discount stores, department stores, variety stores, dollar stores, discount clothing stores, drug stores, grocery stores, convenience stores, outlet stores, warehouse stores and other stores. Many other large U.S. retailers have stores in areas in which we operate. We believe the relatively small size of our stores permits us to operate new stores in most areas, including rural areas and large urban markets, in locations convenient to our customers.

Seasonality

Historically, sales have been highest in the second fiscal quarter (December, January, and February) in connection with the holiday season, representing approximately 27% of total annual sales over the last five fiscal years. Our quarterly results can also be impacted by the timing of certain holidays. We purchase significant amounts of seasonal inventory during the fourth and first quarter in anticipation of in-transit lead times in preparation for the holiday season.

Working Capital

We maintain an adequate level of working capital to support our business needs and our customers' requirements. Such working capital requirements are not, however, in the opinion of management, materially different from those experienced by our major competitors. We believe our sales and payment terms are competitive in and appropriate for the markets in which we compete.

Trademarks

We have registered with the U.S. Patent and Trademark Office the names Family Dollar® and Family Dollar Stores® as service marks, and also have registered, or have filed registration applications for, other names and designs as trademarks for certain merchandise sold in our stores, such as Family Gourmet®, Family Pet®, Kidgets® and Outdoors by Design®. Although in aggregate we consider our trademarks to be valuable to our operations, we do not believe our business is materially dependent on a single trademark or any group of trademarks.

Employees

As of August 30, 2014, we had approximately 35,000 full-time employees and approximately 25,000 part-time employees. None of our employees are covered by collective bargaining agreements. We consider our employee relations generally to be good.

NYSE Certification

In accordance with New York Stock Exchange ("NYSE") rules, on February 10, 2014, we filed the annual certification by our Chief Executive Officer certifying that, as of the date of the certification, Family Dollar was in compliance with the NYSE listing standards. For the fiscal year ended August 30, 2014, our Chief Executive Officer and our Chief Financial Officer executed the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002, which are filed as exhibits to this Report.


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ITEM 1A. RISK FACTORS

The risks described below could materially and adversely affect our business, financial condition, and results of operations.  We also may be adversely affected by risks not currently known or risks we do not currently consider material to our business.

The first section of risk factors below, "Risks Related to our Business," represent those faced by Family Dollar as a standalone company and should be read in conjunction with the second section of risk factors below, "Merger Related Risks," which represent risks Family Dollar currently faces under the Dollar Tree merger agreement.

Risks Related to our Business

Current economic conditions and other economic factors could adversely impact our business in various respects, including impacting our customer's disposable income or discretionary spending.

Our customers' low level of participation in the recovery of the U.S. economy, economic slowdown, or other economic factors may affect disposable consumer income and discretionary spending. Such factors include increased or sustained high unemployment or underemployment levels, increased costs of essential services including medical care and utilities, inflation, business conditions, fuel and energy costs, shopping patterns, consumer debt levels, lack of available credit, delays in tax refunds, and higher interest rates and tax rates. Changes in discretionary spending may cause customers to shift spending to products other than those we sell or change the mix of our sales toward less profitable products. These potential unfavorable customer spending trends may result in slower inventory turnover and greater markdowns on inventory.

The current global economic uncertainty, the impact of recessions, the failure of Congress to approve budgets in a timely manner, and the potential for failures or realignments of financial institutions and the related impact on available credit may impact our suppliers, our landlords, and our operations in an adverse manner including, but not limited to, our inability to readily access liquid funds or credit, increases in the cost of credit, bankruptcy of our suppliers or landlords, and other impacts, which we are currently unable to fully anticipate.

We operate in a highly competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales, market share or margins.

We operate in the highly competitive discount retail merchandise sector with numerous competitors, some of which have greater resources than us. We compete for customers, merchandise, real estate locations, and employees. This competitive environment subjects us to various risks, including the ability to continue our store and sales growth and to provide attractive merchandise to our customers at competitive prices that allow us to maintain our profitability. Price reductions by our competitors may result in the reduction of our prices and a corresponding reduction in our profitability.

Consolidation in our retail sector, changes in pricing of merchandise, or offerings of other services by competitors could have a negative impact on the relative attractiveness of our stores to consumers. Our large box competitors are opening stores under small box formats, which creates more competition, particularly in urban markets.

We face increased competition from the use of mobile and web-based technology that facilitates on-line shopping and real-time product and price comparisons. Additionally, the pervasiveness and viral nature of social media could negatively portray or influence our business, employees, and products.

The Company has entered into the Dollar Tree merger agreement. Dollar General has made an unsolicited conditional tender offer to acquire all of the outstanding shares of Family Dollar common stock, and filed a preliminary proxy statement to solicit proxies in opposition to the Dollar Tree merger. The uncertainty surrounding the structure of a combined chain, the target market of a combined chain, and the retention of our current brands and product offerings may have an adverse impact on our current business operations. Our ability to provide convenience in a small box retail format, while offering attractive, competitively-priced products could be impacted by various actions of our competitors that are beyond our control. See Item 1 - "Competition" for further discussion of our competitive position.

Our plans depend significantly on initiatives designed to increase sales and improve the efficiencies, costs, and effectiveness of our operations, independent of business combination transactions. Failure to achieve these plans could affect our performance adversely.

Higher costs or any failure to achieve targeted results associated with the implementation of new programs or initiatives could adversely affect our results of operations. We are undertaking a variety of operating initiatives and infrastructure initiatives

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including, but not limited to, a significant investment to permanently lower prices on a variety of products, merchandise expansions, a comprehensive store renovation program, private brand expansion, and global sourcing initiatives. These changes may result in temporary disruptions to our business and negatively impact sales. We have also undergone an initiative to close a number of underperforming stores. If, during this store closure initiative, we closed stores with future potential of being higher performing stores or did not close an appropriate number of underperforming stores, there could be an adverse impact on our operations and financial performance. The failure to properly execute any of these initiatives or the failure to obtain the anticipated results of such initiatives could have an adverse impact on our future operating results.

Any disruption in our ability to select, obtain, distribute, and market merchandise attractive to customers at prices allowing us to profitably sell such merchandise could adversely impact our business.

We generally have been able to select and obtain sufficient quantities of attractive merchandise at prices allowing us to profitably sell such merchandise.  If we are unable to continue to acquire products attractive to our customers, to obtain such products at costs allowing us to sell such products at a profit, or to market such products effectively to consumers, our sales or profitability could be adversely affected. In addition, the success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics and consumer preferences, expectations and needs across all markets in which we operate stores. Failure to maintain an attractive selection and to timely identify or effectively respond to changing consumer needs, preferences and spending patterns could adversely affect our relationship with customers, the demand for our products, and our market share.

We have substantially increased the number of our private brand items over the past several years, and the program is a sizable part of our future growth plans. We believe our success in maintaining broad market acceptance of our private brands depends on many factors, including our pricing, costs, quality and customer perception. We may not achieve or maintain our expected sales for our private brands and, as a result, our business and results of operations could be adversely impacted. Additionally, the increased number of private brands could negatively impact our existing relationships with our non-private brand suppliers.

Inappropriate pricing causes products to be less attractive to our customers. We continue to enhance our pricing capabilities to drive customer loyalty and have established a strategic pricing team to improve our value perception and to increase profitability. Inability to successfully implement new pricing strategies could have a negative effect on our business.

Any disruption in the supply or increase in pricing of our merchandise could negatively impact our ability to achieve anticipated operating results. A significant amount of our merchandise is manufactured outside the United States, and changes in the prices and flow of these goods for any reason could have an adverse impact on our operations.  For example, because a substantial amount of our imported merchandise is manufactured in China, a change in the Chinese currency or other policies could negatively impact our merchandise costs.  The United States and other countries have occasionally proposed and enacted protectionist trade legislation, which may result in changes in tariff structures, trade policies, and restrictions. Any changes could increase the cost of or reduce the availability of certain merchandise. Any of these or other measures or events relating to suppliers and the countries in which they are located, some or all of which are beyond our control, can negatively impact our operations, increase costs, and reduce our profitability.

In addition, our business could be negatively impacted if we cannot find qualified suppliers who meet our standards, and to access products in a timely and efficient manner, especially with respect to suppliers located and goods sourced outside the United States. Political and economic instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers' failure to meet our supplier standards, labor problems experienced by our suppliers, the availability of raw materials to suppliers, merchandise quality issues, currency exchange rates, transport availability, and cost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located are beyond our control. These and other factors affecting our suppliers, our access to products, and our ability to transport those products could affect our financial performance adversely.

Inability to attract, train, and retain qualified employees, executive officers, and other key personnel, and to control labor costs could adversely affect our business.

Our continuity of business knowledge and growth of the Company could be adversely impacted by our inability to attract, train, and retain qualified employees at the store operations level, in distribution facilities, in sourcing offices, and at the corporate headquarters (the "Store Support Center") level. With uncertainty surrounding the future state of the Company, the pending merger with Dollar Tree, and the unsolicited conditional tender offer from Dollar General, it could become increasingly difficult to retain qualified employees. Additionally, we continually face challenges to reduce turnover at the store operations level, which could negatively impact the customer experience. Various other factors, such as overall labor availability, wage rates, union organizing activity, regulatory or legislative impacts, and benefit costs could all impact our ability to attract, train,

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and retain employees negatively. We do not currently maintain key person life insurance policies with respect to our executive officers or key personnel.

Our ability to retain qualified employees could impact our ability to profitably conduct our operations and adversely impact our results of operations. Further, our ability to attract or realign our executive officers and key personnel is further complicated by the uncertainty of the future state of the Company. Any changes could require discussion and approval from Dollar Tree, under the Dollar Tree merger agreement.

Our growth is dependent upon our ability to increase sales in existing stores, the success of our new store-opening program and our store renovation program, and our ability to successfully identify and close underperforming stores.

Our growth is dependent on both increases in sales in existing stores and our ability to open profitable new stores.  Sales growth in existing stores is dependent upon factors including competition, merchandise selection, store operations, and customer satisfaction. Our ability to open profitable new stores is dependent upon factors including having available capital resources, identifying suitable locations for new stores, negotiating favorable leases and development agreements, competing against local competition, and gaining name recognition in new markets. Unavailability of attractive store locations, delays in acquisition or opening of new stores, and delays or unexpected costs associated with remodeling and renovating existing stores, may negatively impact new store growth and profitability of remodeled or renovated stores. Additionally, difficulties in staffing and operating both existing and new store locations, and lack of customer acceptance of stores in new market areas or our renovated store design may impact our ability to increase sales.

We continually reassess the location and profitability of our store locations. During the second half of fiscal 2014, we closed a number of stores beyond our normal plans for store closures. If, during this store closure initiative, we closed stores with future potential of being higher performing stores or did not close an appropriate number of underperforming stores, there could be an adverse impact on our operations and financial performance. Further, if a significant number of stores will be required to be closed as a result of a business combination, this could have an adverse impact on our operations.

We depend heavily on technology systems to support all aspects of our operations. The failure of existing or new technology to provide anticipated benefits could adversely affect our results of operations.

Our business depends heavily upon the efficient operation of our technological resources. A failure in our information technology systems or controls could negatively impact our operations. In addition, we continuously upgrade and update our current technology or install new technology. In fiscal 2014, the Company re-implemented an Enterprise Resource Planning ("ERP") system. The Company believes it has taken the necessary steps to mitigate risk associated with this reimplementation, including a comprehensive review of internal controls, extensive employee training, and additional verifications and testing to ensure data integrity. Our inability to implement upgrades, updates, or installations in a timely manner, to train our employees effectively in the use of our technology, or to obtain the anticipated benefits of our technology could adversely impact our operations or profitability.

Our technology systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, other malicious computer programs, denial-of-service attacks, security breaches, catastrophic events such as fires, tornadoes, earthquakes and hurricanes, and usage errors by our employees. If our technology systems and our back-up systems are damaged, breached, or cease to function properly, we may incur significant costs to repair or replace them, and we may suffer interruptions in our operations. Any material interruption in both our technology systems and back-up systems may have an adverse effect on our business or results of operations.

Operational difficulties, including those associated with our ability to develop and operate our stores and distribution facilities, could adversely impact our business.

Our stores are decentralized and are managed through a network of geographically dispersed management personnel.  In addition, we rely upon our distribution and logistics network to provide goods to stores in a timely and cost-effective manner.  Any disruption, unanticipated expense, or operational failure related to this process could impact our store operations negatively. We maintain a network of distribution facilities throughout our geographic territory and build new facilities to support our growth objectives. Delays in opening distribution facilities or stores could adversely affect our future operations by slowing the unit growth, which may in turn reduce revenue growth. Adverse changes in the cost of operating distribution facilities and stores, such as changes in labor, utility and other operating costs, could have an adverse impact on our financial performance.



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Our profitability is vulnerable to cost increases, inflation and energy prices.

Future increases in our costs, such as the cost of merchandise, shipping rates, freight and fuel costs, and store occupancy costs, may reduce our profitability. The minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions, and there is a possibility Congress will increase the federal minimum wage. These cost changes may be the result of inflationary pressures which could further reduce our sales or profitability. Increases in other operating costs, including changes in energy prices, wage rates and lease and utility costs, may increase our costs of sales or operating expenses and reduce our profitability.

Our performance may be adversely impacted if we are not successful in managing our inventory balances.

