family dollar stores Second Quarter 10Q2007

FORM 10−QFAMILY DOLLAR STORES INC − FDO

Filed: April 12, 2007 (period: March 03, 2007)

Quarterly report which provides a continuing view of a company's financial position

Table of ContentsPART I

FINANCIAL INFORMATIONItem 1. Consolidated Condensed Financial StatementsItem 2. Management s Discussion and Analysis of Financial Condition and Results of

OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and Procedures

PART II

− OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX−10.4 (EX−10.4)

EX−31.1 (EX−31.1)

EX−31.2 (EX−31.2)

EX−32.1 (EX−32.1)

EX−32.2 (EX−32.2)

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10−Q(Mark One)

⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended March 3, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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 (I.R.S. Employerincorporation or organization) Identification No.)

P. O. Box 1017, 10401 Monroe RoadCharlotte, North Carolina 28201−1017

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (704) 847−6961

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange 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 ⌧ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non−accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b−2 of the Exchange Act. (Check one):Large Accelerated Filer ⌧ Accelerated Filer o Non−Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b−2 of the Exchange Act).Yes o No ⌧

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class Outstanding at March 30, 2007

Common Stock, $0.10 par value 150,807,820 shares

Source: FAMILY DOLLAR STORES, 10−Q, April 12, 2007

FAMILY DOLLAR STORES, INC. AND SUBSIDIARIES

INDEX

Part I − Financial Information

Item 1 − Consolidated Condensed Financial Statements (unaudited):

Consolidated Condensed Balance Sheets − March 3, 2007 and August 26, 2006

Consolidated Condensed Statements of Income − Quarter Ended March 3, 2007 and February 25, 2006

Consolidated Condensed Statements of Income − First Half Ended March 3, 2007 and February 25, 2006

Consolidated Condensed Statements of Cash Flows − First Half Ended March 3, 2007 and February 25,2006

Notes to Consolidated Condensed Financial Statements

Item 2 − Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 − Quantitative and Qualitative Disclosures About Market Risk

Item 4 − Controls and Procedures

Part II − Other Information and Signatures

Item 1 − Legal Proceedings

Item 1A − Risk Factors

Item 2 − Unregistered Sales of Equity Securities and Use of Proceeds

Item 5 − Other Information

Item 6 − Exhibits

Signatures

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PART I – FINANCIAL INFORMATION

Item 1. Consolidated Condensed Financial Statements

FAMILY DOLLAR STORES, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except per share and share amounts) March 3, 2007 August 26, 2006

AssetsCurrent assets:

Cash and cash equivalents (Note 2) $ 83,715 $ 79,727Investment securities (Note 2) 331,853 136,505Merchandise inventories 1,001,373 1,037,859Deferred income taxes 145,419 133,468Income tax refund receivable — 2,397Prepayments and other current assets 55,733 28,892

Total current assets 1,618,093 1,418,848

Property and equipment, net 1,055,317 1,077,608Other assets 24,785 26,573

$ 2,698,195 $ 2,523,029

Liabilities and Shareholders’ EquityCurrent liabilities:

Accounts payable $ 546,441 $ 556,531Accrued liabilities 451,468 429,580Income taxes payable 36,268 —

Total current liabilities 1,034,177 986,111

Long−term debt (Note 4) 250,000 250,000Deferred income taxes 74,040 78,525Commitments and contingencies

Shareholders’ equity: (Notes 5 and 6)Preferred stock, $1 par; authorized and unissued 500,000 sharesCommon stock, $.10 par; authorized 600,000,000 shares; issued 179,156,747 shares at March 3,

2007, and 178,559,411 shares at August 26, 2006; and outstanding 150,807,820 shares atMarch 3, 2007, and 150,210,484 shares at August 26, 2006 17,916 17,856

Capital in excess of par 160,848 140,829Retained earnings 1,657,872 1,546,366

1,836,636 1,705,051Less: common stock held in treasury, at cost (28,348,927 shares both at March 3, 2007, and

August 26, 2006) 496,658 496,658Total shareholders’ equity 1,339,978 1,208,393

$ 2,698,195 $ 2,523,029

See notes to the consolidated condensed financial statements.

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FAMILY DOLLAR STORES, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

Quarter Ended(in thousands, except per share amounts) March 3, 2007 February 25, 2006

Net sales $ 1,947,380 $ 1,735,683

Cost and expenses:Cost of sales 1,294,870 1,165,194Selling, general and administrative 509,204 438,177Litigation charge — 45,000

Cost of sales and operating expenses 1,804,074 1,648,371

Operating profit 143,306 87,312

Interest income 3,508 2,198

Interest expense (Note 4) 4,667 2,956

Income before income taxes 142,147 86,554

Income taxes 51,604 32,025

Net income $ 90,543 $ 54,529

Net income per common share – basic (Note 7) $ 0.60 $ 0.35

Average shares – basic (Note 7) 150,656 155,293

Net income per common share – diluted (Note 7) $ 0.60 $ 0.35

Average shares – diluted (Note 7) 150,925 156,755

Dividends declared per common share $ 0.115 $ 0.105


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FAMILY DOLLAR STORES, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

First Half Ended(in thousands, except per share amounts) March 3, 2007 February 25, 2006

Net sales $ 3,547,644 $ 3,247,140

Cost and expenses:Cost of sales 2,342,252 2,168,448Selling, general and administrative 970,959 863,468Litigation charge — 45,000

Cost of sales and operating expenses 3,313,211 3,076,916

Operating profit 234,433 170,224

Interest income 4,955 3,049

Interest expense (Note 4) 10,173 5,149

Income before income taxes 229,215 168,124

Income taxes 84,548 62,206

Net income $ 144,667 $ 105,918

Net income per common share – basic (Note 7) $ 0.96 $ 0.67

Average shares – basic (Note 7) 150,562 157,311

Net income per common share – diluted (Note 7) $ 0.96 $ 0.67

Average shares – diluted (Note 7) 151,185 158,772

Dividends declared per common share $ 0.22 $ 0.20


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FAMILY DOLLAR STORES, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

First Half Ended(in thousands) March 3, 2007 February 25, 2006

Cash flows from operating activities:Net income $ 144,667 $ 105,918Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 71,299 64,983Deferred income taxes (16,436) (35,255)Stock−based compensation 4,832 3,412Loss on disposition of property and equipment 1,736 3,350Changes in operating assets and liabilities:

Merchandise inventories 36,486 74,280Income tax refund receivable 2,397 —Prepayments and other current assets (26,841) (27,170)Other assets 1,788 930Accounts payable and accrued liabilities 4,754 68,998Income taxes payable 36,268 22,532

260,950 281,978

Cash flows from investing activities:Purchases of investment securities (709,727) (248,805)Sales of investment securities 514,379 52,700Capital expenditures (50,942) (97,799)Proceeds from dispositions of property and equipment 198 507

(246,092) (293,397)

Cash flows from financing activities:Issuance of long−term debt — 250,000Payment of debt issuance costs — (958)Repurchases of common stock — (201,398)Changes in cash overdrafts 5,478 (11,029)Proceeds from employee stock options 14,597 1,220Excess tax benefits from stock−based compensation 649 41Payment of dividends (31,594) (30,450)

(10,870) 7,426

Net change in cash and cash equivalents 3,988 (3,993)Cash and cash equivalents at beginning of period 79,727 105,175Cash and cash equivalents at end of period $ 83,715 $ 101,182


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FAMILY DOLLAR STORES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS1. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments

(consisting of only normal recurring accruals unless otherwise stated) necessary to present fairly the Company’s financial positionas of March 3, 2007; the results of operations for the second quarter and first half ended March 3, 2007 (“second quarter and firsthalf of fiscal 2007”), and February 25, 2006 (“second quarter and first half of fiscal 2006”); and the cash flows for the first half offiscal 2007 and first half of fiscal 2006. For further information, refer to the consolidated financial statements and footnotesincluded in the Company’s Annual Report on Form 10−K for the fiscal year ended August 26, 2006 (“fiscal 2006”).

The results of operations for the second quarter and first half of fiscal 2007 are not necessarily indicative of the results to beexpected for the full year.

Certain reclassifications of the amounts for the second quarter and first half of fiscal 2006 have been made to conform to thepresentation for the second quarter and first half of fiscal 2007.

2. The Company considers all highly liquid investments with an original maturity of three months or less to be “cash equivalents.” The carrying amount of the Company’s cash equivalents approximates fair value due to the short maturities of these investmentsand consists primarily of money−market funds and other overnight investments. The Company maintains cash deposits withmajor banks, which from time to time may exceed federally insured limits. The Company periodically assesses the financialcondition of the institutions and believes that the risk of any loss is minimal.

The items classified as investment securities are principally auction rate securities and variable rate demand notes. The Companyclassifies all investment securities as available−for−sale. Securities accounted for as available−for−sale are required to bereported at fair value with unrealized gains and losses, net of taxes, excluded from net income and shown separately as acomponent of accumulated other comprehensive income within shareholders’ equity. The securities that the Company hasclassified as available−for−sale generally trade at par and as a result typically do not have any realized or unrealized gains orlosses.

