The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for fiscal 2009, fiscal 2008 and fiscal 2007 and our expectations for fiscal 2010. You should read this discussion in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this Report. Our discussion contains forward-looking statements which are based upon our current expectations and which involve risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the "Cautionary Statement Regarding Forward Looking Statements" in the General Information section of this Report and the "Risk Factors" listed in Part I, Item 1A of this Report.

Our fiscal year generally ends on the Saturday closest to August 31 of each year, which generally results in an extra week every six years. Fiscal 2009 and fiscal 2008 were 52-week years compared with a 53-week year in fiscal 2007. The second quarter of fiscal 2009 and the second quarter of fiscal 2008 included 13 weeks compared with 14 weeks in the second quarter of fiscal 2007.

Executive Overview

We operate a chain of more than 6,600 general merchandise retail discount stores in 44 states, providing primarily low to middle income consumers with a selection of competitively priced merchandise in convenient neighborhood stores. Our merchandise assortment includes consumables, home products, apparel and accessories, and seasonal and electronics. We sell merchandise at prices that generally range from less than $1 to $10.

During fiscal 2009 as compared with fiscal 2008, our net sales increased 6.0% to $7.4 billion, our net income increased 25.0% to $291.3 million, and our diluted net income per common share increased 24.7% to $2.07. Comparable store sales (stores open more than 13 months) for fiscal 2009 increased 4.0% compared with fiscal 2008. Our strong results during fiscal 2009 were due primarily to strong sales of consumable merchandise and improvements in cost of sales, as a percentage of net sales.

Although the economic environment remained difficult for our customers during fiscal 2009, with rapidly rising unemployment and a decline in average hours worked, we believe our customers benefited from lower energy costs and certain government stimulus programs. We believe our strategy of providing both value and convenience continues to resonate well with budget-minded consumers. During fiscal 2009, we experienced an increase in customer traffic and the dollar value of the average transaction. Our customer research suggests that our core low-income customer is shopping us more frequently and spending more when they shop at our stores. In addition, we are seeing growth in the number of shopping trips and average transaction from more middle-income customers. The various components affecting our results for fiscal 2009 are discussed in more detail below.

During fiscal 2009, we focused on driving revenues, mitigating risk and managing costs through the following key initiatives:

• We continued the expansion of our assortment of traffic-driving consumables, providing customers with more of what they need in a challenging economic environment. During fiscal 2009, we initiated efforts to re-align space in our stores to accommodate strong customer demand for consumable merchandise and improve the in-store shopping experience. Approximately 48% of the chain was impacted by these efforts during fiscal 2009.

• To strengthen the Family Dollar brand with customers and to reinforce the values we offer, we focused on increasing the productivity and returns of our advertising and customer communications and improving our in-store execution of promotional events.

• We continued the roll-out of new register and point-of-sale technology in approximately 2,500 additional stores. As of August 29, 2009, approximately 4,900 stores were operating on the new technology platform. The new platform facilitates the acceptance of additional payment types, including credit cards and food stamps, and includes a number of computer-based tools designed to provide our store managers with better training, analytics and work flow management.

• Through our price management work, the continued development of our private label offering, and our global sourcing efforts, we offset the impact of the shift in the merchandise mix to more lower-margin consumable merchandise.

• We continued to focus on inventory productivity, and we lowered our inventory levels in more discretionary merchandise categories. During fiscal 2009, total inventory decreased 3.8% and inventory per store decreased 5.0%, both in comparison to fiscal 2008. Lower inventory levels are making our stores easier to shop and reducing our exposure to seasonal markdowns. We also believe that lower inventory levels are resulting in lower inventory shrinkage and a reduction in workers' compensation and general liability claims.

Fiscal 2010 Outlook

During fiscal 2010, we plan to build on the improvements we made during fiscal 2009 and maintain our focus on four key priorities: increase relevancy to the customer, drive increased profitability, manage risk and build great employee teams.

To increase our relevancy to the customer we plan to continue re-aligning the space in our stores to better meet customer demand and improve the in-store shopping experience. In addition, we plan to complete the rollout of our new register and point-of-sale technology during fiscal 2010. We also plan to adjust our store operating hours to provide greater convenience for our customers and continue to expand our customer research efforts.

In order to drive increased profitability, we plan to continue investing in initiatives that drive top-line growth, and we remain focused on cost management. In addition to the initiatives already discussed, we plan to enhance our private label offering and global sourcing efforts and make additional investments to strengthen our pricing efforts.

We plan to continue managing our inventory risk by constraining purchases of discretionary merchandise. We also plan to leverage the investments we have made in our Project Accelerate initiative and global sourcing efforts to improve inventory productivity and quality.

We believe that our long-term success is dependent on our ability to create strong employee teams that can adjust and respond quickly to ever-changing conditions. We plan to continue to invest in building a stronger Family Dollar culture and great employee teams. We also plan to continue to focus on improving employee retention.