Our inventory balance represented approximately 42% of our total assets as of August 30, 2014. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels and appropriate product mix throughout the year to meet our customers' demands without allowing those levels to increase to such an extent that the cost to store and hold the goods adversely impacts our financial results. If our buying decisions are not accurate or well-timed in correlation to customer trends and spending levels, we may incur unanticipated markdowns to dispose of the excess inventory. Further, we believe excess inventory levels in stores subjects us to the risk of increased inventory shrinkage. If we are not successful in managing our inventory balances and shrinkage, our results from operations and cash flows from operations may be negatively affected.
    
Changes in and our compliance with state or federal legislation or regulations could impact our operations.

We employ more than 60,000 team members and are exposed to the risk federal or state legislation, particularly related to our team members, may negatively impact our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation or tax laws could adversely impact our ability to achieve our financial targets.  Changes in other regulatory areas, such as consumer credit, privacy and information security, product safety, supply chain transparency or environmental could cause our expenses to increase. In 2010, Congress enacted comprehensive health care reform legislation which includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the complexity of the health care reform legislation, the challenges faced in implementation regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the health care reform legislation on our business over the coming years. Possible adverse effects of the health care reform legislation include increased costs, exposure to expanded liability, and requirements for us to revise ways in which we conduct business.

Our business is subject to federal, state, local, and international laws, rules, and regulations, such as state and local wage and hour laws, anti-corruption laws, import and export laws, unclaimed property laws, and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements, increased enforcement, and our ongoing expansion of our global sourcing operations. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations which may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies. These investigations and audits can occur in the ordinary course of business or can result from increased scrutiny from a particular agency towards an industry, country, or practice. If we fail to comply with laws, rules, and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

Adverse impacts associated with legal proceedings and claims could negatively affect our business.

The ongoing antitrust investigations by federal and state regulators of the pending merger between Family Dollar and Dollar Tree and Dollar General's proposals to Family Dollar could negatively impact our store operations, growth, and financial results. The investigations could extend for a significant time, and regulators may seek to prohibit such transactions or, as a condition to approving such transactions, require the divestiture of certain stores and other assets.

We are involved in a number of legal proceedings which include employment, shareholder actions, tort, real estate, commercial, and other litigation. Certain of these lawsuits, if decided adversely to us or settled by us, may result in a liability material to our results of operations, financial condition, and liquidity.


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Lawsuits filed by competitors for alleged violations of certain restrictive covenants, binding on the occupants of shopping centers, could also have an adverse impact on our store operations. We, and many of our competitors, are currently engaged in a lawsuit with Winn-Dixie, and depending on the outcome of the lawsuit, the sale of food or other items at Family Dollar stores in locations near Winn-Dixie may be limited, which would negatively impact sales.

Nationally, the number of employment-related class actions filed each year has continued to increase, and recent changes and proposed changes in federal and state laws may cause claims to rise even more. We are currently a defendant in numerous employment cases containing class-action allegations, including those in which the plaintiffs have alleged violations of federal and state wage and hour laws. The cost to defend these class-action lawsuits may be significant. Plaintiffs in these types of cases may seek recovery of significant or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in a liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required.

There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. Refer to Note 13 to the Consolidated Financial Statements included in this Report for further details regarding certain of these pending matters.

If we are unable to secure our customers' confidential and credit card information, or other private data relating to our employees, suppliers or the Company, we could be subject to negative publicity, costly government enforcement actions or private litigation, which could damage our business reputation and adversely affect our profitability.

The protection of our customer, employee and Company data is critical to us. We have procedures and technology in place to safeguard our customers' debit and credit card information, our employees' private data, suppliers' data, and the Company's records and intellectual property. As a retailer that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard ("PCI DSS"), issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing, and transmission of individual cardholder data.

Despite our compliance with PCI DSS standards, the procedures, technology and other information security measures, we cannot be certain all our information technology ("IT") systems are able to prevent, contain or detect any cyber-attacks, cyber- terrorism, or security breaches from known malware or malware that may be developed in the future. As evidenced by other retailers who have recently suffered serious security breaches, we may be vulnerable to, and unable to detect and appropriately respond to, data security breaches and data loss, including cyber-security attacks. If we experience a data security breach of any kind, whether external, internal or misuse of sensitive data, we could be exposed to negative publicity, government enforcement actions, private litigation, penalties or costly response measures, which may not be covered by our insurance policies. In addition, our reputation within the business community and with our customers may be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores or not shopping in our stores altogether.

A breach of our security measures, a breach of our third-party service providers' security measures, or failure to comply with applicable privacy and information security laws and regulations could result in exposure of sensitive data. Such a breach or failure, which could go undetected for a period of time or not be detected at all, could have the following impacts:

Result in significant costs to protect compromised customers' or employees' personal data and to restore their confidence in us;
Require significant resources to address the problems and to further upgrade the security measures, which guard sensitive information; and
Result in disruption of our operations which could require us to make changes to our information systems and administrative processes to address security issues and compliance with applicable laws and regulations.

To the extent any disruption results in the loss, damage or misappropriation of information, we may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations, and others. In addition, the cost of complying with stricter privacy and information security laws and standards could be significant to us.





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We rely on suppliers, third-party distributors, and carriers whose operations are outside our control and any failure by them to deliver products in a timely manner may damage our reputation and could cause us to lose customers.

We rely on arrangements with third-party distributors and carriers such as independent shipping companies for timely delivery of products to stores and distribution operations throughout the country. As a result of our reliance on third-party distributors and carriers, including McLane, we are subject to carrier disruptions and increased costs due to factors beyond our control, including labor strikes, inclement weather, natural disasters, trade restrictions, and increased fuel costs. If the services of any of these third parties become unsatisfactory, we may experience delays in meeting our customers' product demands and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products in a timely manner may damage our reputation and could cause us to lose customers.

Our largest supplier accounted for almost 9% of our merchandise purchases (at cost) and we distributed approximately 17% of our merchandise through our relationship with McLane. We have not experienced difficulty in obtaining sufficient quantities of core merchandise and believe, if one or more of our current sources of supply became unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our merchandise costs and reduce the quality of our merchandise, and an inability to obtain alternative sources could adversely affect our sales.

Our ability to obtain additional financing on favorable terms, if needed, could be adversely affected by the uncertainty surrounding the future state of the Company and the volatility in the capital markets.

In the event financial results fall below market expectations for several consecutive quarters, our debt rating could be downgraded, which would have an adverse impact on our ability to secure additional financing. Additionally, the pending merger with Dollar Tree, including the related financing by Dollar Tree and the Financing Sources, as defined in the Dollar Tree merger agreement, could have an adverse impact on our ability to secure additional financing. Further, completion of an acquisition or merger could result in our Company no longer being considered investment grade, which could result in difficulty obtaining additional new financing.

We obtain and manage liquidity from the positive cash flow we generate from our operating activities and our access to capital markets, including our credit facilities with a consortium of banks. There is no assurance our ability to obtain additional financing through the capital markets, if needed, will not be adversely impacted by economic conditions. Tightening in the credit markets, low liquidity, and volatility in the capital markets could result in diminished availability of credit, higher cost of borrowing, and lack of confidence in the equity market, making it increasingly difficult to obtain additional financing on terms favorable to us.

We are exposed to the risk of natural disasters, unusual weather, pandemic outbreaks, global political events, war, and terrorism. These events could disrupt business and result in lower sales, increased operating costs, and capital expenditures.

Our store locations, distribution centers, sourcing offices, and Store Support Center, as well as certain of our vendors and customers, are located in areas which could be subject to unusual weather patterns or natural disasters such as floods, hurricanes, tornadoes or earthquakes. Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures, may disrupt our business and may adversely affect our ability to sell and distribute products.

In addition, we operate in markets susceptible to pandemic outbreaks, war, terrorist acts, or disruptive global political events, such as civil unrest in countries in which our suppliers are located. Our business may be harmed if our ability to sell and distribute products is impacted by any such events. Such events could result in physical damage or temporary closure to one or more of our properties, a temporary shortage of adequate work force in the market, a temporary or permanent disruption or delay in the transport and delivery of goods to our distribution centers and stores, a disruption of technology support or information systems, or fuel shortages or dramatic increases in fuel prices. Additionally, such events could influence customer trends. All these possible outcomes could increase the cost of doing business and negatively impact our net sales, properties or operations. 

Failure to comply with our debt covenants could adversely affect our capital resources, financial condition and liquidity.

Our debt agreements contain certain restrictive covenants, which impose various operating and financial restrictions on us. Such restrictions include, but are not limited to, a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt ratio. Our failure to comply with the restrictive covenants in our debt agreements, as a result of one or

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more of the factors listed in this section, could result in an event of default, which, if not cured or waived, could result in us having to repay our borrowings before their due dates. If we are forced to refinance these borrowings on less favorable terms or if we were to experience difficulty in refinancing the debt prior to maturity, our results of operations or financial condition could be harmed. In addition, if we are in default under any of our existing or future debt facilities, we will be unable to borrow additional amounts under those facilities to the extent otherwise available.

Product and food safety concerns and the effects of legislation and regulations on product and food safety and quality could adversely affect our results of operations and perception by customers.

Federal or state legislation and regulations regarding product and food quality and safety may negatively impact our operations. Any changes in product safety or quality legislation or regulations may lead to product recalls and the disposal or write-off of merchandise inventories, as well as certain fines or penalties and reputational damage. Our inability to timely comply with regulatory requirements or execute product recalls could result in substantial fines or penalties, which could have an adverse impact on our financial results. All our vendors and their products must comply with applicable product and food safety laws.

We may be subject to product liability claims from customers relating to food and other products recalled, defective or otherwise alleged to be harmful. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. The outcome of claims against the Company could have an adverse impact on our financial results. Additionally, negative customer perceptions regarding the safety of our products could cause us to lose market share to our competitors, which can be difficult to regain.

Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.

We use a combination of third-party insurance and self-insurance to provide for potential liability for workers' compensation, automobile and general liability, property, director and officers' liability, and employee health care benefits. Any actuarial projection of losses is subject to a high degree of variability. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all adversely affect our financial condition, results of operations, or cash flows.

New accounting guidance or changes in the interpretation or application of existing accounting guidance could adversely affect our financial performance.

New accounting guidance may require systems, which could increase our operating costs, and other changes, including changes to our financial statements. For example, implementing future accounting guidance related to leases, contingencies, and other areas impacted by the convergence project between the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") could require us to make significant changes to our lease management system or other accounting systems, and could result in changes to our financial statements.

Unanticipated changes in the interpretation or application of existing accounting guidance could result in material charges to or restatements of our financial statements, which may further result in litigation or regulatory actions which could have an adverse effect on our financial condition and results of operations.

Merger Related Risks

The value of the stock portion of the merger consideration is subject to changes based on fluctuations in the value of Dollar Tree common stock, and Family Dollar stockholders may receive stock consideration with a value that, at the time received, is less than $14.90 per share of Family Dollar common stock.

The market value of Dollar Tree common stock will fluctuate during the period before the date of the special meeting of Family Dollar stockholders to vote on the adoption of the Dollar Tree merger agreement, during the 20 trading day period the exchange ratio will be based upon, and the time between the last day of the 20 trading day period and the time Family Dollar stockholders receive merger consideration in the form of Dollar Tree common stock, as well as thereafter.

Upon completion of the merger, each issued and outstanding share of Family Dollar common stock will be converted into the right to receive the per share merger consideration, which is equal to $59.60 in cash and a number of Dollar Tree shares equal to the exchange ratio, which depends on the average stock price. If the average Dollar Tree stock price is greater than $49.08 and less than $59.98 per share, the exchange ratio will be the quotient of $14.90 divided by the average stock price. If the

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average stock price is greater than or equal to $59.98, the exchange ratio will be 0.2484. If the average stock price is less than or equal to $49.08, the exchange ratio will be 0.3036. Accordingly, the actual number of shares and the value of Dollar Tree common stock delivered to Family Dollar stockholders will depend on the average stock price, and the value of the shares of Dollar Tree common stock delivered for each such share of Family Dollar common stock may be greater than or less than, or equal to, $14.90. It is impossible to accurately predict the market price of Dollar Tree common stock at the effective time or during the period over which the average stock price is calculated and therefore impossible to accurately predict the number or value of the shares of Dollar Tree common stock that Family Dollar stockholders will be delivered in the merger.

The market price of Dollar Tree common stock after the merger will continue to fluctuate and may be affected by factors different from those affecting shares of Family Dollar common stock currently.

Upon completion of the merger, holders of Family Dollar common stock will become holders of Dollar Tree common stock. The market price of Dollar Tree common stock may fluctuate significantly following consummation of the merger and holders of Family Dollar common stock could lose the value of their investment in Dollar Tree common stock. In addition, the stock market has experienced significant price and volume fluctuations in recent times, which could have a material adverse effect on the market for, or liquidity of, the Dollar Tree common stock, regardless of Dollar Tree's actual operating performance. In addition, Dollar Tree's business differs in important respects from that of Family Dollar, and accordingly, the results of operations of the combined company and the market price of Dollar Tree common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of Dollar Tree and Family Dollar.

Dollar Tree does not intend to pay dividends in the foreseeable future, and current Family Dollar stockholders may have to rely on increases in the trading price of Dollar Tree common stock for returns on their investment following the merger. In addition, the Dollar Tree merger agreement places restrictions on Family Dollar's ability to pay dividends.