3. The preparation of the Company’s Consolidated Condensed Financial Statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to make estimates and assumptions. These estimatesand assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dateof the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results coulddiffer from these estimates.

4. On December 19, 2006, the Company entered into separate agreements in connection with its unsecured Senior Notes (the“Notes”) and its unsecured revolving credit facility. The agreements extended the delivery date for the fiscal 2006 auditedfinancial statements, the unaudited financial statements for the first quarter of fiscal 2007 and the corresponding compliancecertificates to March 31, 2007, and waived any Defaults or Events of Default that would have occurred due to the failure of theCompany to deliver such information in connection with the Notes and credit facility. As discussed in Note 5 below, theCompany formed a Special Committee of the Board of Directors to investigate the Company’s stock option granting practices. As a result, the Company was unable to file its Annual Report on Form 10−K for fiscal 2006 and its Quarterly Report on Form10−Q for the first quarter of fiscal 2007 by the required deadlines. During March 2007, the Company delivered the appropriatefinancial statements and compliance certificates and is now in compliance with all covenants under both the Notes and creditfacility. As of the end of the first half of fiscal 2007, the Company had outstanding long−term debt of $250.0 million related tothe Notes. The Company had no borrowings against its credit facility during the first half of fiscal 2007.

5. The Company accounts for its stock−based compensation plans in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 123 (revised 2004) “Share−Based Payment” (“SFAS 123R”). Under SFAS 123R, all stock−based compensationcost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the incomestatement over the requisite service period. The Company currently recognizes stock−based compensation in connection with itsstock option and performance share right awards.

During the second quarter and first half of fiscal 2007, the Company recognized stock−based compensation expense (related tostock options and performance share rights) of $2.8 million and $5.5 million, respectively. During the second quarter and firsthalf of fiscal 2006, the Company recognized stock−based compensation expense (related to stock options and performance sharerights) of $1.9 million and $3.4 million, respectively. These amounts were included within selling, general, and administrativeexpenses on the Consolidated Condensed Statements of Income.

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Stock Options

The Company’s stock option plans provide for grants of stock options to key employees at prices not less than the fair marketvalue of the Company’s common stock on the grant date. The Company’s practice for a number of years has been to make asingle annual grant to all employees participating in the stock option program and to generally make other grants only inconnection with employment or promotions. Options expire five years from the grant date and are exercisable to the extent of40% after the second anniversary of the grant and an additional 30% at each of the following two anniversary dates on acumulative basis. Compensation cost is recognized on a straight−line basis, net of estimated forfeitures, over the requisite serviceperiod. The Company used the Black−Scholes option−pricing model to estimate the grant−date fair value of each option grantedbefore and after the adoption of SFAS 123R on August 28, 2005. The fair values of options granted during the first quarter andthe first half of fiscal 2007 were estimated using the following weighted−average assumptions:

Quarter Ended First Half EndedMarch 3, 2007 March 3, 2007

Expected dividend yield 1.76% 1.78%Expected stock price

volatility 29.00% 29.00%Weighted average risk−free

interest rate 4.66% 4.57%Expected life of options

(years) 4.48 4.49

The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price on the grantdate. Expected stock price volatility is derived from an analysis of the historical and implied volatility of the Company’s publiclytraded stock. The risk−free interest rate is based on the U.S. Treasury rates on the grant date with maturity dates approximatingthe expected life of the option on the grant date. The expected life of the options is based on an analysis of historical andexpected future exercise behavior, as well as certain demographic characteristics. These assumptions are evaluated and revisedfor future grants, as necessary, to reflect market conditions and experience. There were no significant changes made to themethodology used to determine the assumptions during the second quarter and first half of fiscal 2007. The weighted−averagegrant−date fair value of stock options granted during the second quarter and first half of fiscal 2007 were $8.11 and $7.85,respectively. The following table summarizes the transactions under the stock option plans during the first half of fiscal 2007.

(in thousands, except per share amounts)Options

Outstanding

WeightedAverage

Exercise Price

Balance at August 26, 2006 5,757 $ 29.54Granted 672 29.28Exercised (552) 26.45Cancelled (459) 26.89Balance at March 3, 2007 5,418 $ 30.05

The total intrinsic value of stock options exercised during the second quarter and first half of fiscal 2007 was $0.9 million and$1.7 million, respectively. As of March 3, 2007, there was approximately $10.5 million of unrecognized compensation costrelated to outstanding stock options. The unrecognized compensation cost will be recognized over a weighted−average period ofapproximately 1.4 years.

Performance Share Rights

Performance share rights give employees the right to receive shares of the Company’s common stock at a future date based on theCompany’s performance relative to a peer group. Performance is measured based on two pre−tax metrics: Return on Equity andIncome Growth. The Compensation Committee of the Board of Directors establishes the peer group and performance metrics. The performance share rights vest at the end of the performance period (generally three years) and the shares are issued shortlythereafter. The actual number of shares issued can range from 0% to 200% of the employee’s target award depending on theCompany’s performance relative to the peer group. The following table summarizes the transactions under the performance sharerights program during the first half of fiscal 2007.

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(in thousands, except per share amounts)

PerformanceShare RightsOutstanding

WeightedAverage

Grant−DateFair Value

Nonvested − August 26, 2006 261 $ 24.17Granted 249 29.32Vested (68) 24.16Cancellations (5) 26.78Adjustments (4) N/ANonvested − March 3, 2007 433 $ 27.10

The grant−date fair value of the performance share rights is based on the stock price on the grate date. Compensation cost isrecognized on a straight−line basis, net of estimated forfeitures, over the requisite service period and adjusted quarterly to reflectthe ultimate number of shares expected to be issued. The adjustments of performance share rights outstanding in the table aboverepresents changes in the number of shares expected to be issued. As of March 3, 2007, there was approximately $7.8 million ofunrecognized compensation cost related to outstanding performance share rights, based on the Company’s most recentperformance analysis. The unrecognized compensation cost will be recognized over a weighted−average period of approximately2.0 years.

Special Committee Review of Historical Stock Option Granting Procedures

On September 25, 2006, the Company filed a Form 8−K with the Securities and Exchange Commission (the “SEC”) in which theCompany advised that it was named as a nominal defendant in a lawsuit filed in the Superior Court of North Carolina,Mecklenburg County, alleging that certain of the Company’s stock option grants were “backdated.” In connection with thelawsuit, the Company’s Board of Directors formed a Special Committee (the “Special Committee”), consisting solely ofindependent directors who were not named as defendants in the lawsuit, to conduct an independent investigation of theCompany’s stock option granting practices, evaluate the lawsuit and take such actions with respect to the lawsuit and relatedmatters as the Special Committee deemed appropriate. The Special Committee was advised in its review by independent legalcounsel, Richards, Layton & Finger, P.A., and by independent accounting experts. The Special Committee’s five month reviewincluded 35 interviews of 21 current or former officers, directors and employees of the Company, as well as the review ofdocuments and electronically−stored information amounting to hundreds of thousands of pages of documents and data.

On March 7, 2007, the Company filed a Form 8−K announcing that, based on its review of the principal factual findings of theSpecial Committee, the Company determined it did not properly account for certain stock options granted during the period fromfiscal 1995 to fiscal 2006. As a result, the Company recorded a cumulative charge during the fourth quarter of fiscal 2006 tocorrect the errors. See Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form10−K for fiscal 2006 for more information. The impact of these accounting adjustments on the first half of fiscal 2007 was notmaterial.

6. During fiscal 2006, the Company purchased in the open market 15.4 million shares of its common stock at a cost of $367.3million. The Company did not purchase any shares of its common stock during the second quarter and first half of fiscal 2007. As of March 3, 2007, the Company had outstanding authorizations to purchase a total of approximately 6.1 million shares.

7. Basic net income per common share is computed by dividing net income by the weighted average number of shares outstandingduring each period. Diluted net income per common share gives effect to all securities representing potential common shares thatwere dilutive and outstanding during the period. The exercise prices for certain of the outstanding stock options that theCompany has awarded exceed the average market price of the Company’s common stock. Such stock options are antidilutive(options for 1.6 million for both the quarter and first half ended March 3, 2007, and options for 5.3 million and 5.4 million for thequarter and first half ended February 25, 2006, respectively) and were not included in the computation of diluted net income pershare. In the calculation of diluted net income per common share, the denominator includes the number of additional commonshares that would have been outstanding if the Company’s outstanding stock options and performance share rights had beenexercised.