During fiscal 2010, we expect sales will continue to be strongest in the Consumables category, as customers continue to constrain their discretionary spending. We expect cost of sales, as a percentage of net sales, will continue to be pressured by the shift in the merchandise mix to more consumable merchandise. We plan to offset this pressure through lower markdowns, the enhancement of our private label program, improvements in price optimization, and lower inventory shrinkage. We expect selling, general and administrative ("SG&A") expenses, as a percentage of net sales, will be pressured as we continue to make revenue driving investments, including the re-alignment of space in our stores, the roll-out of new register and point-of-sale technology and the expansion of store operating hours. See Part I, Item 1 of this Report for more information on our current strategic initiatives.

Results of Operations

Our results of operations for fiscal 2009, fiscal 2008 and fiscal 2007 are highlighted in the table below and discussed in the following paragraphs:

                                                                  Years Ended
(in thousands)                       August 29, 2009           August 30, 2008           September 1, 2007
Net sales                           $       7,400,606         $       6,983,628         $         6,834,305

Cost and expenses:
Cost of sales                               4,822,401                 4,637,826                   4,512,242
% of net sales                                   65.2 %                    66.4 %                      66.0 %
Selling, general and
administrative                              2,120,936                 1,980,496                   1,933,430
% of net sales                                   28.7 %                    28.4 %                      28.3 %

Cost of sales and operating
expenses                                    6,943,337                 6,618,322                   6,445,672
% of net sales                                   93.8 %                    94.8 %                      94.3 %


Operating profit                              457,269                   365,306                     388,633
% of net sales                                    6.2 %                     5.2 %                       5.7 %

Interest income                                 6,595                    11,042                      10,690
% of net sales                                    0.1 %                     0.2 %                       0.2 %

Interest expense                               12,939                    14,586                      17,427
% of net sales                                    0.2 %                     0.2 %                       0.3 %


Income before income taxes                    450,925                   361,762                     381,896
% of net sales                                    6.1 %                     5.2 %                       5.6 %

Income taxes                                  159,659                   128,689                     139,042
% of net sales                                    2.2 %                     1.8 %                       2.0 %


Net Income                                    291,266                   233,073                     242,854
% of net sales                                    3.9 %                     3.3 %                       3.6 %

Net Sales

Net sales increased 6.0% in fiscal 2009 compared to fiscal 2008 and 2.2% in fiscal 2008 compared to fiscal 2007. The increases in fiscal 2009 and fiscal 2008 were attributable, in part, to increases in comparable store sales of 4.0% and 1.2%, respectively, with the balance of the increases primarily relating to sales from new stores opened as part of our store growth program. Comparable store sales includes stores that have been open more than 13 months. Stores that have been renovated, relocated, or expanded are included in the comparable store sales calculation to the extent that they had sales during comparable weeks in each year. The method of calculating comparable store sales varies across the retail industry. As a result, our comparable store sales calculation may not be comparable to similarly titled measures reported by other companies.

Net sales in fiscal 2008 as compared to fiscal 2007, were negatively impacted by the loss of one week during the reporting period. Fiscal 2008 was a 52-week year compared to a 53-week year in fiscal 2007. The additional week was approximately 2% of net sales in fiscal 2007.

The 4.0% increase in comparable store sales in fiscal 2009 resulted from an increase in customer traffic, as measured by the number of register transactions in comparable stores and an increase in the dollar value of the average customer transaction. During fiscal 2009, the customer count increased approximately 2.8% and the average customer transaction increased approximately 1.2% to $9.84 compared to fiscal 2008. Sales during fiscal 2009, on a comparable store basis, were strongest in Consumables, driven primarily by sales of food. Sales in more discretionary categories continued to be soft, reflecting the current economic environment.

The 1.2% increase in comparable store sales in fiscal 2008 resulted from an increase in the average customer transaction. During fiscal 2008, the customer count, as measured by the number of register transactions in comparable stores, was approximately flat (0.3% decrease), and the average customer transaction increased approximately 1.5% to $9.70 compared to fiscal 2007. Sales during fiscal 2008, on a comparable store basis, were strongest in Consumables. Sales in more discretionary categories were weaker.

During fiscal 2009, we opened 180 stores and closed 96 stores for a net addition of 84 stores, compared with the opening of 205 stores and closing of 64 stores for a net addition of 141 stores during fiscal 2008. We relocated 10 stores in fiscal 2009, compared with 17 stores that were relocated in fiscal 2008. We also expanded or renovated 41 stores in fiscal 2009, compared with 80 stores that were expanded or renovated in fiscal 2008. In addition, during fiscal 2009, we initiated efforts to re-align space in our stores to accommodate strong customer demand for consumable merchandise and improve the in-store shopping experience. Approximately 48% of the chain was impacted by these efforts during fiscal 2009.