Family Dollar and Dollar Tree have had different dividend policies historically. Family Dollar has consistently paid a regular quarterly dividend, but Dollar Tree does not currently pay regular quarterly dividends and does not anticipate paying dividends on its common stock in the foreseeable future. Any payment of dividends by Dollar Tree would require approval by the Dollar Tree board of directors and the board may change its dividend policy at any time. As such, Dollar Tree may not pay any regular dividends in the foreseeable future, in which case former Family Dollar stockholders who become stockholders of Dollar Tree would no longer be able to rely on receiving regular dividend payments. Former Family Dollar stockholders, and other Dollar Tree stockholders, would have to rely on increases in the trading price of Dollar Tree common stock for any returns on their investment. In addition, under the Dollar Tree merger agreement, Family Dollar is not permitted to pay dividends other than a single cash dividend of $0.31 in the first quarter of fiscal year 2015.

Sales of shares of Dollar Tree common stock before and after the completion of the transaction may cause the market price of Dollar Tree common stock to fall.

The issuance of new shares of Dollar Tree common stock in connection with the transaction could have the effect of depressing the market price for Dollar Tree common stock.

In addition, many Family Dollar stockholders may decide not to hold the shares of Dollar Tree common stock they will receive in the merger. Other Family Dollar stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of Dollar Tree common stock they receive in the merger. Such sales of Dollar Tree common stock could have the effect of depressing the market price for Dollar Tree common stock and may take place promptly following the merger.

Completion of the merger is subject to conditions and if these conditions are not satisfied or waived, the merger will not be completed. The Dollar Tree merger agreement can also be terminated by Family Dollar under certain circumstances relating to a company superior proposal, as described in the Dollar Tree merger agreement.

The obligations of Dollar Tree and Family Dollar to complete the merger are subject to satisfaction or waiver, to the extent permitted under applicable law, of a number of conditions including adoption of the merger by the Family Dollar stockholders, expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"), the effectiveness of the Form S-4, the approval of the listing on the Nasdaq of the Dollar Tree common stock to be issued in the merger, the absence of an injunction prohibiting the merger, the accuracy of the representations, and the warranties of the other party under the Dollar Tree merger agreement (subject to the materiality standards set forth in the Dollar Tree merger agreement), the performance by the other party of its respective obligations under the Dollar Tree merger agreement in all material respects, delivery of officer certificates by the other party certifying satisfaction of the two preceding

18



conditions, and in the case of Dollar Tree's obligations to complete the merger, the absence of a material adverse effect, as described in the Dollar Tree merger agreement, on Family Dollar following July 27, 2014.

The satisfaction of all of the required conditions could delay the completion of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger could cause Dollar Tree not to realize some or all of the benefits that Dollar Tree expects to achieve if the merger is successfully completed within its expected timeframe. Further, there can be no assurance the conditions to the closing of the merger will be satisfied or waived or the merger will be completed. See the risk factor entitled "Failure to complete the merger could negatively impact the stock price and the future business and financial results of Family Dollar,'' below.

Under certain circumstances, if a third party makes a company superior proposal, as described in the Dollar Tree merger agreement, to acquire Family Dollar, Family Dollar could pay Dollar Tree a termination fee of $305 million, terminate the Dollar Tree merger agreement, and sign a merger agreement with the third party, and the pending merger between Family Dollar and Dollar Tree would not be completed.

In order to complete the merger, Dollar Tree and Family Dollar must make certain governmental filings and obtain certain governmental authorizations, and if such filings and authorizations are not made or granted or are granted with conditions, or if regulators otherwise seek to impose conditions or to challenge the merger, completion of the merger may be jeopardized or the anticipated benefits of the merger could be reduced.

Although Dollar Tree and Family Dollar have agreed in the Dollar Tree merger agreement to use their reasonable best efforts, subject to certain limitations, to make certain governmental filings, and obtain the required expiration or termination of the waiting period under the HSR Act, there can be no assurance the waiting period under the HSR Act will expire or be terminated. As a condition to granting termination of the waiting period under the HSR Act or avoiding a lawsuit challenging the merger, governmental authorities may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of Dollar Tree's business after completion of the merger. Under the terms of the Dollar Tree merger agreement, subject to certain exceptions, Dollar Tree and its subsidiaries are required to accept certain conditions and take certain actions imposed by governmental authorities that would apply to, or affect, the businesses, assets or properties of it, its subsidiaries or Family Dollar and its subsidiaries. There can be no assurance regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the merger or imposing additional material costs on or materially limiting the revenues of the combined company following the merger, or otherwise adversely affecting Dollar Tree's businesses and results of operations after completion of the merger. In addition, we can provide no assurance these conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger. There can also be no assurance regulators will not seek to challenge the merger.

Combining the two companies may be more difficult, costly, or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.

Family Dollar and Dollar Tree have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on Dollar Tree's ability to successfully combine and integrate the businesses of Dollar Tree and Family Dollar. It is possible the pending nature of the merger and/or the integration process could result in the loss of key employees, higher than expected costs, diversion of management attention of both Family Dollar and Dollar Tree, increased competition, the disruption of either company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company's ability to maintain relationships with customers, vendors, and employees or to achieve the anticipated benefits and cost savings of the merger. If Dollar Tree experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. Integration efforts between the two companies will also divert management's attention and resources. These integration matters could have an adverse effect on each of Dollar Tree and Family Dollar during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated.

Family Dollar's executive officers and directors have interests in the merger that may be different from your interests as a stockholder of Family Dollar or as a stockholder of Dollar Tree.

When considering the recommendation of the Family Dollar board that Family Dollar stockholders adopt the Dollar Tree merger agreement, Family Dollar stockholders should be aware that directors and executive officers of Family Dollar have certain interests in the merger that may be different from or in addition to the interests of Family Dollar stockholders and Dollar Tree stockholders generally. These interests, which arise from both contractual arrangements existing prior to the execution of the Dollar Tree merger agreement and provisions of the Dollar Tree merger agreement, include, among others, the treatment of

19



outstanding equity awards pursuant to the Dollar Tree merger agreement, potential severance benefits and other payments, retention, and rights to ongoing indemnification and insurance coverage by the surviving company for acts or omissions occurring prior to the merger. As a result of these interests, these directors and executive officers of Family Dollar might be more likely to support and to vote in favor of the proposals described in the proxy statement than if they did not have these interests. Family Dollar's stockholders should consider whether these interests might have influenced these directors and executive officers to support or recommend adoption of the Dollar Tree merger agreement.

The Dollar Tree merger agreement limits Family Dollar's ability to pursue alternatives to the merger and may discourage other companies from trying to acquire Family Dollar for greater consideration than what Dollar Tree has agreed to pay.

The Dollar Tree merger agreement contains provisions that make it more difficult for Family Dollar to sell its business to a party other than Dollar Tree. These provisions include a general prohibition on Family Dollar soliciting any acquisition proposal or offer for a competing transaction. In some circumstances upon termination of the Dollar Tree merger agreement, Family Dollar may be required to pay to Dollar Tree its out-of-pocket expenses not to exceed $90 million and/or a termination fee of $305 million, less any payment paid in respect of Dollar Tree's out-of-pocket expenses. Further, there are only limited exceptions to Family Dollar's agreement that the Family Dollar Board of Directors will not withdraw or modify in a manner adverse to Dollar Tree the recommendation of the Family Dollar board in favor of the adoption of the Dollar Tree merger agreement and to Family Dollar's agreement not to enter into an agreement with respect to a company takeover proposal.

These provisions might discourage a third party that has an interest in acquiring all or a significant part of Family Dollar from considering or proposing an acquisition, even if the party were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or the payment of expenses that may become payable in certain circumstances.

Actions by Dollar General may negatively impact the interests of Family Dollar's stockholders and Family Dollar.

The Dollar General tender offer and actions by Dollar General could negatively impact the interests of Family Dollar stockholders and Family Dollar. Since August 18, 2014, Dollar General has made two unsolicited conditional proposals to acquire Family Dollar, and commenced the Dollar General tender offer, each of which has been unanimously rejected by the Family Dollar board.

Dollar General has also filed a preliminary proxy statement with the SEC to solicit proxies in opposition to the Dollar Tree merger. It is unclear what additional actions Dollar General may take to further the Dollar General tender offer or to prevent the Dollar Tree merger from occurring. These additional actions taken or to be taken by Dollar General may cause disruption in Family Dollar's business and could negatively impact the expected timing of the consummation of the Dollar Tree merger. In addition, Family Dollar's stockholders may be persuaded to vote against adoption of the Dollar Tree merger agreement as a result of Dollar General's actions and, consequently, the required stockholder approval of the Dollar Tree merger may not be obtained. If, at the special meeting, Family Dollar stockholders were to fail to approve the Dollar Tree merger, then:

The Dollar Tree merger agreement may be terminated without any money going to Family Dollar stockholders;
If the Dollar Tree merger agreement is terminated, Family Dollar will have to reimburse Dollar Tree in cash for its out-of-pocket expenses up to $90 million and under certain circumstances, including a consummation of a transaction with Dollar General, will be required to pay a termination fee to Dollar Tree in cash of $305 million, less any prior payment in respect of Dollar Tree's out-of-pocket expenses; and
Family Dollar may remain a stand-alone company and reject any proposed transactions with Dollar General, including on the basis of antitrust regulatory considerations, or other third parties; and
The Dollar General tender offer may not be completed on the proposed terms because one or more conditions, including the condition that Dollar General and Family Dollar must have entered into a merger agreement in form and substance satisfactory to Dollar General in its reasonable discretion, are not satisfied or Dollar General may unilaterally decide to fail to extend its tender offer or change the price per share or other terms of the offer as described below.

Family Dollar does not expect the Dollar General tender offer to receive antitrust regulatory clearance before the tender offer's currently scheduled expiration date and, if this turns out to be the case, Dollar General will not be able to purchase any tendered shares in connection with the scheduled expiration of the tender offer. Dollar General may determine not to extend its tender offer beyond the upcoming or any extended expiration date. Moreover, even if Dollar General were to extend its tender offer, Dollar General may decide not to continue to offer the same price per share or other terms upon any extension of the Dollar General tender offer and may elect in its "reasonable discretion" not to enter into a merger agreement with Family Dollar on the

20



terms currently described in its offer. Furthermore, Dollar General has not indicated it will extend the tender offer over a period long enough to permit Dollar General to obtain antitrust regulatory clearance for a combination with Family Dollar. Also see the risk factor entitled "Failure to complete the merger could negatively impact the stock price and the future business and financial results of Family Dollar.''

Failure to complete the merger could negatively impact the stock price and the future business and financial results of Family Dollar.

If the merger is not completed for any reason, including as a result of Family Dollar stockholders failing to adopt the Dollar Tree merger agreement, the ongoing business of Family Dollar may be adversely affected and, without realizing any of the benefits of having completed the merger, Family Dollar would be subject to a number of risks, including the following:

Family Dollar may experience negative reactions from the financial markets, including negative impacts on its stock price;
Family Dollar may experience negative reactions from its customers, vendors and employees;
Family Dollar will be required to pay certain costs relating to the merger, whether or not the merger is completed;
The Dollar Tree merger agreement places certain restrictions on the conduct of Family Dollar's businesses prior to completion of the merger. Such restrictions, the waiver of which is subject to the consent of Dollar Tree (in certain cases, not to be unreasonably withheld, conditioned or delayed), may prevent Family Dollar from making certain acquisitions or taking certain other specified actions during the pendency of the merger; and
Matters relating to the merger, including integration planning, will require substantial commitments of time and resources by Family Dollar management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to Family Dollar as an independent company.

In addition to the above risks, Family Dollar may be required, under certain circumstances, to pay to Dollar Tree a termination fee of $305 million or the payment of Dollar Tree's out-of-pocket expenses incurred in connection with the merger or the Dollar Tree merger agreement not to exceed $90 million, which may materially adversely affect Family Dollar's financial results. Further, Family Dollar could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against Family Dollar to perform its obligations under the Dollar Tree merger agreement. If the merger is not completed, these risks may materialize and may adversely affect Family Dollar's businesses, financial condition, financial results, and stock price.

The shares of Dollar Tree common stock to be received by Family Dollar stockholders as a result of the merger will have rights different from the shares of Family Dollar common stock.

Upon completion of the merger, Family Dollar stockholders will no longer be stockholders of Family Dollar but will instead become Dollar Tree stockholders, and their rights as stockholders will be governed by the terms of the Dollar Tree charter and bylaws and by Virginia corporate law. The terms of the Dollar Tree charter and bylaws and Virginia corporate law are, in some respects, different than the terms of the Family Dollar charter and bylaws and Delaware corporate law, which currently govern the rights of Family Dollar stockholders.

After the merger, Family Dollar stockholders will have a significantly lower ownership and voting interest in Dollar Tree than they currently have in Family Dollar and will exercise less influence over management.

It is expected that, immediately after completion of the merger, former Family Dollar stockholders will have less of an ownership percentage of Dollar Tree common stock, compared to their previous ownership percentage of Family Dollar common stock. Consequently, former Family Dollar stockholders will have less influence over the management and policies of Dollar Tree than they currently have over the management and policies of Family Dollar.

The fairness opinion obtained by Family Dollar from its financial advisor will not reflect changes in circumstances between the date of the signing of the Dollar Tree merger agreement and the completion of the merger.