9


The following table sets forth the computation of basic and diluted net income per common share:

Quarter Ended First Half Ended

(in thousands, except per share amounts)March 3,

2007February 25,

2006March 3,

2007February 25,

2006

Basic Net Income Per Share:Net income $ 90,543 $ 54,529 $ 144,667 $ 105,918Weighted average number of shares

outstanding 150,656 155,293 150,562 157,311Net income per common share − basic $ 0.60 $ 0.35 $ 0.96 $ 0.67

Diluted Net Income Per Share:Net income $ 90,543 $ 54,529 $ 144,667 $ 105,918Weighted average number of shares

outstanding 150,656 155,293 150,562 157,311Effect of dilutive securities − stock options — — 382 —Effect of dilutive securities − performance

share rights 269 105 241 31Effect of dilutive securities − forward contract — 1,357 — 1,430Average shares − diluted 150,925 156,755 151,185 158,772Net income per common share − diluted $ 0.60 $ 0.35 $ 0.96 $ 0.67

8. On January 30, 2001, Janice Morgan and Barbara Richardson, two individuals who have held the position of Store Manager forsubsidiaries of the Company, filed a Complaint against the Company in the United States District Court for the Northern Districtof Alabama. Thereafter, pursuant to the Court’s ruling, notice of the pendency of the lawsuit was sent to approximately 13,000current and former Store Managers holding the position on or after July 1, 1999. Approximately 2,550 of those receiving suchnotice filed consent forms and joined the lawsuit as plaintiffs, including approximately 2,300 former Store Managers andapproximately 250 then current employees. After rulings by the Court on motions to dismiss certain plaintiffs filed by theCompany and motions to reconsider filed by plaintiffs, 1,424 plaintiffs remained in the case at the commencement of trial.

The case has proceeded as a collective action under the Fair Labor Standards Act (“FLSA”). The Complaint alleged that theCompany violated the FLSA by classifying the named plaintiffs and other similarly situated current and former Store Managers as“exempt” employees who are not entitled to overtime compensation.

A jury trial in this case was held in June 2005, in Tuscaloosa, Alabama, and ended with the judge declaring a mistrial after thejury was unable to reach a unanimous decision in the matter. The case was subsequently retried to a jury in Tuscaloosa, Alabama,which found that the Company should have classified the Store Manager plaintiffs as hourly employees entitled to overtime payrather than as salaried exempt managers and awarded damages. Subsequently, the Court ruled the Company did not act in goodfaith in classifying the plaintiffs as exempt, and after making adjustments to the damages award based upon the filing of personalbankruptcy by certain plaintiffs, the Court entered a judgment for approximately $33.3 million. The Company and the plaintiffshave filed post−trial motions, which have suspended the entry of a final judgment. The Company posted a bond to stay executionon any judgment which may be finally entered. In addition, the Court ruled that it will consider the plaintiffs’ motion for anaward of attorneys’ fees and expenses at the conclusion of the Company’s appeal. The Company plans to appeal if the Courtdenies the pending post−trial motions and enters a final judgment.

The Company recognized $45.0 million as a litigation charge in the second quarter of fiscal 2006 with respect to this litigation. During the appellate process, the Company will not be required to pay the amount of the judgment. Accordingly, this charge willnot have any impact on cash flow while the Company pursues its appellate rights with respect to this judgment.

In general, the Company continues to believe that the Store Managers are “exempt” employees under the FLSA and have beenproperly compensated and that the Company has meritorious positions on appeal that should enable it ultimately to prevail. However, the outcome of any litigation is inherently uncertain. Resolution of this matter could have a material adverse effect onthe Company’s financial position, liquidity or results of operation.

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On August 24, 2006, a shareholder derivative complaint was filed in the Superior Court of North Carolina, Mecklenburg County,by Rebecca Mitchell against the Company as a nominal defendant and certain of its current and former officers and directors asindividual defendants. The complaint asserted claims under state law in connection with allegations that certain of theCompany’s stock option grants were “backdated.” This complaint was subsequently consolidated with a second, nearly identicalcomplaint filed by Jeffrey Alasina and transferred to the North Carolina Business Court. On January 4, 2007, the plaintiffs filed aconsolidated amended complaint in the case, which is now captioned In re Family Dollar Stores, Inc. Derivative Litigation,Master File No. 06−CVS−16796 in the General Court of Justice, Superior Court Division, Mecklenburg County. Theconsolidated amended complaint names the Company as a nominal defendant and Howard R. Levine, R. James Kelly, R. DavidAlexander, Jr., George R. Mahoney, Jr., John J. Scanlon, C. Martin Sowers, Charles S. Gibson, Jr., Gilbert A. LaFare, Samuel N.McPherson, Mark R. Bernstein, James G. Martin, and Sharon A. Decker as individual defendants. The consolidated amendedcomplaint contains claims for an accounting, breach of fiduciary duty, restitution/unjust enrichment, and recission in connectionwith the Company’s alleged backdating. The consolidated amended complaint seeks unspecified damages, disgorgement,equitable relief, and costs, including attorneys’ fees.

On December 15, 2006, a shareholder derivative complaint was filed in the United States District Court for the Western Districtof North Carolina, Case No. 3:06CV510−W, by Dorothy M. Lee against the Company as a nominal defendant and certain of itscurrent and former officers and directors, Howard R. Levine, Leon Levine, R. James Kelly, R. David Alexander, Jr., Charles S.Gibson, Jr., C. Martin Sowers, George R. Mahoney, Jr., Mark R. Bernstein, Sharon Allred Decker, Edward C. Dolby, Glenn A.Eisenberg, James G. Martin, and Dale C. Pond, as individual defendants. The complaint asserted claims under state and federallaw in connection with allegations that certain of the Company’s stock option grants were “backdated.” On December 20, 2006, asecond, nearly identical complaint was filed by Stanford H. Arden in the United States District Court for the Western District ofNorth Carolina, Case No. 3:06CV523−C. The complaints each contain claims for violations of section 14(a) of the ExchangeAct, an accounting, breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjustenrichment, recission, and breach of fiduciary duty for insider selling and misappropriation of information in connection with theCompany’s alleged backdating of stock option grants. The complaints each seek unspecified money damages, an accounting,corporate governance and internal control reforms, imposition of a constructive trust over the defendants’ stock options, punitivedamages, and costs, including attorneys’ fees. On March 23, 2007, the Court advised that these two federal actions were to beconsolidated under the caption In re Family Dollar Stores, Inc. Derivative Litigation, Case No. 3106CV510−W.

As previously disclosed, the Company has formed a Special Committee to investigate the Company’s stock option grantingpractices and to make determinations regarding appropriate remedial measures and what actions the Company should take withrespect to the pending shareholder derivative litigation. See Note 5 for more information.

The Company is involved in numerous other legal proceedings and claims incidental to its business, including litigation related toalleged failures to comply with various state and federal employment laws, some of which are or may be pled as class orcollective actions, and litigation related to alleged personal or property damage, as to which the Company carries insurancecoverage and/or, pursuant to Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” hasestablished reserves as set forth in the Company’s financial statements. While the ultimate outcome cannot be determined, theCompany currently believes that these proceedings and claims, both individually and in the aggregate, should not have a materialadverse effect on the Company’s financial position, liquidity or results of operations. However, the outcome of any litigation isinherently uncertain and, if decided adversely to the Company, the Company may be subject to liability that could have a materialadverse effect on the Company’s financial position, liquidity or results of operations.

9. The Company manages its business on the basis of one reportable segment. All of the Company’s operations are located in theUnited States. The following information regarding classes of similar products is presented in accordance with SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information.”

Quarter Ended First Half Ended(in thousands) March 3, 2007 February 25, 2006 March 3, 2007 February 25, 2006

Classes of similar products:Consumables $ 1,083,049 $ 936,759 $ 2,047,993 $ 1,843,240Home Products 326,088 290,552 568,501 523,872Apparel and Accessories 259,455 234,299 482,357 445,083Seasonal and Electronics 278,788 274,073 448,793 434,945

Net sales $ 1,947,380 $ 1,735,683 $ 3,547,644 $ 3,247,140

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Consumables includes household chemical and paper products, candy, snacks and other food, health and beauty aids, hardwareand automotive supplies, and pet food and supplies. Home Products includes domestic items such as blankets, sheets and towelsas well as housewares and giftware. Apparel and Accessories includes men’s, women’s, boys’, girls’ and infants’ clothing andshoes. Seasonal and Electronics includes toys, stationery and school supplies, seasonal goods and electronics, including pre−paidcellular phones and services.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting the consolidated results of operations and financial conditionof the Company for the fourteen−week period ended March 3, 2007, and the thirteen−week period ended February 25, 2006(“second quarter of fiscal 2007” and “second quarter of fiscal 2006”, respectively) and the twenty−seven−week period endedMarch 3, 2007, and the twenty−six−week period ended February 25, 2006 (“first half of fiscal 2007” and “first half of fiscal2006”, respectively). This discussion should be read in conjunction with, and is qualified by, the financial statements included inthis quarterly report, the financial statements for the fiscal year ended August 26, 2006 (“fiscal 2006”), and Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in the Company’s AnnualReport on Form 10−K for fiscal 2006. This discussion should also be read in conjunction with the “Cautionary StatementRegarding Forward Looking Statements” set forth following this MD&A, and the “Risk Factors” set forth in Part I, Item 1A ofthe Company’s Annual Report on Form 10−K for fiscal 2006.

Results of Operations

Fiscal 2007 is a 53−week year, compared with a 52−week year in fiscal 2006. The second quarter of fiscal 2007 included14 weeks compared with 13 weeks in the second quarter of fiscal 2006. The first half of fiscal 2007 included 27 weeks comparedto 26 weeks in the first half of fiscal 2006.

2007 Year−to−date Results and Fiscal 2007 Outlook

During the first half of fiscal 2007, the Company’s net sales increased 9.3% to $3.5 billion, net income increased 36.6% to$144.7 million and diluted net income per common share increased 43.3% to $0.96 as compared to the first half of fiscal 2006. The results for the first half of fiscal 2007 included the benefit of an additional week, as discussed above. In addition, the firsthalf of fiscal 2006 was negatively impacted by a $45.0 million litigation charge (approximately $0.18 per diluted share). Despitea lower than planned increase in sales in comparable stores (stores open more than 13 months), the Company was able to achieveits expected results for the first half of fiscal 2007 due to improvements in cost of sales. The Company continued to focus oninventory productivity during the first half of fiscal 2007. Inventory on a per store basis at the end of the first half of fiscal 2007was approximately 7.4% lower than inventory on a per store basis at the end of the first half of fiscal 2006, excludingmerchandise in transit to the distribution centers. The various components affecting the Company’s results for the first half offiscal 2007 are discussed in more detail below.

During the first half of fiscal 2007, the Company continued to focus its efforts on key initiatives designed to supportsustainable and profitable growth, as discussed below.

• The Company installed refrigerated coolers in approximately 590 stores during the first half of fiscal 2007. The coolersare part of an enhanced food strategy designed to increase customer traffic. At the end of the first half of fiscal 2007,approximately 4,390 stores had coolers for the sale of refrigerated food. The Company currently expects to have coolers inapproximately 5,000 stores by the end of fiscal 2007. During the first half of fiscal 2007, the Company also increased itsfood assortment in approximately 2,000 stores. In addition, the Company plans to install technology to facilitate theacceptance of food stamps in approximately 1,000 stores by the end of fiscal 2007.

• Most Urban Initiative markets experienced improvements in store manager retention, inventory productivity andprofitability during the first half of fiscal 2007 as compared to the first half of fiscal 2006. The Company plans to continueto focus on driving better returns in these markets and plans to implement a new technological platform in approximately800 Urban Initiative stores by the end of fiscal 2007. The new platform is designed to facilitate better customer service andmake stores easier to manage.

• In support of the Treasure Hunt strategy, the Company continues to: develop event−driven programs that create excitementfor customers and employees; focus on improving inventory flow and turns, resulting in better presentation of newproducts; and enhance the apparel assortment.

• During fiscal 2007, the Company plans to open approximately 300 stores and close approximately 45 stores. TheCompany also plans to continue to refine its site selection process and increase its cross−functional focus on new storeperformance. During the first half of fiscal 2007, the Company opened 170 stores and closed 24 stores.

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• During the first half of fiscal 2007, the Company continued to enhance its research and development effort known as“Concept Renewal.” The Concept Renewal effort involves developing new ideas and initiatives designed to sustainprofitable growth. As of March 3, 2007, the Company had two Concept Renewal Stores to test new ideas, including storelayouts and design elements. The Company plans to have approximately ten Concept Renewal test stores by the end offiscal 2007. During the second quarter of fiscal 2007, the Company began to incorporate many of its new design andlayout elements into new stores.

• The Company initiated an effort known as “Project Accelerate” during the first quarter of fiscal 2007. Project Accelerateis a strategic, multi−year initiative designed to optimize the Company’s merchandising and supply chain processes and willinclude improvements to price optimization, category management, space management, and assortment planning.

Based on operating results for the first half of fiscal 2007, as discussed below, and the Company’s plans for the remainderof the year, the Company currently expects diluted net income per common share to be between $1.63 and $1.69 for fiscal 2007,compared to $1.26 in fiscal 2006. Diluted net income per common share in fiscal 2006 includes the impact (approximately $0.18per diluted share) of an adverse litigation judgment, as discussed in Note 8 to the Consolidated Condensed Financial Statementsincluded in this Report, and cumulative charges (approximately $0.04 per diluted share) to record non−cash stock basedcompensation and income tax related interest expense, as discussed in Note 5 to the Consolidated Condensed FinancialStatements included in this Report and in Note 10 to the Consolidated Financial Statements included in the Company’s AnnualReport on Form 10−K for fiscal 2006.

Second Quarter Results and Third Quarter Outlook

Net SalesNet sales in the second quarter of fiscal 2007 were $1.9 billion, an increase of approximately 12.2% ($211.7 million), as

compared with an increase of 9.4% ($148.9 million) in the second quarter of fiscal 2006. The increase was attributable, in part, toincreased sales in comparable stores (stores open more than 13 months) of 0.4% ($7.3 million), with the balance of the increaseprimarily relating to sales from new stores opened as part of the Company’s store growth program. The increase in sales incomparable stores resulted from an increase in the average customer transaction, which offset a slight decline in customer traffic,as measured by the number of register transactions in comparable stores. Sales during the second quarter of fiscal 2007 werestrongest in Consumables and were weaker in Home Products and Apparel and Accessories. Sales of Seasonal and Electronicswere impacted by increased sales of prepaid services, which are recorded on a net basis. As a result, only the markup on the salesof these products is recorded as revenue.

The Company distributed two advertising circulars during the second quarter of both fiscal 2007 and fiscal 2006. Thecirculars are designed to stimulate traffic and inform customers about the Company’s Treasure Hunt merchandise, seasonal valuesand competitive prices on core consumables.

The average number of stores in operation during the second quarter of fiscal 2007 was 5.3% higher than the averagenumber of stores in operation during the second quarter of fiscal 2006.

Cost of Sales

Cost of sales increased approximately 11.1% in the second quarter of fiscal 2007 compared with the second quarter offiscal 2006. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of netsales, was 66.5% in the second quarter of fiscal 2007 and 67.1% in the second quarter of fiscal 2006. The improvement in cost ofsales, as a percentage of net sales, was due to the effect of an increase in sales of prepaid services, which are reported on a netbasis, as discussed above, better merchandise markup, and lower inventory shrinkage. These improvements were partially offsetby higher markdown expense. Freight expense, as a percentage of net sales, was substantially unchanged. The Companycontinues to focus on improving inventory productivity, including the continued refinement of the Company’s inventoryreplenishment system and the implementation of a more aggressive markdown strategy. The Company believes that theimprovements in inventory productivity are positively impacting inventory shrinkage and store manager retention trends.

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Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 16.2% in the second quarter of fiscal 2007, comparedwith the second quarter of fiscal 2006. The increases in these expenses were due primarily to additional costs arising from thecontinued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 26.1% in the secondquarter of fiscal 2007 and 25.2% in the second quarter of fiscal 2006. As a result of relatively flat comparable store sales growthand the effect of an increase in sales of prepaid services, most costs in the second quarter of fiscal 2007, including compensationexpense, were deleveraged. Expenses associated with the Company’s review of its stock option granting practices (approximately0.7% of net sales) and increased compensation expense (approximately 0.5% of net sales) were partially offset by a decrease ininsurance costs (approximately 0.3% of net sales). See Note 5 to the Consolidated Condensed Financial Statements included inthis Report and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10−K forfiscal 2006 for more information on the Company’s review of its stock option granting practices. The decrease in insurance costs,as a percentage of net sales, was due to a reduction in health care and workers compensation expenses. The Company believesthat improvements in processes, lower inventory levels and increased store manager retention rates contributed to the reduction inworkers compensation costs.

Litigation Charge

During the second quarter of fiscal 2006, the Company recorded a $45.0 million (approximately $0.18 per diluted share)litigation charge associated with an adverse litigation judgment in a case in Tuscaloosa, Alabama. See Note 8 to the ConsolidatedCondensed Financial Statements included in this Report for more information. All other legal expenses incurred during thesecond quarter of both fiscal 2007 and fiscal 2006 were recorded in SG&A.

Interest Income

Interest income increased $1.3 million in the second quarter of fiscal 2007 compared with the second quarter of fiscal2006. The increase in interest income was due to an increase in investments and interest rates.

Interest Expense

Interest expense increased $1.7 million in the second quarter of fiscal 2007 compared with the second quarter of fiscal2006. The increase in interest expense was due primarily to interest on state income taxes.

Income Taxes

The effective tax rate was 36.3% for the second quarter of fiscal 2007 compared with 37.0% for the second quarter offiscal 2006. The decrease in the effective tax rate was primarily the result of the positive impact of a retroactive reinstatement offederal jobs tax credits and the effect of changes in state income taxes.

Third Quarter Outlook

For the third quarter of fiscal 2007, the Company expects comparable store sales to increase 1−3% as a result of therollout of the Company’s food strategy, the impact from “Treasure Hunt” merchandise sales and continued focus on driving betterreturns in the Urban Initiative markets, as well as sales of prepaid cellular phones and services. The Company believes that costof sales, as a percentage of net sales, during the third quarter of fiscal 2007 will decrease as compared to fiscal 2006 due to bettermerchandise markup, lower inventory shrinkage, lower freight expense, and the effect of an increase in sales of prepaid services. These factors are expected to offset the continuing effect of the shift in the merchandise mix to more lower−margin basicconsumables. The Company believes that SG&A expense, as a percentage of net sales, will increase as compared to fiscal 2006due to continued investments in the Company’s ongoing initiatives and low single−digit comparable store sales growth. Usingthese assumptions, the Company expects that earnings per share will be between $0.39 and $0.43 for the third quarter of fiscal2007.