Family Dollar has obtained a fairness opinion, dated July 27, 2014, which has not been updated as of the date of this Annual report on Form 10-K, and will not be updated, revised, or reaffirmed at the time of the completion of the merger. In the opinion, judgments and assumptions were made by Family Dollar's financial advisor with regard to industry performance, general business, market and financial conditions and other matters, which are beyond the control of Family Dollar or Dollar Tree. These include, among other things, the impact of competition on the businesses of Family Dollar and Dollar Tree, the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Family Dollar and Dollar Tree, the industry and in the financial markets in general, which could affect the public trading value of

21



Family Dollar common stock and Dollar Tree common stock by the time the merger is completed. The fairness opinion does not address the fairness of the merger consideration, from a financial point of view, at the time the merger is completed or as of any date other than the date of the opinion nor the prices at which Family Dollar common stock or Dollar Tree common stock will trade at any time.

Three lawsuits have been filed against Family Dollar, its directors, Dollar Tree and the merger subsidiary challenging the merger, and an adverse ruling in such lawsuits may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

Family Dollar, its directors, Dollar Tree and the merger subsidiary are named as defendants in three putative class action lawsuits brought by purported Family Dollar stockholders challenging the pending merger, seeking, among other things, to enjoin consummation of the merger. One of the conditions to the completion of the merger is that no injunction by any court or other tribunal of competent jurisdiction will be in effect that prohibits or makes illegal the consummation of the merger. As such, if any of the plaintiffs are successful in obtaining an injunction prohibiting the consummation of the merger, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe. See Note 13 to the Consolidated Financial Statements.


22



ITEM 1B. UNRESOLVED STAFF COMMENTS

None noted.

ITEM 2. PROPERTIES

Stores

We operate a chain of self-service retail discount stores. As of October 4, 2014, there were 8,055 stores in 46 states and the District of Columbia as follows:
 
Texas
1,020

West Virginia
115

Florida
593

Massachusetts
113

Ohio
479

Arkansas
112

North Carolina
417

New Jersey
111

Michigan
403

Maryland
102

Georgia
397

Minnesota
76

New York
336

Utah
61

Pennsylvania
304

Maine
60

Louisiana
293

Connecticut
59

Virginia
247

Kansas
50

Tennessee
246

Idaho
44

Illinois
235

Nevada
41

South Carolina
225

Nebraska
34

Indiana
210

Iowa
33

Kentucky
208

New Hampshire
32

Alabama
172

Wyoming
29

Mississippi
157

Rhode Island
28

Arizona
154

South Dakota
25

Wisconsin
145

Delaware
23

Colorado
133

North Dakota
19

Oklahoma
132

Vermont
17

New Mexico
119

Montana
7

California
118

District of Columbia
3

Missouri
118

 
 

As of October 4, 2014, we had, in the aggregate, approximately 69.5 million square feet of total store space (including receiving rooms and other non-selling areas) and approximately 58.3 million square feet of selling space.

The number of stores we operated at the end of each of our last five fiscal years was:  
Fiscal Year
 
Number of Stores at Year End
2010
 
6,785

2011
 
7,023

2012
 
7,442

2013
 
7,916

2014
 
8,042


During fiscal 2014, we opened 526 stores, closed 400 stores, and renovated, relocated or expanded 738 stores. From August 30, 2014, through October 4, 2014, we opened 13 new stores, closed no stores, and renovated, relocated or expanded 47 stores.


23



As of October 4, 2014, we owned 198 of the total 8,055 stores we operated. Most of our leases have an initial term between five and fifteen years and provide for fixed rentals, and most of our leases require additional payments based upon a percentage of sales, property taxes, insurance premiums, or common area maintenance charges. Of our 7,857 leased stores at October 4, 2014, all but 690 leases grant us options to renew for additional terms, in most cases for a number of successive five-year periods. 

Store Support Center

We own our Store Support Center located in Matthews, North Carolina, just outside of Charlotte.

Distribution Centers

We own eleven full-service distribution centers, which include receiving, warehousing, shipping, and storage facilities. Following is a summary of our distribution centers:
 
 
Facility Size
 
 
Distribution Center
 
Land
 
Building
 
Date Operational
Matthews, NC(1)
 
108 acres
 
1,240,000 sq. ft.
 
1974
West Memphis, AR
 
75 acres
 
850,000 sq. ft.
 
April 1994
Front Royal, VA
 
108 acres
 
907,000 sq. ft.
 
January 1998
Duncan, OK
 
85 acres
 
907,000 sq. ft.
 
July 1999
Morehead, KY
 
94 acres
 
907,000 sq. ft.
 
June 2000
Maquoketa, IA
 
74 acres
 
907,000 sq. ft.
 
March 2002
Odessa, TX
 
89 acres
 
907,000 sq. ft.
 
July 2003
Marianna, FL
 
76 acres
 
907,000 sq. ft.
 
January 2005
Rome, NY
 
87 acres
 
907,000 sq. ft.
 
April 2006
Ashley, IN
 
89 acres
 
814,019 sq. ft.
 
June 2012
St. George, UT
 
88 acres
 
814,019 sq. ft.
 
July 2013

(1) Approximately 310,000 sq. ft. used for Store Support Center and approximately 930,000 sq. ft. used for distribution center.

ITEM 3. LEGAL PROCEEDINGS

Information for this item is included in Note 13 to the Consolidated Financial Statements included in this Report, and incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


24



Executive Officers of the Company

The following information is furnished with respect to each of the executive officers of Family Dollar as of October 4, 2014.
Name
 
Position and Office
 
Age
Howard R. Levine
 
Chairman of the Board and Chief Executive Officer
 
55

Mary A. Winston
 
Executive Vice President - Chief Financial Officer
 
52

Barry W. Sullivan
 
Executive Vice President - Store Operations
 
50

James C. Snyder, Jr.
 
Senior Vice President - General Counsel and Secretary
 
50

Jason S. Reiser
 
Executive Vice President - Chief Merchandising Officer
 
46

Bryan E. Venberg
 
Senior Vice President - Human Resources
 
46


Mr. Howard R. Levine was employed by the Company in various capacities in the Merchandising Department from 1981 to 1987, including employment as Senior Vice President - Merchandising and Advertising. From 1988 to 1992, Mr. Levine was President of Best Price Clothing Stores, Inc., a chain of ladies' apparel stores. From 1992 to April 1996, he was self-employed as an investment manager. He rejoined the Company in April 1996 and was elected Vice President - General Merchandise Manager: Softlines; Senior Vice President - Merchandising and Advertising in September 1996; President and Chief Operating Officer in April 1997; Chief Executive Officer in August 1998; and Chairman of the Board in January 2003. He is the son of Leon Levine, the founder and former Chairman of the Board of the Company.

Ms. Mary A. Winston was employed by the Company as Executive Vice President - Chief Financial Officer in April 2012. Prior to joining the Company, Ms. Winston served as Senior Vice President and Chief Financial Officer of Giant Eagle, Inc., a food retailer and food distributor, since 2008. She was President and Founder of WinsCo Financial, LLC, a financial solutions consulting firm, from 2007 to 2008 and served as Executive Vice President and Chief Financial Officer of Scholastic Corporation, a children's publishing and media company, from 2004 to 2007. Ms. Winston has also served as a Vice President, Treasurer, and then Controller of Visteon Corporation, an automotive parts supplier, and as a Vice President, Global Financial Operations, of Pfizer Inc., a global pharmaceutical company. She has also been a director of Dover Corporation, a diversified manufacturing company, since 2005 and is the chair of its Audit Committee, and a director of Plexus Corporation, an electronic manufacturing services company, since 2008 and is a member of its Audit Committee and its Nominating and Governance Committee.

Mr. Barry W. Sullivan was employed by the Company as Vice President - Store Operations in September 2002 and was promoted to Senior Vice President - Store Operations in May 2005 and to Executive Vice President - Store Operations in October 2007.

Mr. James C. Snyder, Jr., was employed by the Company as Senior Vice President - General Counsel and Secretary in April 2009. Prior to his employment by the Company, he was employed by The Home Depot, Inc., a chain of home improvement stores, from July 2001 to March 2009, where his last position was Vice President and Associate General Counsel for Legal and Risk Management.

Mr. Jason S. Reiser was employed by the Company as Senior Vice President- Merchandising form July 2013 to January 2014 and was promoted to Executive Vice President - Chief Merchandising Officer in January 2014.  Prior to his role at the Company, he was employed by Wal-Mart Stores, Inc. for 17 years in a variety of roles, including as Merchandising Vice President, Health & Family Care of Sam's Club from November 2010 to June 2013, as Vice President, Health & Wellness Operations and Compliance of Sam's Club from May 2010 to November 2010, and as Senior Category Director, at Wal-Mart from May 2009 to May 2010. 

Mr. Bryan E. Venberg was employed by the Company as Senior Vice President - Human Resources in February 2008. Prior to his employment by the Company, he was employed by ShopNBC, a multi-media retailer, from May 2004 to November 2007, where his last position was Senior Vice President - Operations, Customer Service and Human Resources.

All executive officers of the Company are elected annually by, and serve at the pleasure of, the Board of Directors until their successors are duly elected.

25




PART II
 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NYSE under the ticker symbol FDO.  At October 4, 2014, there were 4,061 holders of record of our common stock. The accompanying tables give the high and low sales prices of our common stock and the dividends declared per share for each quarter of fiscal 2014 and fiscal 2013. In fiscal 2014 and 2013, dividends were paid in each quarter.

On September 3, 2014, subsequent to the end of fiscal 2014, we announced our Board of Directors declared a regular quarterly cash dividend on the Company's common stock of $0.31 per share, payable October 15, 2014, to shareholders of record at the close of business on September 15, 2014. Under the Dollar Tree merger agreement, the combined company does not plan to pay a dividend to shareholders after the consummation of the merger.
 
Refer to Note 15 of the Consolidated Financial Statements included in this Report for additional information on equity securities.

Market Prices and Dividends
2014
 
High
 
Low
 
Dividends Declared
 
Dividends Paid
First Quarter
 
$
75.29

 
$
66.94

 
$
0.26

 
$
0.26

Second Quarter
 
70.01

 
59.67

 
0.26

 
0.26

Third Quarter
 
66.13

 
55.64

 
0.31

 
0.31

Fourth Quarter
 
80.20

 
58.21

 
0.31

 
0.31

 
 
 
 
 
 
 
 
 
2013
 
High
 
Low
 
Dividends Declared
 
Dividends Paid
First Quarter
 
$
70.17

 
$
61.26

 
$
0.21

 
$
0.21

Second Quarter
 
72.54

 
54.06

 
0.21

 
0.21

Third Quarter
 
65.82

 
57.50

 
0.26

 
0.26

Fourth Quarter
 
74.44

 
59.30

 
0.26

 
0.26


Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended August 30, 2014, by us, on our behalf or by any "affiliated purchaser" as defined by Rule 10b-18(a)(3) of the Exchange Act.  
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)
June (6/1/2014 - 7/5/2014)
 

 
$

 

 
3,740,937

July (7/6/2014 - 8/2/2014)
 

 

 

 
3,240,337

August (8/3/2014 - 8/30/2014)
 

 

 

 
3,078,787

Total
 

 
$

 

 
3,078,787

 
(1) 
On January 17, 2013, we announced that the Board of Directors authorized the purchase of up to an additional $300 million of the Company's outstanding common stock. As of August 30, 2014, the Company had $245.8 million remaining under the current share repurchase authorization.
(2) 
Remaining dollar amounts are converted to shares using the closing stock price as of the end of the fiscal month.


26



See Note 15 to the Consolidated Financial Statements included in this Report for more information regarding share repurchases.

Equity Compensation Plan Information

This information is included in Part III of this report under the caption "Equity Compensation Plan Information" and is incorporated herein by reference.

Stock Performance Graph

The following graph sets forth the yearly percentage change in the cumulative total shareholder return on our common stock during the five fiscal years ended August 30, 2014, compared with the cumulative total returns of the S&P 500 Index and the S&P General Merchandise Stores Index. The comparison assumes $100 was invested on August 29, 2009, in stock or on August 31, 2009, in index, including reinvestment of dividends. Indexes are calculated on a month-end basis.