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Year−to−date Results

Net SalesNet sales in the first half of fiscal 2007 were $3.5 billion, an increase of approximately 9.3% ($300.5 million), as

compared with an increase of 9.4% ($280.1 million) in the first half of fiscal 2006. The increase was attributable, in part, toincreased sales in comparable stores (stores open more than 13 months) of 0.6% ($20.4 million), with the balance of the increaseprimarily relating to sales from new stores opened as part of the Company’s store growth program. The increase in sales incomparable stores resulted from an increase in the average customer transaction, which offset a slight decline in customer traffic,as measured by the number of register transactions in comparable stores. Sales during the first half of fiscal 2007 were strongestin Consumables and were weaker in Home Products and Apparel and Accessories. Sales of Seasonal and Electronics wereimpacted by increased sales of prepaid services, which are recorded on a net basis. As a result, only the markup on the sales ofthese products is recorded as revenue.

The Company distributed three advertising circulars during the first half of both fiscal 2007 and fiscal 2006. Thecirculars are designed to stimulate traffic and inform customers about the Company’s Treasure Hunt merchandise, seasonal valuesand competitive prices on core consumables.

The average number of stores in operation during the first half of fiscal 2007 was 5.2% higher than the average numberof stores in operation during the first half of fiscal 2006. The Company had 6,319 stores in operation at the end of the first half offiscal 2007, compared with 6,002 stores in operation at the end of the first half of fiscal 2006, representing an increase of 5.3%.

Cost of Sales

Cost of sales increased approximately 8.0% in the first half of fiscal 2007 compared with the first half of fiscal 2006. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was66.0% in the first half of fiscal 2007 and 66.8% in the first half of fiscal 2006. The improvement in cost of sales, as a percentageof net sales, was due to the effect of an increase in sales of prepaid services, which are reported on a net basis, as discussed above,better merchandise markup, and lower inventory shrinkage. These improvements were offset slightly by higher markdownexpense. Freight expense, as a percentage of net sales, was substantially unchanged. The Company continues to focus onimproving inventory productivity, including the continued refinement of the Company’s inventory replenishment system and theimplementation of a more aggressive markdown strategy. The Company believes that the improvements in inventory productivityare positively impacting inventory shrinkage and store manager retention trends.

Selling, General and Administrative Expenses

SG&A expenses increased 12.4% in the first half of fiscal 2007, compared with the first half of fiscal 2006. Theincreases in these expenses were due primarily to additional costs arising from the continued growth in the number of stores inoperation. SG&A expenses, as a percentage of net sales, were 27.4% in the first half of fiscal 2007 and 26.6% in the first half offiscal 2006. As a result of relatively flat comparable store sales growth and the effect of an increase in sales of prepaid services,most costs in the first half of fiscal 2007, including compensation expense, were deleveraged. Expenses associated with theCompany’s review of its stock option granting practices (approximately 0.5% of net sales), increased occupancy costs(approximately 0.3% of net sales) and increased compensation expense (approximately 0.3% of net sales) were partially offset bya decrease in insurance costs (approximately 0.3% of net sales). See Note 5 to the Consolidated Condensed Financial Statementsincluded in this Report and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form10−K for fiscal 2006 for more information on the Company’s review of its stock option granting practices. The increase inoccupancy costs, as a percentage of net sales, was due primarily to higher rent expense. The decrease in insurance costs, as apercentage of net sales, was due to a reduction in health care and workers compensation expenses. The Company believes thatimprovements in processes, lower inventory levels and increased store manager retention rates contributed to the reduction inworkers compensation costs.

Litigation Charge

During the first half of fiscal 2006, the Company recorded a $45.0 million (approximately $0.18 per diluted share)litigation charge associated with an adverse litigation judgment in a case in Tuscaloosa, Alabama. See Note 8 to the ConsolidatedCondensed Financial Statements included in this Report for more information. All other legal expenses incurred during the firsthalf of both fiscal 2007 and fiscal 2006 were recorded in SG&A.

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Interest Income

Interest income increased $1.9 million in the first half of fiscal 2007 compared with the first half of fiscal 2006. Theincrease in interest income was due to an increase in investments and interest rates.

Interest Expense

Interest expense increased $5.0 million in the first half of fiscal 2007 compared with the first half of fiscal 2006. Theincrease in interest expense was due primarily to interest on taxes as proposed by the Internal Revenue Service during theirexamination of the Company’s consolidated federal income tax returns for fiscal 2005, fiscal 2004 and fiscal 2003 and interest onstate income taxes.

Income Taxes

The effective tax rate was 36.9% for the first half of fiscal 2007, compared with 37.0% for the first half of fiscal 2006. The decrease in the effective tax rate was primarily the result of the effect of changes in state income taxes.

Liquidity and Capital Resources

At the end of the first half of fiscal 2007, the Company had working capital of $583.9 million, compared with $432.7million as of August 26, 2006. Changes in working capital during the first half of fiscal 2007 and fiscal 2006 were primarily theresult of earnings, changes in merchandise inventories, capital expenditures, changes in income taxes payable, and, in the first halfof fiscal 2006, repurchases of the Company’s common stock. The Company’s inventories at the end of the first half of fiscal2007 were 1.5% lower than at the end of the first half of fiscal 2006. Inventory on a per store basis at the end of the first half offiscal 2007 was approximately 7.4% lower than inventory on a per store basis at the end of the first half of fiscal 2006, excludingmerchandise in transit to the distribution centers. The decrease in inventory on a per store basis is the result of the Company’scontinued refinement of its replenishment system and renewed focus on inventory productivity, which includes improvedplanning and flow of fashion merchandise and the use of more aggressive exit strategies. The decrease in inventory levels hashad a positive impact on merchandise presentation and store manager retention.

Capital expenditures for the first half of fiscal 2007 were approximately $50.9 million and are currently expected to beapproximately $155 million to $165 million for fiscal 2007. The majority of the planned capital expenditures for fiscal 2007relate to the Company’s new store openings; existing store expansions, relocations and renovations; and expenditures related tostore−focused technology infrastructure.

In the first half of fiscal 2007, the Company opened 170 stores, closed 24 stores and expanded, relocated, or renovated 9stores. The Company occupies most of its stores under operating leases. Store opening, closing, expansion, relocation, andrenovation plans, as well as overall capital expenditure plans, are continuously reviewed and are subject to change.

During fiscal 2006, the Company purchased in the open market 15.4 million shares of its common stock at a cost of$367.3 million. The Company did not purchase any shares of its common stock during the first half of fiscal 2007 but expects tobegin purchasing additional shares of its common stock during the second half of fiscal 2007. As of March 3, 2007, the Companyhad outstanding authorizations to purchase a total of approximately 6.1 million shares.

The Company has an unsecured revolving credit facility with a syndicate of lenders for short−term borrowings of up to$350 million. Outstanding standby letters of credit ($123.0 million as of March 3, 2007) reduce the borrowing capacity of thecredit facility. The credit facility expires on August 24, 2011. The Company had no outstanding borrowings against the creditfacility during the first half of fiscal 2007. Cash flow from current operations and the available credit facility, as discussed above,are expected to be sufficient to meet planned liquidity and operational capital resource needs, including store expansion and othercapital spending programs, scheduled interest payments, and any further repurchases of the Company’s common stock.

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On December 19, 2006, the Company entered into separate agreements in connection with its unsecured Senior Notes(the “Notes”) and its unsecured revolving credit facility. The agreements extended the delivery date for the fiscal 2006 auditedfinancial statements, the unaudited financial statements for the first quarter of fiscal 2007 and the corresponding compliancecertificates to March 31, 2007, and waived any Defaults or Events of Default that would have occurred due to the failure of theCompany to deliver such information in connection with the Notes and credit facility. As discussed in Note 5 to the ConsolidatedCondensed Financial Statements included in this Report, the Company formed a Special Committee of the Board of Directors toinvestigate the Company’s stock option granting practices. As a result, the Company was unable to file its Annual Report onForm 10−K for fiscal 2006 and its Quarterly Report on Form 10−Q for the first quarter of fiscal 2007 by the required deadlines. During March 2007, the Company delivered the appropriate financial statements and compliance certificates and is in compliancewith all covenants under both the Notes and credit facility. As of the end of the first half of fiscal 2007, the Company hadoutstanding long−term debt of $250.0 million related to the Notes.

The following table shows the Company’s obligations and commitments as of the end of the first half of fiscal 2007 tomake future payments under contractual obligations:

Payments Due During Period Ending(in thousands) February February February February FebruaryContractual Obligations Total 2008 2009 2010 2011 2012 ThereafterLong−term debt $ 250,000 $ — $ — $ — $ — $ 16,200 $ 233,800Interest 111,996 13,387 13,387 13,387 13,387 13,034 45,414Merchandise letters of credit 95,196 95,196 — — — — —Operating leases 1,266,549 287,442 253,984 212,226 167,231 121,264 224,402Construction obligations 6,123 6,123 — — — — —Total $ 1,729,864 $ 402,148 $ 267,371 $ 225,613 $ 180,618 $ 150,498 $ 503,616

At the end of the first half of fiscal 2007, approximately $37.4 million of the merchandise letters of credit were includedin accounts payable on the Company’s Consolidated Condensed Balance Sheet. Most of the Company’s operating leases providethe Company with an option to extend the term of the lease at designated rates.

The following table shows the Company’s other commercial commitments as of the end of the first half of fiscal 2007:

Total AmountsOther Commercial Commitments (in thousands) Committed

Standby letters of credit $ 123,027Surety bonds 44,935Total Commercial Commitments $ 167,962

The standby letters of credit (which are primarily renewed on an annual basis) are used as surety for future premium anddeductible payments to the Company’s workers’ compensation and general liability insurance carrier. The Company accrues forthese future payment liabilities as described in the “Critical Accounting Policies” section of “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10−K for fiscal 2006. Included in the outstanding amount of surety bonds is a $41.6 million bond obtained by the Company during the third quarter offiscal 2006 in connection with an adverse litigation judgment, as discussed in Note 8 to the Consolidated Condensed FinancialStatements included in this Report.

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changesin Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change inaccounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning afterDecember 15, 2005. The Company does not expect SFAS 154 to have a material impact on its Consolidated FinancialStatements.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48provides guidance regarding the recognition and measurement of tax positions and the related reporting and disclosurerequirements and will be effective for the Company beginning with its first quarter of fiscal 2008. The Company has not yetdetermined the impact, if any, that FIN 48 will have on its Consolidated Financial Statements.


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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fairvalue, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures aboutfair value measurements. SFAS 157 is effective for the first annual period ending after November 15, 2007. The Company hasnot yet determined the impact, if any, that SFAS 157 will have on its Consolidated Financial Statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 providesguidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purposeof a materiality assessment. SAB 108 requires quantification of financial statement errors based on the effects of the error oneach of the company’s financial statements and the related financial statement disclosures. This approach is referred to as the“dual approach” because it requires both the carryover and reversing effects of prior year misstatements to be quantified. SAB108 is effective for the first annual period ending after November 15, 2006. The Company is currently assessing the impact thatSAB 108 will have on its Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities− Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities the option to measuremany financial instruments and certain other items at fair value. If a company elects the fair value option for an eligible item,then it will report unrealized gains and losses on those items at each subsequent reporting date. SFAS 159 is effective for fiscalyears beginning after November 15, 2007. The Company has not yet determined the impact, if any, that SFAS 159 will have onits Consolidated Financial Statements.

Critical Accounting Policies

There have been no changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form10−K for fiscal 2006.

Cautionary Statement Regarding Forward−Looking Statements

Certain statements contained in this Report, or in other public filings, press releases, or other written or oralcommunications made by the Company or its representatives, which are not historical facts are forward−looking statements madepursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward−looking statementsaddress the Company’s plans, activities or events which the Company expects will or may occur in the future and may includeexpress or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth orinitiatives; statements of future economic performance; or statements regarding the outcome or impact of pending or threatenedlitigation. These forward−looking statements may be identified by the use of the words “plan,” “estimate,” “expect,” “anticipate,”“probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties andother factors may cause the Company’s actual results to differ materially from those expressed or implied in any forward−lookingstatements. Factors, uncertainties and risks that may result in actual results differing from such forward−looking informationinclude, but are not limited to those listed in Part I, Item 1A of the Company’s Annual Report on Form 10−K for fiscal 2006, aswell as other factors discussed throughout this Report, including, without limitation, the factors described under “CriticalAccounting Policies” in Part I, Item 2 above, or in other filings or statements made by the Company. All of the forward−lookingstatements made by the Company in this Report and other documents or statements are qualified by these and other factors, risksand uncertainties. Readers are cautioned not to place undue reliance on these forward−looking statements, which speak only as ofthe date of this Report. The Company does not intend to publicly update or revise its forward−looking statements even ifexperience or future changes make it clear that projected results expressed or implied in such statements will not be realized,except as may be required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing andcash management activities. The Company maintains an unsecured revolving credit facility at a variable rate of interest to meetthe short−term needs of its expansion program and seasonal inventory increases. The Company had no outstanding borrowingsagainst this facility during the first half of fiscal 2007. The Company’s long−term debt associated with the Notes bears interest atfixed rates.

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Item 4. Controls and Procedures

As discussed in Note 5 to the Consolidated Condensed Financial Statements included in this Report, a SpecialCommittee of the Board of Directors has reviewed the Company’s historical stock option practices and, as a result of such review,the Company recorded a charge in the fourth quarter of fiscal 2006 for certain non−cash stock−based compensation expense andrelated interest expense. Management has reviewed the Special Committee’s factual findings regarding the Company’s stockoption process, including findings regarding changes in the Company’s stock option granting process instituted in fiscal 2005. The Special Committee has not yet made its determinations concerning remediation or what actions the Company should takewith respect to the pending shareholder litigation.

Based on an evaluation by management of the Company (with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer), including consideration of the matters set forth in the preceding paragraph, as of the end of the period coveredby this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (asdefined in Rules 13a−15(e) and 15d−15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were effective to providereasonable assurance that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated andcommunicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regardingrequired disclosures.

The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internalcontrols. This results in refinements to processes throughout the Company. However, there has been no change in theCompany’s internal control over financial reporting (as defined in Exchange Act Rule 13a−15(f)) during the most recent fiscalquarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financialreporting.

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PART II − OTHER INFORMATION

Item 1. Legal Proceedings

The information in Note 8 to the Consolidated Condensed Financial Statements contained in Part I, Item 1 of the Form 10−Qis incorporated herein by this reference.

Item 1A. Risk Factors

There have been no material changes in the Risk Factors outlined in the Company’s Annual Report on Form 10−K for fiscal2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information with respect to purchases of shares of the Company’s common stock made duringthe quarter ended March 3, 2007, by or on behalf of the Company or any “affiliated purchaser” as defined by Rule 10b−18(a)(3) of theSecurities Exchange Act of 1934.

Period

Total Numberof SharesPurchased

Average PricePaid Per Share

Total Number ofShares Purchased as

Part of PubliclyAnnounced Plans or

Programs(1)

Maximum Numberof Shares that MayYet Be PurchasedUnder the Plans or

Programs(1)

December (11/26/06 − 12/30/06) — — — 6,071,254January (12/31/06 − 2/3/07) — — — 6,071,254February (2/4/07 − 3/3/07) — — — 6,071,254

Total — — — 6,071,254

(1) On April 13, 2005, the Company announced that the Board of Directors authorized the purchase of up to five million shares of itsoutstanding common stock from time to time as market conditions warrant. As of March 3, 2007, the Company had 1.1 millionshares remaining under this authorization. On August 18, 2006, the Company announced that the Board of Directors authorizedthe purchase of up to an additional five million shares of its outstanding common stock from time to time as market conditionswarrant. As of March 3, 2007, the Company had not purchased any shares under this authorization. There is no expiration dategoverning the period during which the Company can make share repurchases pursuant to the above referenced authorizations.

Between January 1, 2007, and February 28, 2007, the Company issued 251,270 shares of the Company’s common stock, foran aggregate price of $6,991,823, to certain of the Company’s key employees upon their exercise of options previously granted underthe Family Dollar Stores, Inc. 1989 Non−Qualified Stock Option Plan. To the extent not covered by an effective registrationstatement, such issuances were made pursuant to Section 4(2) of the Securities Act of 1933, as amended, as transactions not involvinga public offering due to lack of general solicitation or advertising, the status and knowledge of the key employee optionees andpublicly available information about the Company and its operations.

Item 5. Other Information

The Company has set the time, date and location for its 2007 annual meeting of stockholders (the “2007 Annual Meeting”) as2:00 p.m., local time, on June 19, 2007, at the office of the Company, 10401 Monroe Road, Matthews, North Carolina 28201−1017. April 25, 2007, is the record date for the determination of stockholders who will be entitled to notice of and voting rights at the 2007Annual Meeting.

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Because the scheduled date for the 2007 Annual Meeting is more than 30 days after the anniversary date of the 2006 annualmeeting of stockholders, proposals of stockholders intended to be presented at the 2007 Annual Meeting, and to be included in theproxy statement and form of proxy pursuant to Rule 14a−8 under the Exchange Act, must be received by the Company on or beforeApril 23, 2007. If the Company does not receive notice of any stockholder proposal on or before April 23, 2007, such proposal will beconsidered untimely pursuant to Rules 14a−4 and 14a−5(e) under the Act, and the persons named in the proxies solicited by the Boardof Directors for the 2007 Annual Meeting may exercise discretionary voting power with respect to such proposal. Additionally, theCompany’s Bylaws require that any stockholder who intends to make a nomination or bring any other matter before the 2007 AnnualMeeting must deliver notice of such intent to the Company not later than April 28, 2007. Any such proposals or notices should be inwriting and should be sent by certified mail, return receipt requested to the Secretary, Family Dollar Stores, Inc., P.O. Box 1017,Charlotte, North Carolina 28201−1017.