27



ITEM 6. SELECTED FINANCIAL DATA
  
 
Years Ended
(in thousands, except per share, store,
and net sales per square foot data)
 
August 30,
2014
 
August 31,
2013*
 
August 25,
2012
 
August 27,
2011
 
August 28,
2010
Net sales
 
$
10,489,330

 
$
10,391,457

 
$
9,331,005

 
$
8,547,835

 
$
7,866,971

Cost of sales(1)
 
6,946,115

 
6,836,712

 
6,071,058

 
5,515,540

 
5,058,971

Cost of sales - restructuring(2)
 
11,930

 

 

 

 

Gross profit
 
3,531,285

 
3,554,745

 
3,259,947

 
3,032,295

 
2,808,000

Selling, general and administrative expenses
 
3,022,219

 
2,866,788

 
2,584,234

 
2,409,522

 
2,234,347

Restructuring(2)
 
78,180

 

 

 

 

Other Charges(3)
 
9,434

 

 
11,500

 

 

Operating profit
 
421,452

 
687,957

 
664,213

 
622,773

 
573,653

Income before income taxes
 
422,754

 
690,697

 
663,938

 
617,158

 
563,858

Income taxes
 
138,251

 
247,122

 
241,698

 
228,713

 
205,723

Net income
 
$
284,503

 
$
443,575

 
$
422,240

 
$
388,445

 
$
358,135

Diluted net income per common share
 
$
2.49

 
$
3.83

 
$
3.58

 
$
3.12

 
$
2.62

Dividends declared per common share
 
$
1.14

 
$
0.94

 
$
0.60

 
$
0.695

 
$
0.60

Cash dividends paid per common share
 
$
1.14

 
$
0.94

 
$
0.78

 
$
0.67

 
$
0.58

Cash dividends paid
 
$
130,087

 
$
108,334

 
$
91,390

 
$
83,439

 
$
78,913

Comparable store sales growth(4)
 
(2.1
)%
 
3.0
%
 
4.7
%
 
5.5
%
 
4.8
%
Ending selling square feet
 
58,112

 
56,846

 
53,207

 
49,996

 
48,225

Net sales per square foot(5)
 
$
180

 
$
189

 
$
181

 
$
174

 
$
165

Consumables sales
 
73.4
 %
 
72.4
%
 
69.0
%
 
66.5
%
 
65.1
%
Home products sales
 
9.6
 %
 
10.1
%
 
11.4
%
 
12.7
%
 
13.2
%
Apparel and accessories sales
 
7.3
 %
 
7.6
%
 
8.8
%
 
10.0
%
 
10.7
%
Seasonal and electronics sales
 
9.7
 %
 
9.9
%
 
10.8
%
 
10.8
%
 
11.0
%
Net cash provided by operating activities
 
$
469,162

 
$
471,973

 
$
369,371

 
$
528,064

 
$
591,539

Net cash used in investing activities
 
(199,984
)
 
(314,591
)
 
(198,311
)
 
(280,418
)
 
(306,948
)
Net cash used in financing activities
 
(270,337
)
 
(108,716
)
 
(220,132
)
 
(488,995
)
 
(340,727
)
Total capital expenditures
 
(436,288
)
 
(744,428
)
 
(603,313
)
 
(345,268
)
 
(212,435
)
Total proceeds from sale-leaseback
 
194,766

 
345,249

 
359,663

 

 

Total repurchases of common stock
 
(125,038
)
 
(74,954
)
 
(191,573
)
 
(670,466
)
 
(332,189
)
Total assets
 
3,857,295

 
3,709,861

 
3,373,065

 
2,996,205

 
2,968,145

Working capital
 
973,016

 
776,783

 
702,513

 
516,789

 
641,527

Long-term investment securities(6)
 

 
22,977

 
23,720

 
107,458

 
147,108

Long-term debt
 
500,426

 
516,475

 
532,520

 
548,570

 
250,000

Shareholders' equity
 
$
1,665,725

 
$
1,599,055

 
$
1,297,627

 
$
1,087,074

 
$
1,421,554

Stores opened
 
526

 
500

 
475

 
300

 
200

Stores closed
 
400

 
26

 
56

 
62

 
70

Number of stores—end of year
 
8,042

 
7,916

 
7,442

 
7,023

 
6,785

 
*
Fiscal 2013 contains 53 weeks. All other fiscal years presented include 52 weeks. The additional week in fiscal 2013 accounted for approximately $189 million in net sales and approximately $0.07 of diluted net income per common share.
(1)
Fiscal 2013 includes a $5.0 million favorable accounting adjustment within Cost of sales related to certain vendor allowances.
(2)
Fiscal 2014 includes charges related to store closures and workforce optimization initiatives. Charges relate primarily to $11.9 million of inventory write-downs included in Cost of sales - restructuring to sell through merchandise at closed stores, and $78.2 million of future lease obligations at closed stores, property and equipment impairments at closed stores, and termination benefits, included in Restructuring.
(3)
Fiscal 2014 includes $9.4 million in expenses related to the Company's merger agreement with Dollar Tree, Inc. Fiscal 2012 includes the impact of a litigation charge of $11.5 million recorded in the fourth quarter of fiscal 2012.
(4)
Comparable store sales growth describes the change in net sales in any period for stores 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. Renovated, relocated, or expanded stores 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 be different than similarly titled measures reported by other companies.
(5)
Net sales per square foot was calculated based on total sales for the preceding 12 months as of the ending date of the reporting period divided by the average selling square footage during the period, including the end of the fiscal year, the beginning of the fiscal year, and the end of each of our three interim fiscal quarters. Comparable store sales represent the change in sales attributable to stores open in both the current and prior period, whereas sales per square foot represents total net sales divided by the average total selling square footage. As a result, all stores are included in the sales per square foot calculation, including stores without a full year of sales.
(6)
As of August 30, 2014, a $4.8 million balance of investment securities was moved to short-term investment securities on the Consolidated Balance Sheet.

28




ITEM 7. 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 fiscal 2014, fiscal 2013, and fiscal 2012, and our expectations for fiscal 2015. You should read this discussion in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this Report. Our discussion contains forward-looking statements which are based upon our current expectations and which involve risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the "Cautionary Statement Regarding Forward-Looking Statements" in the General Information section of this Report and the "Risk Factors" listed in Part I—Item 1A of this Report.

Our fiscal year generally ends on the Saturday closest to August 31 of each year, which generally results in an extra week every six years. Fiscal 2014 was a 52-week year, fiscal 2013 was a 53-week year, and fiscal 2012 was a 52-week year. Fiscal 2015 will be a 52-week year.

Executive Overview

We operate a chain of more than 8,000 general merchandise retail discount stores in 46 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 classify the combination of Home Products, Apparel and Accessories, and Seasonal and Electronics as "Discretionary." We sell merchandise at prices that generally range from less than $1 to $10.

We believe during fiscal 2014, our customers continued to face increased financial pressures, including continued high unemployment rates, increased payroll taxes, and volatility in gasoline prices. In fiscal 2014, customers focused their spending on necessities, with sales in Consumables comprising 73.4% of our total sales. In addition, our industry remains highly competitive on the basis of store locations, convenience, price and quality of merchandise, in-stock consistency, merchandise assortment and presentation, and customer service.  In fiscal 2014, these trends continued to pressure our profitability.

As a result of these pressures, we initiated an in-depth business review to identify opportunities to strengthen our value proposition, increase operational efficiencies, and improve financial performance. In the second half of fiscal 2014, we implemented a series of strategic initiatives, including investing to permanently lower prices on nearly 1,000 basic items, closing 377 underperforming stores across the chain, and reducing expenses through workforce optimization. Although these internal strategic initiatives position us to deliver stronger returns, we continued to evaluate external strategic alternatives, which led us to enter into the Dollar Tree merger agreement, as discussed in the Business section above.

During fiscal 2014, as compared with fiscal 2013, our net sales increased 0.9% to $10.49 billion. Comparable store sales (stores open more than 13 months) for fiscal 2014 decreased 2.1%, as compared to fiscal 2013. Consistent with the National Retail Federation Calendar, fiscal 2014 included 52 weeks, as compared to 53 weeks in fiscal 2013. Excluding the additional week of sales in fiscal 2013, our net sales increased 2.8% in fiscal 2014, as compared to fiscal 2013. As a result of decreased comparable store sales and charges associated with our restructuring initiatives, our net income decreased to $284.5 million, and our diluted net income per common share decreased to $2.49.

During fiscal 2014, we remained focused on achieving our four corporate goals: deliver profitable sales growth; build customer loyalty and experience; develop diverse, high performing teams; and drive continuous improvement. We completed the following in fiscal 2014:

We completed internal restructuring initiatives including a reduction of corporate overhead, closing 377 underperforming stores, and lowering prices on nearly 1,000 basic items.
We opened 526 new stores and renovated, relocated or expanded 738 stores.
We converted two distribution centers to a pallet delivery system and began conversion of a third distribution center.
We added more than 700 private brand SKUs through a combination of introduction of new items and conversion of existing control brands to private brand.
We reduced store manager turnover by approximately 18%, as compared to fiscal 2013.
We deployed new technology aimed at reducing inventory shrinkage in approximately 65% of the chain.
We upgraded our point of sale system in more than 1,100 stores to improve the checkout experience.


29



Fiscal 2015 Outlook

On July 27, 2014, we entered into the Dollar Tree merger agreement. The following outlook only considers Family Dollar as a standalone company and excludes any outlook from the pending business combination.

In fiscal 2015, we plan to continue to execute and evaluate our initiatives designed to deliver profitable sales growth, build customer loyalty and experience, and drive continuous improvement.

During fiscal 2015, we expect to open approximately 375 new stores and close 40 stores, for a net store growth of 335. Additionally, we plan to renovate, relocate, or expand approximately 775 stores.

To deliver even more compelling value to our customers, we lowered prices on nearly 1,000 basic items during fiscal 2014. In fiscal 2015, we expect to sustain everyday low costs by proactively managing our product assortment and critically reviewing pricing in all product categories. We also plan to expand our program which allows customers to present a local competitor's printed ad in our stores, and we guarantee Family Dollar will match their price.

To increase relevancy with our customers and drive discretionary spend, we expect we will accelerate our rollout of beer and wine and expand our tobacco assortment. Additionally, reflecting trends in customer demand and the diversity of our store base, we will be launching an initiative to cluster assortments based on market dynamics, while creating a flexible supply chain and market-specific store formats to drive higher productivity and return on investment. 

In fiscal 2014, we expanded our private brand assortment. In fiscal 2015 we expect to continue penetration of private brands, including a refresh of certain private brands in Consumables to offer our customers more quality and value while broadening their appeal. We intend to drive greater awareness of our private brands program through right-sized marketing and improved visual merchandising support.

We have increased global sourcing and plan to continue to utilize global sourcing as it remains an opportunity to increase profitability. In fiscal 2015, we plan to focus on the quality and value of sourced products, and to continue to expand our supplier network in an effort to increase the level and amount of direct imports.

Non-GAAP Measures

In our analysis of the results of operations, we utilized non-GAAP financial measures for operating profit, net income and diluted net income per common share. We believe these non-GAAP financial measures better enable management and investors to understand and analyze our performance by providing meaningful information relevant to events that impact the comparability of underlying business results from period to period. In the measures presented, we have excluded the restructuring charges and merger related fees as presented in Note 2 to the Consolidated Financial Statements because the exclusion of such amounts facilitates the comparison of the Company's financial results to its historical operating results. However, these supplemental measures should be considered in addition to, and not as a substitute for or superior to, the related measures determined in accordance with GAAP.

The following table reconciles operating profit, income before taxes, net income, and diluted net income per common share (GAAP financial measures) for the periods presented to adjusted operating profit, adjusted net income and adjusted diluted net income per common share (non-GAAP financial measures) for the periods presented.

30



  
 
52 Weeks Ended
 
53 Weeks Ended
 
52 Weeks Ended
(in thousands, except per share amounts)
 
August 30, 2014
 
August 31, 2013
 
August 25, 2012
Operating profit
 
$
421,452

 
$
687,957

 
$
664,213

Cost of sales - restructuring
 
11,930

 

 

Restructuring
 
78,180

 

 

Merger fees
 
9,434

 

 

Accounting adjustment - vendor allowances
 

 
(4,953
)
 

Litigation charge
 

 

 
11,500

Adjusted operating profit
 
$
520,996

 
$
683,004

 
$
675,713

 
 
 
 
 
 
 
Income before taxes
 
$
422,754

 
$
690,697

 
$
663,938

Cost of sales - restructuring
 
11,930

 

 

Restructuring
 
78,180

 

 

Merger fees
 
9,434

 

 

Accounting adjustment - vendor allowances
 

 
(4,953
)
 

Litigation charge
 

 

 
11,500

Adjusted income before taxes
 
$
522,298

 
$
685,744

 
$
675,438

 
 
 
 
 
 
 
Net income
 
$
284,503

 
$
443,575

 
$
422,240

After-tax impact of Cost of sales - restructuring
 
7,762

 

 

After-tax impact of Restructuring
 
50,864

 

 

After-tax impact of Merger fees
 
6,138

 

 

After-tax impact of Accounting adjustment - vendor allowances
 

 
(3,175
)
 

After-tax impact of Litigation charge
 

 

 
7,140

Adjusted net income
 
$
349,267

 
$
440,400

 
$
429,380

 
 
 
 
 
 
 
Diluted net income per common share
 
$
2.49

 
$
3.83

 
$
3.58

Per share impact of Cost of sales - restructuring
 
0.07

 

 

Per share impact of Restructuring
 
0.44

 

 

Per share impact of Merger fees
 
0.05

 

 

Per share impact of Accounting adjustment - vendor allowances
 

 
(0.03
)
 

Per share impact of Litigation charge
 

 

 
0.06

Adjusted diluted net income per common share
 
$
3.05

 
$
3.80

 
$
3.64


Results of Operations

Our results of operations for fiscal 2014, fiscal 2013 and fiscal 2012 are highlighted in the table below and discussed in the following paragraphs:
 

31



  
 
52 Weeks Ended
 
53 Weeks Ended
 
52 Weeks Ended
(in thousands)
 
August 30, 2014
% of Net Sales*
 
August 31, 2013
% of Net Sales*
 
August 25, 2012
% of Net Sales*
Net sales
 
$
10,489,330



 
$
10,391,457


 
$
9,331,005


Cost and expenses:
 


 


 


Cost of sales**
 
6,946,115

66.2
%
 
6,836,712

65.8
%
 
6,071,058

65.1
%
Cost of sales - restructuring
 
11,930

0.1
%
 

%
 

%
Selling, general and administrative
 
3,022,219

28.8
%
 
2,866,788

27.6
%
 
2,584,234

27.7
%
Restructuring
 
78,180

0.7
%
 

%
 

%
Merger fees
 
9,434

0.1
%
 

%
 

%
Litigation charge
 

%
 

%
 
11,500

0.1
%
Cost of sales and operating expenses
 
10,067,878

96.0
%
 
9,703,500

93.4
%
 
8,666,792

92.9
%
Operating profit
 
421,452

4.0
%
 
687,957

6.6
%
 
664,213

7.1
%
Investment income
 
190

%
 
422

%
 
927

%
Interest expense
 
30,038

0.3
%
 
25,888

0.2
%
 
25,090

0.3
%
Other Income
 
31,150

0.3
%
 
28,206

0.3
%
 
23,888

0.3
%
Income before income taxes
 
422,754

4.0
%
 
690,697

6.7
%
 
663,938

7.1
%
Income taxes
 
138,251

1.3
%
 
247,122

2.4
%
 
241,698

2.6
%
Net Income
 
$
284,503

2.7
%
 
$
443,575

4.3
%
 
$
422,240

4.5
%
*Percentages are rounded.
**Included in Cost of Sales for fiscal 2013 was a $5.0 million favorable accounting adjustment related to certain vendor allowances.