Item 6. Exhibits

(a) Exhibits incorporated by reference:

10.1 Letter Agreement dated December 8, 2006, between the Company, Family Dollar, Inc., Wachovia Bank, NationalAssociation as Administrative Agent and the Lenders (filed as Exhibit 10 to the Company’s report on Form 8−Kfiled December 14, 2006).

10.2 Consent dated December 19, 2006, between the Company, Family Dollar, Inc., the Subsidiary Guarantors,Wachovia Bank, National Association as Administrative Agent and the Lenders (filed as Exhibit 10.1 to theCompany’s Report on Form 8−K filed December 22, 2006).

10.3 Letter Agreement dated December 19, 2006, between the Company, Family Dollar, Inc. and various institutionalaccredited investors (filed as Exhibit 10.2 to the Company’s Report on Form 8−K filed December 22, 2006).

(b) Exhibits filed herewith:

* 10.4 Family Dollar Stores, Inc. 2006 Incentive Plan: Guidelines for Long−Term Incentive Performance Share RightsAwards

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

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

32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906of the Sarbanes−Oxley Act of 2002

32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906of the Sarbanes−Oxley Act of 2002

* Exhibit represents a management contract or compensatory plan

21


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

FAMILY DOLLAR STORES, INC.(Registrant)

Date: April 12, 2007 /s/ R. James KellyR. JAMES KELLYPresident and Chief Operating Officer −Interim Chief Financial Officer

Date: April 12, 2007 /s/ C. Martin SowersC. MARTIN SOWERSSenior Vice President−Finance

22


Exhibit 10.4

FAMILY DOLLAR STORES, INC.

2006 INCENTIVE PLAN

Guidelines for Long−Term Incentive Performance Share Rights Awards

Document Contents:

SECTION 1: PURPOSESECTION 2: SCOPESECTION 3: ELIGIBILITY FOR AWARDS AND PAYOUTS

NEW HIRE AND PROMOTION AWARDS (NEW EQUITY PLAN PARTICIPANTS)PROMOTION AWARDS FOR ACTIVE EQUITY PLAN PARTICIPANTS (EQUITY TO EQUITY)PAYOUT ELIGIBILITY

SECTION 4: PAYOUT CALCULATION OF PSR AWARDSSECTION 5: TERMINATION OF EMPLOYMENT OR PLAN PARTICIPATIONSECTION 6: ADDITIONAL RULESSECTION 7: TRANSITION PERIODSECTION 8: QUALIFIED PERFORMANCE BASED AWARDS


FAMILY DOLLAR STORES, INC.

2006 INCENTIVE PLAN

Guidelines for Long−Term Incentive Performance Share Rights Awards

Section 1: PurposeFamily Dollar Stores, Inc. (the “Company”) maintains for the benefit of eligible individuals the Family Dollar Stores, Inc. 2006Incentive Plan (the “Plan”), which is intended to provide flexibility to the Company in its ability to motivate, attract, and retain theservices of such individuals upon whose judgment, interest, and special effort the successful conduct of the Company’s operation islargely dependent. These Guidelines for Long−Term Incentive Performance Share Rights Awards (the “Guidelines”) are intended toimplement the Plan by providing eligible Associates of the Company with an opportunity to participate in the Company’s success byearning long−term incentive compensation awards in the form of shares of Company Stock (“Common Stock”) within the frameworkof the Plan (the “Performance Share Rights Awards” or the “Awards”), and as further described in these Guidelines.

These Guidelines are adopted pursuant to relevant provisions of the Plan and are to be interpreted and applied in accordance with theterms and provisions thereof. Specifically, these Guidelines provide for the grant of Performance Share Rights Awards under Article9 of the Plan and, with respect to Associates in the position of Vice President or above, the grant of Qualified Performance−BasedAwards under Article 14 of the Plan. Unless otherwise provided herein, capitalized terms used in these Guidelines will have themeaning given such terms in the Plan. If there is any conflict between these Guidelines and the Plan, the terms and provisions of thePlan shall control.

Section 2: ScopeThe Guidelines cover Associates who are eligible for participation in the Plan under these Guidelines and are selected by theCommittee for Performance Share Rights Awards identified in Section 1 above. Awards under these Guidelines cover three (3) yearperformance periods relating to such Awards which generally track the Company’s fiscal (not calendar) year that is the 12−monthperiod that generally runs from approximately September 1st to August 31st. (The “Performance Period”). The actual dates for thefiscal year are determined and announced by the Company at the beginning of each fiscal year. See Section 7 below regardingtransition periods.


Section 3: Eligibility for Awards and Payouts

The Compensation Committee of the Board (the “Committee”) and/or management of the Company will determine annually whichAssociates are eligible to receive Performance Share Rights Awards under these Guidelines. Participants are selected no later than 90days following the beginning of each performance period or upon employment with the Company or promotion. Annual PerformanceShare Rights Awards under these Guidelines will result in overlapping performance periods. Additional eligibility requirements are asfollows:

New Hire and Promotion Awards (New Equity Plan Participants)• An Associate who becomes eligible for a Performance Share Rights Award under these Guidelines after the beginning of a

performance period, either because the Associate is newly hired or is promoted into a position covered by these Guidelines,will be granted an Award computed in accordance with these Guidelines. The dollar value of an Award for the performanceperiod beginning in the year in which the Associate is hired or promoted will be established based upon the Associate’sposition and prorated for the number of months remaining (rounded up to the next full month for any partial month ofservice) in the fiscal year of the Associate’s hire or promotion (the “base line year”). The dollar value of the base line yearAward will be prorated by a fraction, the numerator of which is the number of calendar months remaining in the performanceperiod at the date of hire or promotion (rounded up to the next full month for any partial month of service), and thedenominator of which is the total number of calendar months in the performance period for any performance periodsbeginning prior to the year of hire or promotion. The dollar amounts so awarded shall be converted into Performance ShareRights based on the fair value of the Performance Share Rights, as established from time to time by the Company. Paymentsof all such Awards shall be subject to Company performance as outlined in Section 4 below.

Promotion Awards for Active Equity Plan Participants (Equity to Equity)• An Associate covered by these Guidelines who has a job change that results in a higher Performance Share Rights Award

will have their Award for all pending performance periods as of the date of the job change adjusted upward on a pro ratabasis. The additional equity award will be calculated as the difference between the full year Award for the new position andthe actual Award for the old position for each relevant performance period, prorated for the time in the new position.Payments of all such Awards will be subject to Company performance as outlined in section 4 below.


Payout Eligibility

• An Associate must be classified as a regular full−time employee during the entire performance period for which an Award isbeing made and at the time of the actual issuance of the Common Stock pursuant to the Performance Shares Rights Award inorder to be issued Common Stock pursuant to an Award.

• An Associate on leave of absence, regardless of type, will be issued Common Stock pursuant to a Performance Share RightsAward only upon return to regular, full time work/active status. An associate who is on an approved family medical leave orapproved military leave will be issued Common Stock pursuant to such Award at the time such shares are issued even if theassociate has not returned to regular, full time work/active status at that time.

• The Company will not issue common stock pursuant to the Performance Share Rights Award for any performance period ifthe associate’s most recent annual performance rating is Unsatisfactory/Does Not Meet Expectations.

• These Guidelines do not in any manner restrict the right of the Company or the Associate to terminate employment at anytime, for any reason, with or without cause. See Section 5 below for further information on the consequences of terminationof employment during a pending performance period.

Section 4: Payout Calculation of PSR AwardsAt the time an Associate is selected for an Award under these Guidelines for a particular performance period, the Associate will beassigned a “target” number of shares of Common Stock to be earned if the Company’s performance level is at the 50% level incomparison to the peer group (as set forth below) for the performance period. “Target” is defined as the actual number of sharesapproved and awarded. Each performance period is a three (3) year period, and any payout is based on cumulative yearly performanceover the 3 years covered. The Award will be expressed as a number of Performance Share Rights and will be evidenced by an AwardCertificate consistent with the provisions of the Plan. The actual payout for the performance period, if any, will be determined as a percentage of thetarget Award payout depending on Company performance.


• Company performance for each performance period will be based equally upon (i) the Company’s average annual return onequity (“ROE”) for each fiscal year during the performance period and (ii) the Company’s pre−tax net income growth rateover the performance period, compounded annually. For purposes of these Guidelines, ROE will be calculated by dividingthe Company’s pre−tax net income for the relevant fiscal year by the total shareholders’ equity.

• Actual Company performance for each criteria above at the end of the relevant performance period is then measured againstthe performance of a peer group of companies selected prior to, or within 90 days after the beginning of, the performanceperiod. The Award levels for the relevant performance period will be adjusted at the end of the performance period to reflectthe Company’s performance relative to the peer group. Any such adjustment will generally range from 0% (i.e., no payoutfor the performance period) to 200% of the target Award per the following chart (with linear interpolation between thethresholds set forth below):

PerformanceAgainst

PerformancePeer Group

Percent ofAward

Adjustment(to Target Award)

90th Percentile 200%75th Percentile 150%50th Percentile 100%40th Percentile 75%30th Percentile 25%

<30th Percentile 0%

• In addition, under relevant provisions of the Plan, the determination of ROE and net−income−growth and the peer group ofcompanies for the relevant performance period may be further adjusted, collectively or individually, to reflect extraordinaryevents or circumstances affecting the Company or its business, or any of the companies included in the peer group, whichrender any such goals or peer group selection unsuitable.

• These Guidelines do not in any manner restrict the right of the Company to modify performance measures, targets, cycles, orany other term or condition of these Guidelines, as the Company deems it necessary or appropriate, subject to the terms of thePlan.


Section 5: Termination of Employment or Plan Participation

Notwithstanding anything in these Guidelines to the contrary, the following provisions will apply to any Associate whose employmentwith the Company terminates.

• In the event of a termination of an Associate’s employment, either (i) as a result of the Associate’s death, Disability orRetirement (as defined by Article 2, section 3.1 (ll) of the Incentive Plan) or (ii) by the Company without Cause, paymentswith respect to any outstanding Performance Share Rights Awards will be based on actual Company performance (Percent ofAward Adjustment) from the 3 year performance period immediately preceding the date of termination. Common stockissued pursuant to the Performance Share Rights will be paid on a pro−rata basis based on the actual number of monthsworked in each relevant performance period. The pro ration will be determined by multiplying the number of PerformanceShares Rights to which the Associate would have been entitled based on Company performance by a fraction the numeratorof which is the number of calendar months in the performance period of the Associate’s actual employment with theCompany (including the full calendar month in which the Associate’s employment terminated) and the denominator of whichis the total number of calendar months in the performance period. Payments under this paragraph will be made as soon asadministratively convenient following the termination of the Associate’s employment.

• In the case of death or Disability, individual performance of the Associate will be ignored. In either event, payments underthis paragraph shall be made as soon as administratively convenient after termination of employment.

• In the event of termination of an Associate’s employment with the Company before the end of any relevant performanceperiod or the actual issuance by the Company of Common Stock pursuant to the Performance Share Rights Award, either (i)by the Company for Cause, or (ii) by the Associate for any reason (other than death, Disability or Retirement), anyoutstanding Awards for all relevant performance periods will be immediately forfeited.

• In the event that an active Associate leaves the Plan for any reason but remains employed by the company, the Associate’sPerformance Share rights will be paid on a pro−rata basis based on the actual number of months worked in each relevantperformance period, including the full calendar month in which the Associate’s plan participation ended. Payments will bemade during the same cycle as active plan participants and will be subject to the Company performance criteria outlined insection 4 of this document.


Section 6: Additional Rules

• All payments under these Guidelines are considered supplemental pay and will be taxed as such. Appropriate withholdingand deductions will be taken from such payments. In accordance with the Plan, the Company may require tax withholding tobe satisfied through withholding of shares of Common Stock otherwise payable under the Award.

• These Guidelines cannot be changed or modified by a verbal communication or course of dealing but only by a writtencommunication signed by the Chairman, Vice Chairman, and/or the Chief Executive Officer (“CEO”) of the Company or anyofficer designated by one of them.

• Payouts earned under these Guidelines are expected to be paid as soon as administratively convenient following the end ofthe relevant performance period in the form of one (1) share of the Company’s Common Stock for each whole PerformanceShare Right that is payable under the Plan and these Guidelines, rounded up to the next whole share. Notwithstanding theforegoing, the Company may permit recipients of Awards to elect to defer receipt of payment of such Awards under suchterms and conditions as the Company may prescribe.

• In the event of major economic changes, catastrophic events, or any other circumstances not contemplated by the Company(but subject to the Plan provisions relating to Qualified Performance−Based Awards), the Committee, the Chairman, ViceChairman and/or the CEO of the Company reserves the right to alter, amend, or terminate these Guidelines and any Awardshereunder.

• The Chairman of the Company will make all final decisions, rulings and interpretations under these Guidelines (subject tothe Plan provisions relating to Qualified Performance−Based Awards, which may require action by the Committee). Byparticipating in the Plan under these Guidelines, each Associate agrees that such decisions, rulings and interpretations will befinal and that each Associate will be bound by them. Each Associate further agrees that if and when any circumstances ariserelating to these Guidelines, which are not covered by this description of the Plan, the Associate will be bound by the finaldecision, ruling or interpretation of the Chairman.

Section 7: Transition Period• In addition to Performance Share Rights Awards made under these Guidelines for multiple year periods, during the

Company’s 2006 and 2007 fiscal years, Performance Share Rights Awards will be made to Associates participating in thePlan under these Guidelines for each of the 2006 and 2007 fiscal years based upon the Company’s performance in each ofsuch fiscal years as set forth in Section 4 above. An Associate who is hired or is promoted into a position eligible to receivea Performance Share Rights Award under the Plan during 2006 or 2007 will be eligible to receive a prorated PerformanceShare Rights Award which is otherwise computed in the manner set forth in Section 3 above.


Section 8: Qualified Performance Based Awards

Notwithstanding anything in these Guidelines to the contrary, the following provisions will apply to any Associate who is a vicepresident or above at the time the Awards are established under these Guidelines. Awards under this Section 8 are intended to satisfythe Section 162(m) Exemption applicable to Qualified Performance−Based Awards under Article 14 of the Plan. Please refer to thePlan document for further information.

• All determinations under these Guidelines will be made by the Committee which, pursuant to Section 4.1 of the Plan, willconsist of all the members of the Compensation Committee who are “outside directors” within the meaning of Section162(m) of the Code.

• The Committee will establish within 90 days after the beginning of each performance period the target Award payout foreach Associate covered by this Section 8, the peer group of companies and potential payout adjustments relating thereto forthe relevant performance period.

• Notwithstanding the foregoing, the Committee will adjust ROE and net−income−growth, the peer group of companies andpotential payout adjustments relating thereto for the relevant performance period, collectively or individually, with respect toeach Associate covered by this Section 8 to adequately reflect the occurrence, during the performance period, of any of theevents described in Sections 14.2 and 14.4 of the Plan.

• Payment of any Award under these Guidelines to any Associate covered by this Section 8 is conditioned upon the writtencertification of the Committee that the performance goals and any other material conditions applicable to such Award weresatisfied.

• The Committee will retain the discretion to decrease, but not increase, the Award otherwise payable to any Associatecovered by this Section 8 in accordance with the applicable performance formula described above. In no event will theAward otherwise payable to any Associate covered by this Section 8 in accordance with the applicable performance formuladescribed above exceed 1,000,000 shares of Company Stock.

• Consistent with Section 1 above, payment of any Award under these Guidelines to any Associate covered by this Section 8 isconditioned upon the Plan having been previously approved by the shareholders of the Company.

Adopted: September28, 2005

Amended:January 19,2006; March27, 2007


Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO RULES 13a−14(a) AND 15d−14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302OF THE SARBANES−OXLEY ACT OF 2002

I, Howard R. Levine, certify that:

1. I have reviewed this Quarterly Report on Form 10−Q of Family Dollar Stores, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a−15(f) and 15d−15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

Date: April 12, 2007

/s/ Howard R. Levine Howard R. Levine Chairman of the Board and Chief Executive Officer (Principal Executive Officer)



Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO RULES 13a−14(a) AND 15d−14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302OF THE SARBANES−OXLEY ACT OF 2002

I, R. James Kelly, certify that:

1. I have reviewed this Quarterly Report on Form 10−Q of Family Dollar Stores, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a−15(f) and 15d−15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.


/s/ R. James Kelly R. James Kelly President and Chief Operating Officer — Interim Chief Financial Officer (Principal Financial Officer)



Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES−OXLEY ACT OF 2002

I, Howard R. Levine, Chairman of the Board and Chief Executive Officer of Family Dollar Stores, Inc., (the “Company”),do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes−Oxley Act of 2002, that, tomy knowledge:

• the Quarterly Report on Form 10−Q of the Company for the quarter ended March 3, 2007, as filed with the Securities andExchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.


/s/ Howard R. Levine Howard R. Levine Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to Family Dollar Stores, Inc., and will beretained by Family Dollar Stores, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.


Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES−OXLEY ACT OF 2002

I, R. James Kelly, President, Chief Operating Officer, and Interim Chief Financial Officer of Family Dollar Stores, Inc., (the“Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes−Oxley Act of2002, that, to my knowledge:

• the Quarterly Report on Form 10−Q of the Company for the quarter ended March 3, 2007, as filed with the Securities andExchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.


/s/ R. James Kelly R. James Kelly President and Chief Operating Officer — Interim Chief Financial Officer (Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to Family Dollar Stores, Inc., and will beretained by Family Dollar Stores, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.

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Economy & Finance

family dollar stores Second Quarter 10Q2007