Comparison of Fiscal 2014 to Fiscal 2013

Net Sales

Net sales increased 0.9% in fiscal 2014, as compared to fiscal 2013, which was primarily due to sales from new stores opened as part of our store growth program, partially offset by a decrease in comparable store sales. Consistent with the National Retail Federation Calendar, fiscal 2013 included an extra week. The additional week accounted for approximately $189 million in net sales for fiscal 2013. Excluding the impact of the extra week of sales in fiscal 2013, net sales in fiscal 2014 increased 2.8%. The average number of stores in operation increased to 8,095 in fiscal 2014, from 7,680 fiscal 2013, or an increase of 5.4%.

Comparable store sales growth describes the change in net sales in any period for stores 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 open. Renovated, relocated, or expanded stores 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 be different than similarly titled measures reported by other companies.

Comparable store sales were strongest in the Consumables category, however all categories had negative comparable sales in fiscal 2014, as compared to fiscal 2013. There was a 2.1% decrease in total comparable store sales in fiscal 2014, as compared to fiscal 2013, as a result of a decrease in customer transactions in comparable stores, which was partially offset by an increase in average customer transaction values. During fiscal 2014, the number of customer transactions decreased approximately 2.6%, and the average customer transaction increased approximately 0.5%, as compared to fiscal 2013.
    
Cost of Sales

Cost of sales increased 1.6% in fiscal 2014, as compared to fiscal 2013. Cost of sales, as a percentage of net sales, was 66.2% in fiscal 2014 and 65.8% in fiscal 2013.  Cost of sales, as a percentage of net sales, was negatively impacted by the following:

A shift in sales mix to lower-margin consumable merchandise. An increase in lower-margin Consumables, as well as softness in sales of higher-margin Discretionary items, continued to pressure cost of sales as a percentage of net sales.
A decrease in markups on merchandise sales. As we remain committed to strengthening our value perception, we lowered prices on nearly 1,000 basic items during fiscal 2014.

32



An increase in markdowns. In a challenging macro-economic environment, we continued to use markdowns to drive revenue growth and manage inventory levels as we continued to refine our assortment of Consumables merchandise.
Vendor allowance adjustment in fiscal 2013. Included in Cost of sales for fiscal 2013 was a $5.0 million favorable accounting adjustment related to certain vendor allowances.

These unfavorable items were partially offset by the following:

Lower freight expense. The decrease in freight expense was impacted by our ongoing relationship with McLane, which resulted in less merchandise being handled through our own distribution network.
A decrease in inventory shrinkage. The decrease in inventory shrinkage resulted from technology introduced into stores and decreased store manager turnover.
    
Cost of Sales - Restructuring

In the second half of fiscal 2014, the Company closed 377 underperforming stores across the chain as part of a series of restructuring initiatives. Inventory write-downs of $11.9 million were included in Cost of Sales - Restructuring and were incurred to sell through merchandise at stores closed as part of the restructuring initiatives.

Selling, General and Administrative Expenses
    
Selling, general and administrative ("SG&A") expenses increased 5.4% in fiscal 2014, as compared to fiscal 2013. The increase in these expenses was primarily due to additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 28.8% in fiscal 2014, as compared to 27.6% in fiscal 2013. SG&A expenses, as a percentage of net sales, de-leveraged in the following categories as a result of the decrease in comparable store sales, as compared to the fiscal 2013:

Increased store occupancy costs (approximately 0.9% of net sales).
Increased store payroll costs (approximately 0.3% of net sales).

These unfavorable items were partially offset by the following:

Lower incentive compensation expense (approximately 0.2% of net sales). 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 fiscal 2014, as compared to fiscal 2013.
Decreased advertising costs (approximately 0.2% of net sales). We continued to focus on improving the efficiency and effectiveness of our advertising through changes in the timing, number of pages, and type of merchandise included in our promotional materials, which resulted in a decrease in overall advertising spending, as a percentage of net sales, in fiscal 2014, as compared to fiscal 2013.

Restructuring

In the second half of fiscal 2014, the Company implemented a series of restructuring initiatives, including closing 377 underperforming stores across the chain and optimized our workforce through a headcount reduction. The $78.2 million charge included in Restructuring consists primarily of future lease obligations and property and equipment impairments related to the store closures and termination benefits associated with the workforce optimization.
 
Merger Fees

On July 27, 2014, we entered into the Dollar Tree merger agreement, upon the terms and subject to the conditions of which a subsidiary of Dollar Tree will be merged with and into Family Dollar, with Family Dollar continuing as the surviving entity and a wholly-owned subsidiary of Dollar Tree. In executing the Dollar Tree merger agreement, the Company incurred $9.4 million of professional fees during fiscal 2014, consisting primarily of financial advisory and legal costs.

Investment Income, Interest Expense, and Other Income
    
The changes in investment income, interest expense and other income in fiscal 2014, as compared to fiscal 2013 were not material.

Income Taxes

33



    
The effective tax rate was 32.7% for fiscal 2014, as compared to 35.8% for fiscal 2013. The effective tax rate was lower primarily due to tax benefits associated with federal jobs tax credits, foreign tax benefits associated with global sourcing, and favorable changes in the reserves for uncertain tax positions.

Comparison of Fiscal 2013 to Fiscal 2012

Net Sales
    
Net sales increased 11.4% in fiscal 2013, as compared to fiscal 2012. Consistent with the National Retail Federation Calendar, fiscal 2013 included an extra week, which accounted for approximately $189 million in net sales, or approximately 2.0% of the net sales increase. Additionally, the net sales increase in fiscal 2013 reflects an increase in comparable store sales and new stores opened as part of our store growth program.

Comparable store sales increased 3.0% in the fiscal 2013, as compared to fiscal 2012, as a result of an increase in both customer transactions in comparable stores and average customer transaction values. During fiscal 2013, the number of customer transactions increased approximately 1.7%, and the average customer transaction increased approximately 1.3%, as compared to fiscal 2012. Sales during fiscal 2013, on a comparable store basis, were strongest in the Consumables category.
    
The average number of stores in operation during fiscal 2013 was 6.7% higher than the average number of stores in operation during fiscal 2012. We had 7,916 stores in operation at the end of fiscal 2013, as compared to 7,442 stores in operation at the end of fiscal 2012. As of August 31, 2013, we had, in the aggregate, approximately 56.8 million square feet of selling space, as compared to 53.2 million square feet as of August 25, 2012.

Cost of Sales
    
Cost of sales increased 12.6% in fiscal 2013, as compared to fiscal 2012. The increase was primarily due to additional sales volume.  Included in Cost of sales for fiscal 2013 was a $5.0 million favorable accounting adjustment related to certain vendor allowances. Cost of sales, as a percentage of net sales, was 65.8% in fiscal 2013, as compared to 65.1% in fiscal 2012.  Cost of sales, as a percentage of net sales, was negatively impacted by the following:

A shift in sales mix to lower-margin consumable merchandise. An increase in lower-margin Consumables, as well as softness in sales of Discretionary items, pressured cost of sales as a percentage of net sales.
An increase in inventory shrinkage. While our inventory levels were lower on a per store basis at the end of fiscal 2013, as compared to fiscal 2012, the average inventory balance in our stores was higher throughout fiscal 2013, as compared to fiscal 2012. Inventory shrinkage increased during fiscal 2013, as compared to fiscal 2012, due in part to increased average inventory levels throughout fiscal 2013.
An increase in markdowns. In a challenging macro-economic environment, we used markdowns to drive revenue growth as we refined our assortment of Consumables merchandise.

These unfavorable items were partially offset by the following:

An increase in markups on merchandise sales. We focused on improving our purchase markups through better price management, expanded our global sourcing efforts, and developed our private brand assortment, which resulted in higher gross profit margin.
A decrease in freight expense. The decrease in freight expense was impacted by our relationship with McLane, which began in September 2012 and resulted in less merchandise being handled through our own distribution network.

Selling, General and Administrative Expenses
    
SG&A expenses increased 10.9% in fiscal 2013, as compared to fiscal 2012. The increase in these expenses was due in part to additional sales volume and additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 27.6% in fiscal 2013, as compared to 27.7% in fiscal 2012. SG&A expenses, as a percentage of net sales, were leveraged as a result of the following, as compared to fiscal 2012:

Decreased non-store payroll costs, including incentive compensation expense (approximately 0.2% of net sales). 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 fiscal 2013, as compared to fiscal 2012.


34



This favorable item was partially offset by the following:

Increased store occupancy costs (approximately 0.2% of net sales). Rent expense increased as a percentage of net sales in fiscal 2013, as compared to fiscal 2012, primarily driven by the additional rental expense on the 532 stores sold pursuant to sale-leaseback transactions in the second half of fiscal 2012 and in fiscal 2013.

Litigation Charge
    
During the fourth quarter of fiscal 2012, we recorded an $11.5 million litigation charge associated with the preliminary settlement of a lawsuit in the state of New York. This lawsuit involved claims for overtime pay from New York store managers who worked in our stores.

Investment Income, Interest Expense, and Other Income
    
The changes in investment income, interest expense and other income in fiscal 2013, as compared to fiscal 2012 were not material.

Income Taxes
    
The effective tax rate was 35.8% for fiscal 2013, as compared to 36.4% for fiscal 2012. The decrease in the effective tax rate in fiscal 2013, as compared to fiscal 2012, was due primarily to a decrease in the reserve for state taxes and an increase in the benefit of federal tax credits, partially offset by an increase in the reserves for uncertain tax positions.

Liquidity and Capital Resources

General

We have consistently maintained a strong liquidity position. During fiscal 2014, our cash and cash equivalents decreased $1.2 million from the end of fiscal 2013, and our operating cash flows were $469.2 million. We believe our operating cash flows, proceeds from sale-leaseback transactions, 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 $900 million, less standby letters of credit needed for collateral for our insurance programs of $18.7 million as of August 30, 2014, to supplement operating cash flows. During fiscal 2014, to help supplement our operating cash flows and to support our growth initiatives, we had an average daily outstanding balance of $214.8 million on our unsecured revolving credit facilities. As of August 30, 2014, we had no short-term borrowings outstanding under these facilities. Working capital at the end of fiscal 2014 was $973.0 million, as compared to $776.8 million at the end of fiscal 2013. We believe operating cash flows and capacity under existing credit facilities will continue to provide sufficient liquidity for our ongoing operations and growth initiatives.

Restricted Cash and Investments

We have restricted a portion of cash and investments to serve as collateral for certain of our insurance obligations 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 August 30, 2014, the Company held $34.4 million in this restricted account, of which $31.4 million was included in Restricted Cash and Investments and $3.0 million was included in Other Assets in the Consolidated Balance Sheets. As of August 31, 2013, we held $55.5 million in this restricted account, of which $35.4 million was included in Restricted Cash and Investments and $20.1 million was included in Other Assets in the Consolidated Balance Sheets. The classification between current and non-current is based on the timing of expected payments of the secured insurance obligations. The decrease in restricted cash and investments, as compared to fiscal 2013, is attributable to a reduction in the required collateralization amount related to workers' compensation insurance claims.

Build-to-Suit and Sale-Leaseback Transactions

The Company uses build-to-suit and sale-leaseback transactions to construct and lease new stores. In a build-to-suit transaction, an unrelated third-party funds the new store construction and owns the property throughout and upon completion of construction. In a sale-leaseback transaction, the Company funds the new store construction and owns the property throughout and upon completion of construction. Upon completion of the stores' construction in build-to-suit transactions and concurrent with the sale of stores in sale-leaseback transactions, the Company enters into agreements to lease the properties over an initial

35



term of 15 years, with four, 5-year fixed renewal options. The Company evaluates 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 sale-leasebacks.

During fiscal 2014, the Company completed 356 build-to-suit transactions to support new store growth. Additionally, the Company completed sale-leaseback transactions under which it sold 159 stores to unrelated third-parties for net proceeds of approximately $194.8 million during fiscal 2014. Upon closing of the transactions, the Company realized a gain on the sale of the stores of $28.4 million, of which $1.1 million was recognized immediately and approximately $27.3 million was deferred and will amortize over the initial lease terms.

During fiscal 2013, the Company completed 230 build-to-suit transactions. Additionally, the Company completed sale-leaseback transactions under which it sold 256 stores and 29 parcels of land to unrelated third-parties for net proceeds of approximately $345.2 million. Upon closing of the transactions, the Company realized a gain on the sale of the stores of $84.7 million, of which approximately $2.4 million was recognized immediately and approximately $82.3 million was deferred and will amortize over the initial lease terms.

Credit Facilities
    
On November 13, 2013, the Company entered into a five-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $600 million. The credit facility matures on November 13, 2018, 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.

On November 13, 2013, the Company entered into a four-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $300 million. The credit facility matures on November 13, 2017, 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 revolving credit facilities provide the Company the capacity to borrow up to $900 million, less standby letters of credit needed for collateral for its insurance program of $18.7 million as of August 30, 2014. The prior unsecured revolving credit facilities provided the Company the capacity to borrow up to $700 million, less standby letters of credit needed for collateral for its insurance program of $18.8 million as of August 31, 2013.

The Company had no short-term borrowings outstanding under its unsecured revolving credit facilities as of August 30, 2014, or as of August 31, 2013. During fiscal 2014, the Company had no net borrowings and had an average daily outstanding balance of $214.8 million at a weighted-average interest rate of 1.4% under its unsecured revolving credit facilities. This compares to net repayments of $15.0 million and an average daily outstanding balance of $141.5 million at a weighted-average interest rate of 1.5% under the Company's unsecured revolving credit facilities during fiscal 2013.

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 August 30, 2014, the Company was in compliance with all such covenants.

Long-Term Debt

On January 28, 2011, the Company issued $300 million of 5.00% unsecured senior notes due February 1, 2021 (the "2021 Notes"), through a public offering. The Company's proceeds were approximately $298.5 million, net of an issuance discount of $1.5 million. In addition, the Company incurred issuance costs of approximately $3.3 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2021 Notes. Interest on the 2021 Notes is payable semiannually in arrears on February 1 and August 1 of each year, commencing on August 1, 2011. The 2021 Notes rank pari passu in right of payment with the Company's other unsecured senior indebtedness and will be senior in right of payment to any subordinated indebtedness. The Company may redeem the 2021 Notes in whole at any time or in part from time to time, at the option of the Company, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase the 2021 Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase.

On September 27, 2005, the Company obtained $250 million through a private placement of unsecured senior notes due September 27, 2015 (the "2015 Notes"), to a group of institutional accredited investors. The 2015 Notes were issued in two tranches at par and rank pari passu in right of payment with the Company's other unsecured senior indebtedness. The first

36



tranche has an aggregate principal amount of $169 million, is payable in a single installment on September 27, 2015, and bears interest at a rate of 5.41% per annum from the date of issuance. The second tranche has an aggregate principal amount of $81 million, matures on September 27, 2015, with amortization which commenced on September 27, 2011, and bears interest at a rate of 5.24% per annum from the date of issuance. The second tranche had a required principal payment of $16.2 million on September 27, 2011, and on each September 27 thereafter to and including September 27, 2015. The Company has made all required principal payments from September 2011 through September 2014. Interest on the 2015 Notes is payable semiannually in arrears on March 27 and September 27 of each year. The 2015 Notes contain certain restrictive financial covenants, which include a consolidated debt to consolidated total capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of August 30, 2014, the Company was in compliance with all such covenants.

Other Considerations

During the second half of fiscal 2014, we implemented strategic restructuring initiatives, which are expected to result in annualized operating profit benefit of $40 million to $45 million. The operating profit benefits began to be realized in fiscal 2014 and consisted primarily of reduced labor expense related to the headcount reductions and operating profit benefits associated with the closed stores. We expect to continue to incur cash outlays associated with the lease obligations pursuant to the contractual obligations of the leases. The lease obligations for the stores closed as part of the restructuring initiatives are included in the aggregate minimum annual rental under operating leases as discussed below.

In the fourth quarter of fiscal 2014, the Company entered into the Dollar Tree merger agreement, under which Dollar Tree will acquire Family Dollar in a cash and stock transaction. In conjunction with the Dollar Tree merger agreement, the Company incurred $9.4 million of professional fees during fiscal 2014, consisting primarily of financial advisory and legal costs. In fiscal 2015, the Company estimates it will incur between $45 million and $55 million of additional professional fees related to the pending merger.

Our inventory per store increased 8.0%, as compared to the end of fiscal 2013, primarily driven by the accelerated receipt of shipments and in-transit inventory for holiday merchandise. Total merchandise inventories at the end of fiscal 2014 increased 9.7%, as compared to fiscal 2013, due to both the accelerated receipt of shipments and the new stores opened during fiscal 2014.

Capital expenditures for fiscal 2014 were $436.3 million, as compared to $744.4 million in fiscal 2013. The decrease in capital expenditures was primarily related to a shift to build-to-suit transactions from sale-leaseback transactions in fiscal 2014, as compared to fiscal 2013, and the completion of construction for the eleventh distribution center in fiscal 2013. A summary of spending in fiscal 2014 and fiscal 2013 is as follows:
 
 
52 Weeks Ended
 
53 Weeks Ended
(in thousands)
 
August 30, 2014
 
August 31, 2013
New stores
 
$
148,947

 
$
385,191

Store renovations
 
141,400

 
149,120

Existing stores
 
72,858

 
52,972

Supply chain
 
31,006

 
76,002

Corporate and technology investments
 
42,077

 
81,143

Total capital expenditures
 
$
436,288

 
$
744,428


The total number of stores open at year-end increased 1.6% in fiscal 2014, as compared to fiscal 2013. However, the average store count increased 5.4% in fiscal 2014, as compared to fiscal 2013. The total number of stores at year-end increased 6.4% in fiscal 2013 and the average store count increased 6.7% in fiscal 2013, as compared to fiscal 2012. The average store count is calculated as rolling 13-month average using the ending store count per fiscal month. A summary of store information is as follows:


37



 
 
Fiscal 2014
 
Fiscal 2013
 
Fiscal 2012
Store count - beginning of year
 
7,916

 
7,442

 
7,023

New stores
 
526

 
500

 
475

Closed stores
 
400

 
26

 
56

Store count - end of year
 
8,042

 
7,916

 
7,442

 
 
 
 
 
 
 
Total relocated, expanded, and renovated stores
 
738

 
830

 
854

Total selling square feet (in thousands)
 
58,112

 
56,846

 
53,207

Average store count
 
8,095

 
7,680

 
7,197


During fiscal 2014, the Company purchased a total of 1.8 million shares of its common stock at a cost of $125.0 million. All shares were purchased pursuant to share repurchase authorizations approved by the Board of Directors. As of August 30, 2014, the Company had $245.8 million remaining under the current share repurchase authorization.

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 programs do 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 above, our wholly-owned captive insurance subsidiary maintains unrestricted balances in cash and cash equivalents and investment securities used in connection with our retained workers' compensation, general liability and automobile liability risks and are not designated for general corporate purposes. As of August 30, 2014, these cash and cash equivalents and investment securities balances were $4.0 million and $8.8 million, respectively.

Additionally, during fiscal 2014, we continued to develop our global sourcing teams in Europe and Asia, by enhancing our integration processes, and expanding our supplier network. As of August 30, 2014, we had $42.5 million of cash and cash equivalents in our foreign entities. We are not dependent on dividends from our foreign entities to fund our domestic operations. Unremitted earnings from foreign entities, which are considered to be invested indefinitely, would become subject to U.S. income taxes if they were remitted as dividends or were lent to a domestic entity.

Cash Flows From Operating Activities

During fiscal 2014, we had net cash provided by operating activities of $469.2 million, as compared to net cash provided by operating activities of $472.0 million in fiscal 2013. The decrease was due primarily to changes in merchandise inventories, prepayments and other current assets, and accounts payable and accrued liabilities, all in the ordinary course of business.

Additionally, in fiscal 2014, we incurred non-cash charges for restructuring activities, including an impairment on property and equipment, lease obligations on closed stores, and fees related to our pending merger with Dollar Tree. Refer to Note 2 for additional information on these activities.

During fiscal 2013, we had net cash provided by operating activities of $472.0 million, as compared to net cash provided by operating activities of $369.4 million in fiscal 2012. The increase was due primarily to a reduction in payments for merchandise inventories in fiscal 2013, as compared to fiscal 2012, which was offset partially by changes in prepayments and other current assets and income taxes, all in the ordinary course of business.

Cash Flows From Investing Activities
    
During fiscal 2014, we had net cash used in investing activities of $200.0 million, as compared to net cash used in investing activities of $314.6 million in fiscal 2013. The decrease was due primarily to a decline in capital expenditures and net proceeds from sale-leaseback transactions, which are included in the other considerations discussion above.

During fiscal 2013, we had net cash used in investing activities of $314.6 million, as compared to net cash used in investing activities of $198.3 million in fiscal 2012. The increase was due primarily to an increase in capital expenditures as a result of opening new stores under our sale-leaseback program, offset partially by net changes in restricted cash and investments and investment securities.

Cash Flows From Financing Activities

38



    
During fiscal 2014, we had net cash used in financing activities of $270.3 million, as compared to net cash used in financing activities $108.7 million during fiscal 2013. The increase in fiscal 2014 was due primarily to repurchases of common stock and payments of dividends in fiscal 2014, as compared to fiscal 2013.

During fiscal 2013, we had net cash used in financing activities of $108.7 million, as compared to net cash used in financing activities of $220.1 million during fiscal 2012. We purchased $75.0 million of our common stock during fiscal 2013 as compared to $191.6 million in fiscal 2012, a decrease in share repurchases of $116.6 million.

Contractual Obligations and Other Commercial Commitments

The following table shows our obligations and commitments to make future payments under contractual obligations at the end of fiscal 2014. Merchandise letters of credit represent obligations due within the next year to suppliers for merchandise the Company has agreed to purchase. Construction obligations relate primarily to amounts due to developers for new store construction projects, which have yet to be completed. Minimum royalty payments are related to an exclusive agreement to sell certain branded merchandise.
 
 
Contractual Obligation Payments Due During
(in thousands)
 
Total
 
Fiscal 2015
 
Fiscal 2016
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Thereafter
Long-term debt
 
$
501,400

 
$
16,200

 
$
185,200

 
$

 
$

 
$

 
$
300,000

Interest
 
112,912

 
25,416

 
19,996

 
15,000

 
15,000

 
15,000

 
22,500

Merchandise letters of credit
 
67,534

 
67,534

 

 

 

 

 

Operating leases
 
4,238,878

 
589,846

 
553,859

 
510,208

 
460,031

 
406,167

 
1,718,767

Construction obligations
 
41,456

 
41,456

 

 

 

 

 

Minimum royalties
 
700

 
700

 

 

 

 

 

Total
 
$
4,962,880

 
$
741,152

 
$
759,055

 
$
525,208

 
$
475,031

 
$
421,167

 
$
2,041,267

 
As of August 30, 2014, we had $24.7 million in liabilities related to our uncertain tax positions. At this time, we cannot reasonably determine the timing of any payments related to these liabilities, except for $4.8 million, which were classified as current liabilities and may become payable within the next 12 months. See Note 11 to the Consolidated Financial Statements included in this Report for more information on our tax liabilities.

The following table shows our other commercial commitments at the end of fiscal 2014.
(in thousands)
 
Total Amounts
Committed
Standby letters of credit
 
$
48,695

Surety bonds
 
49,256

Total
 
$
97,951


A substantial portion of the outstanding amount of standby letters of credit, which are primarily renewed on an annual basis, is used as surety for future premium and deductible payments to our workers' compensation and general liability insurance carrier. We accrue for these future payment liabilities as described in the "Critical Accounting Policies" section of this discussion.

We issue inventory purchase orders in the normal course of business, which we may choose to cancel. We do not consider purchase orders to be firm inventory commitments; therefore, they are excluded from the table above. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation.

Pending Merger Commitments

The Dollar Tree merger agreement contains provisions that in the event of termination of the Dollar Tree merger agreement, Family Dollar may be required to pay to Dollar Tree its out-of-pocket expenses, not to exceed $90 million, if the merger agreement is terminated by either Dollar Tree or Family Dollar because Family Dollar fails to obtain the required stockholder approval at the Family Dollar stockholders' meeting (as it may be adjourned or postponed). In addition, Family Dollar may be required to pay a termination fee of $305 million, less any payment paid in respect of Dollar Tree's out-of-pocket expenses,

39



under certain circumstances, including a change in the recommendation of the board of directors of Family Dollar or termination of the Dollar Tree merger agreement by Family Dollar to enter into an agreement for a "Company Superior Proposal" (as defined in the Dollar Tree merger agreement). As of August 30, 2014, no amount has been recorded in our Consolidated Financial Statements related to these provisions.

Off Balance Sheet Arrangements

The Company does not have any material off balance sheet arrangements other than the operating leases included in the "Contractual Obligations and Other Commercial Commitments" section above. Our operating lease obligations are primarily related to payments due under noncancelable store leases.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The ASU is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company will adopt ASU 2014-09 during the first quarter of fiscal 2018. The Company is still assessing the impact of this ASU on the Consolidated Financial Statements.

In September 2013, the Internal Revenue Service issued updated tax regulations for the Deduction and Capitalization of Expenditures Related to Tangible Property. The regulations can be adopted early; however, the mandatory effective date for the Company is the first quarter of fiscal 2015. These regulations provide additional guidance related to the capitalization and expensing of fixed assets, repairs, and other expenditure types related to the updated tax regulations. Based upon the Company's analysis, the regulations are not expected to have a material impact on the Company's Consolidated Financial Statements.

In July 2013, the FASB issued Accounting Standards Update 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  The Company will adopt ASU 2013-11 during the first quarter of fiscal 2015, which is not expected to have a material impact on the Company's Consolidated Financial Statements.

In February 2013, the FASB issued Accounting Standards Update 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 fiscal years, and interim periods within those years, beginning after December 15, 2012.  The ASU was effective for the Company beginning in the first quarter of fiscal 2014 and did not have a material impact on the Company's 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.

We believe the following accounting principles are critical because they involve significant judgments, assumptions and estimates used in the preparation of our Consolidated Financial Statements.

Merchandise Inventories:

Our inventories are valued using the retail method, based on retail prices less markup percentages, which approximates the lower of first-in, first-out (FIFO) cost or market. We record adjustments to inventory through cost of sales when retail price reductions, or markdowns, are taken against on-hand inventory. In addition, we make estimates and judgments regarding, among other things, initial markups, markdowns, future demand for specific product categories and market conditions, all of

40



which can significantly impact inventory valuation. These estimates and judgments are based on the application of a consistent methodology each period. While we believe we have sufficient current and historical knowledge to record reasonable estimates for these components, if actual demand or market conditions are different than our projections, it is possible actual results could differ from recorded estimates. This risk is generally higher for seasonal merchandise than for non-seasonal merchandise. We estimate inventory losses for damaged, lost or stolen inventory (inventory shrinkage) for the period from the most recent physical inventory to the financial statement date. The accrual for estimated inventory shrinkage was $79.5 million as of the end of fiscal 2014 and $77.5 million as of the end of fiscal 2013. The accrual for estimated inventory shrinkage is based on the trailing twelve-month actual inventory shrinkage rate and can fluctuate from period to period based on the timing of the physical inventory counts. Stores receive a physical inventory at least annually. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2014. As a result of the strategic initiative to close 377 underperforming stores during the second half of fiscal 2014, an additional $11.9 million of markdowns were incurred to sell through inventory at these stores. Additionally, an adjustment to shrink expense was made to Cost of sales for any inventory balance remaining on the books and records after the stores were closed. Refer to Note 2 to the Consolidated Financial Statements included in this Report for more information on restructuring activities.

Property and Equipment:

We state property and equipment at cost. We calculate depreciation for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets. For leasehold improvements, this depreciation is over the shorter of the term of the related lease (generally between five and fifteen years), including reasonably assured renewal options, or the asset's useful economic life. The valuation and classification of these assets and the assignment of useful depreciable lives involves significant judgments and the use of estimates. 

The increase in gross property and equipment, before depreciation, is not commensurate with capital expenditures as a result of the impairment recorded for 377 underperforming stores closed as part of the Company's strategic initiatives in fiscal 2014 and as a result of the significant amount of assets sold during the year under sale-leaseback transactions. We generally do not assign salvage value to property and equipment. We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of the strategic initiative to close underperforming stores during the second half of fiscal 2014, an impairment of $19.9 million on property and equipment was recorded in fiscal 2014. Refer to Note 2 to the Consolidated Financial Statements included in this Report for more information on restructuring activities. Refer to Notes 1 and 6 to the Consolidated Financial Statements included in this Report for more information on property and equipment.

Insurance Liabilities:

We are primarily self-insured for health care, property loss, workers' compensation, general liability, and auto liability costs. These costs are significant primarily due to the large number of retail locations and employees. Our self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. We review current and historical claims data in developing our estimates. We also use information provided by outside actuaries with respect to medical, workers' compensation, general liability, and auto liability claims. The insurance liabilities we record are mainly influenced by changes in payroll expense, sales, number of vehicles, and the frequency and severity of claims. The estimates of more recent claims are more volatile and more likely to change than older claims. If the underlying facts and circumstances of the claims change or if the historical trend is not indicative of future trends, then we may be required to record additional expense or a reduction in expense, which could be material to our reported financial condition and results of operations.

We record our liabilities for workers' compensation, general liability and auto liability costs on a gross basis, and record a separate insurance asset for amounts recoverable under stop-loss insurance policies on the Consolidated Balance Sheets. In addition, our gross liabilities and the related insurance asset are separated into current and non-current amounts on the Consolidated Balance Sheets.

Our total liabilities for workers' compensation, general liability and auto liability costs were $224.9 million ($52.6 million current and $172.3 million non-current) as of the end of fiscal 2014 and $232.1 million ($52.2 million current and $179.9 million non-current) as of the end of fiscal 2013. The current portion of the liabilities is included in Accrued Liabilities on the Consolidated Balance Sheets, and the non-current portion is included in Other Liabilities. The insurance assets related to these amounts totaled $29.7 million ($2.1 million current and $27.6 million non-current) as of the end of fiscal 2014 and $31.7 million ($2.5 million current and $29.2 million non-current) as of the end of fiscal 2013. The current portion of the assets is included in Prepayments and other current assets on the Consolidated Balance Sheets, and the non-current portion is included in Other Assets. There were no other material estimates for insurance liabilities during fiscal 2014 or fiscal 2013. Our insurance

41



expense during fiscal 2014, fiscal 2013 and fiscal 2012 was impacted by changes in our liabilities for workers' compensation, general liability and auto liability costs.

Contingent Income Tax Liabilities:

We are subject to routine income tax audits in the normal course of business, and we record contingent income tax liabilities related to our uncertain tax positions. Our liabilities related to uncertain tax positions require an assessment of the probability of the income-tax-related exposures and settlements and are influenced by our historical audit experiences with various taxing authorities, as well as by current income tax trends. If circumstances change, we may be required to record adjustments that could be material to our reported financial condition and results of operations. Our liabilities related to uncertain tax positions were $24.7 million as of the end of fiscal 2014 and $30.2 million as of the end of fiscal 2013. There were no material changes in the estimates or assumptions used to determine contingent income tax liabilities during fiscal 2014. Refer to Note 11 to the Consolidated Financial Statements included in this Report for more information on our contingent income tax liabilities.

Contingent Legal Liabilities:

We are involved in numerous legal proceedings and claims. Our accruals, if any, related to these proceedings and claims are based on a determination of whether or not the loss is both probable and reasonably estimable. We review outstanding claims and proceedings with external counsel to assess probability and estimates of loss. We re-evaluate the claims and proceedings each quarter or as new and significant information becomes available, and we adjust or establish accruals, if necessary. If circumstances change, we may be required to record adjustments that could be material to our Consolidated Financial Statements. Our total legal liabilities were not material as of the end of fiscal 2014 or fiscal 2013. There were no material changes in the estimates or assumptions used to determine contingent legal liabilities during fiscal 2014. See Note 13 to the Consolidated Financial Statements included in this Report for more information on our contingent legal liabilities.

Liabilities for Closed Stores:

From time to time, we vacate stores prior to the expiration of the related lease. For vacated locations with remaining lease commitments, we record an expense for the present value of our future lease payments and related costs, including real estate taxes, insurance, and common area maintenance, from the date of closure through the end of the remaining lease terms, net of expected future sublease rental income. Our estimate of future cash flows is based on historical experience; our analysis of the specific real estate market, including input from independent real estate disposition experts; and economic conditions that can be difficult to predict. Cash flows are discounted using our incremental borrowing interest rates that coincide with the remaining lease terms. As of August 30, 2014, we recorded a liability of $43.7 million related to the strategic initiative to close 377 underperforming stores during the second half of fiscal 2014. Of this liability, $13.3 million was included in Accrued liabilities and $30.4 million was included in Other liabilities in the Consolidated Balance Sheet. Refer to Note 2 to the Consolidated Financial Statements included in this Report for more information on restructuring activities.

Stock-based Compensation Expense:

We measure stock-based compensation expense based on the estimated fair value of the award on the grant date. The determination of the fair value of our employee stock options on the grant date is calculated using a Black-Scholes option-pricing model and is affected by our stock price, as well as by assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. We also grant performance share rights and adjust compensation expense each quarter based on the ultimate number of shares expected to be issued, which is dependent upon the Company's performance relative to a peer group. If factors change and we employ different assumptions to measure stock-based compensation in future periods, the compensation expense recorded may differ significantly from the amount recorded in the current period. Our results for fiscal 2014, fiscal 2013 and fiscal 2012 include stock-based compensation expense of $15.4 million, $16.3 million, and $15.9 million, respectively. There were no material changes in the estimates or assumptions used to determine stock-based compensation during fiscal 2014. See Note 14 to the Consolidated Financial Statements included in this Report for more information on stock-based compensation.

ITEM 7A. 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. We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average daily borrowings under our credit facility. As of August 30,

42



2014, the analysis indicated such a movement would not have a material impact on our financial position, results of operations or cash flows. During fiscal 2014 and fiscal 2013 we incurred an immaterial amount of interest expense related to our credit facilities. Refer to Note 7 to the Consolidated Financial Statements included in this Report for more information on our credit facilities.



43



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
 

 
Page No.


44




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Family Dollar Stores, Inc., and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Family Dollar Stores, Inc. and its subsidiaries at August 30, 2014 and August 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended August 30, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 30, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing in Item 9A in this Form 10-K. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
October 29, 2014


45



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except per share and share amounts)
 
August 30, 2014
 
August 31, 2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
139,840

 
$
140,999

Short-term investment securities
 
8,800

 
4,000

Restricted cash and investments
 
31,380

 
35,443

Merchandise inventories
 
1,609,932

 
1,467,016

Deferred income taxes
 
65,856

 
34,510

Income tax refund receivable
 
64,458

 
13,485

Prepayments and other current assets (Note 5)
 
181,780

 
161,552

Total current assets
 
2,102,046

 
1,857,005

Property and equipment, net (Note 6)
 
1,688,213

 
1,732,544

Investment securities
 

 
22,977

Other assets
 
67,036

 
97,335

Total assets
 
$
3,857,295

 
$
3,709,861

Liabilities and Shareholders' Equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term borrowings (Note 7)
 
$

 
$

Current portion of long-term debt (Note 7)
 
16,200

 
16,200

Accounts payable
 
773,021

 
723,200

Accrued liabilities (Note 9)
 
335,054

 
335,854

Income taxes
 
4,755

 
4,968

Total current liabilities
 
1,129,030

 
1,080,222

Long-term debt (Note 7)
 
484,226

 
500,275

Other liabilities (Note 10)
 
316,382

 
289,194

Deferred gain (Note 8)
 
227,080

 
218,088

Deferred income taxes
 
34,852

 
23,027

Commitments and contingencies (Note 13)
 

 

Shareholders' equity (Note 15):
 
 
 
 
Preferred stock, $1 par; authorized 500,000 shares; no shares issued and outstanding
 

 

Common stock, $0.10 par; authorized 600,000,000 shares; issued 120,749,980 shares at August 30, 2014, and 120,091,158 shares at August 31, 2013, and outstanding 113,986,257 shares at August 30, 2014, and 115,092,113 shares at August 31, 2013
 
12,077

 
12,009

Capital in excess of par
 
333,579

 
299,865

Retained earnings
 
1,724,041

 
1,569,625

Accumulated other comprehensive loss
 
(489
)
 
(2,195
)
Common stock held in treasury, at cost (6,763,723 shares at August 30, 2014, and 4,999,045 shares at August 31, 2013)
 
(403,483
)
 
(280,249
)
Total shareholders' equity
 
1,665,725

 
1,599,055

Total liabilities and shareholders' equity
 
$
3,857,295

 
$
3,709,861

The accompanying notes are an integral part of the consolidated financial statements.

46



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
 
52 Weeks Ended

53 Weeks Ended

52 Weeks Ended
(in thousands, except per share amounts)
 
August 30, 2014
 
August 31, 2013
 
August 25, 2012
Net sales
 
$
10,489,330

 
$
10,391,457

 
$
9,331,005

Cost and expenses:
 

 

 

Cost of sales
 
6,946,115

 
6,836,712

 
6,071,058

Cost of sales - restructuring
 
11,930





Selling, general and administrative
 
3,022,219

 
2,866,788

 
2,584,234

Restructuring
 
78,180





Merger fees
 
9,434

 

 

Litigation charge
 

 

 
11,500

Cost of sales and operating expenses
 
10,067,878

 
9,703,500

 
8,666,792

Operating profit
 
421,452


687,957


664,213

Investment income
 
190

 
422

 
927

Interest expense
 
30,038

 
25,888

 
25,090

Other income
 
31,150

 
28,206

 
23,888

Income before income taxes
 
422,754


690,697


663,938

Income taxes
 
138,251

 
247,122

 
241,698

Net income
 
$
284,503


$
443,575


$
422,240

Net income per common share—basic
 
$
2.49

 
$
3.85

 
$
3.61

Weighted average shares—basic
 
114,035

 
115,252

 
117,097

Net income per common share—diluted
 
$
2.49


$
3.83


$
3.58

Weighted average shares—diluted
 
114,421

 
115,805

 
118,058

The accompanying notes are an integral part of the consolidated financial statements.

47



FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
52 Weeks Ended
 
53 Weeks Ended
 
52 Weeks Ended
(in thousands)
 
August 30, 2014
 
August 31, 2013
 
August 25, 2012
Net income
 
$
284,503

 
$
443,575

 
$
422,240

Other comprehensive income:
 
 
 
 
 
 
Unrealized net gains/(losses) on investment securities (net of taxes)
 
1,679

 
(413
)
 
4,527

Other
 
27

 
59

 
35

Other comprehensive income/(loss)
 
$
1,706

 
$
(354
)
 
$
4,562

Comprehensive income
 
$