Cost of Sales

Cost of sales increased 4.0% in fiscal 2009 compared to fiscal 2008 and 2.8% in fiscal 2008 compared to fiscal 2007. These increases primarily reflected the additional sales volume between years. The increase in fiscal 2008 compared to fiscal 2007 was impacted by the loss of one week during the reporting period, as discussed above. Cost of sales, as a percentage of net sales, was 65.2% in fiscal 2009, 66.4% in fiscal 2008 and 66.0% in fiscal 2007. The decrease in cost of sales, as a percentage of net sales, during fiscal 2009 as compared to fiscal 2008, was due primarily to lower freight expense, lower inventory shrinkage, and lower seasonal markdowns. In addition, higher purchase mark-ups more than offset the effect of stronger sales of lower-margin consumable merchandise. Freight expense benefited from lower diesel costs and increased transportation productivity and efficiency. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes. As a result of the shift in the merchandise sales mix to more consumable merchandise and our continued focus on managing inventory risk, we lowered inventory levels in our discretionary merchandise categories, which resulted in lower seasonal markdowns, especially during the first half of fiscal 2009. The increase in purchase mark-ups was due primarily to our price management work, including zone pricing and price optimization.

The increase in cost of sales, as a percentage of net sales, during fiscal 2008 as compared to fiscal 2007, was due primarily to increased sales of lower-margin consumable merchandise.

The Consumer Product Safety Improvement Act of 2008 was signed into law in August 2008. The new legislation addresses a number of consumer product safety issues, including the permissible levels of lead and phthalates in certain products. During fiscal 2009, we incurred markdown expense of approximately $6.8 million in response to the new legislation.

Selling, General and Administrative Expenses

SG&A expenses increased 7.1% in fiscal 2009 compared to fiscal 2008 and 2.4% in fiscal 2008 compared to fiscal 2007. The increases in these expenses were due in part to additional costs arising from the continued growth in the number of stores in operation. In fiscal 2009, we also incurred additional costs to support higher sales volume. The increase in fiscal 2008 as compared to fiscal 2007 was impacted by the loss of one week during the reporting period, as discussed above. SG&A expenses, as a percentage of net sales, were 28.7% in fiscal 2009, 28.4% in fiscal 2008 and 28.3% in fiscal 2007. The increase in SG&A expenses, as a percentage of net sales, during fiscal 2009 as compared to fiscal 2008, was due primarily to higher incentive compensation (approximately 0.3% of net sales) and higher insurance expense (approximately 0.3% of net sales). Most other costs decreased as a percentage of net sales, including payroll costs (approximately 0.1% of net sales) and occupancy costs (approximately 0.1% of net sales), as a result of a 4.0% increase in comparable store sales and our continued focus on expense control. The increase in incentive compensation was due to certain adjustments to bonus and other performance-based compensation accruals to reflect our strong performance during fiscal 2009. We continued to see favorable trends in workers' compensation and general liability claims during fiscal 2009, but the rate of improvement was lower as compared to fiscal 2008, resulting in an increase in insurance expense as a percentage of net sales.

The increase in SG&A expenses, as a percentage of net sales, in fiscal 2008 as compared to fiscal 2007, was due primarily to an increase in occupancy costs and an increase in advertising costs. In addition, most costs in fiscal 2008 were de-leveraged as a result of low single-digit comparable store sales growth. These increases offset a decrease in insurance costs and a decrease in professional fees.

Interest Income

Interest income decreased approximately 40.3% ($4.4 million) in fiscal 2009 compared to fiscal 2008 and increased approximately 3.3% ($0.4 million) in fiscal 2008 compared to fiscal 2007. The decrease in interest income during fiscal 2009 as compared to fiscal 2008, was due to a decrease in interest rates. The increase in fiscal 2008 as compared to fiscal 2007 was not material.

Interest Expense

Interest expense decreased 11.3% ($1.6 million) in fiscal 2009 compared to fiscal 2008 and 16.3% ($2.8 million) in fiscal 2008 compared to fiscal 2007. We did not borrow under our revolving credit facilities during fiscal 2009, which resulted in a decrease in interest expense as compared to fiscal 2008. During fiscal 2008, we incurred $1.7 million in interest expense related to our revolving credit facilities. The decrease in fiscal 2008 as compared to fiscal 2007 was due to an accounting policy change in the classification of tax-related interest and penalties in connection with our adoption of FIN 48. Tax-related interest and penalties were included in interest expense during fiscal 2007.

Income Taxes

The effective tax rate was 35.4% for fiscal 2009, 35.6% in fiscal 2008 and 36.4% in fiscal 2007. The decrease in the effective tax rate in fiscal 2009 as compared to fiscal 2008 was due primarily to an increase in certain federal jobs tax credits and changes in state income taxes, offset partially by changes in our liabilities for uncertain tax positions and a decrease in tax-exempt interest income. The decrease in the effective rate in fiscal 2008 compared to fiscal 2007 was due primarily to a decrease in our tax liabilities as a result of the expiration of the statute of limitations with respect to uncertain tax positions and favorable settlements with taxing authorities.

Liquidity and Capital Resources

General

We have consistently maintained a strong liquidity position. Cash provided by operating activities during fiscal 2009 was $529.9 million compared to $515.7 million in fiscal 2008 and $415.8 million in fiscal 2007. These amounts have enabled us to fund our regular operating needs, capital expenditure program, cash dividend payments, interest payments, and share repurchases. We believe operating cash flows and existing credit facilities will provide sufficient liquidity for our ongoing operations and growth initiatives.

Credit Facilities

On December 18, 2008, we entered into an unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250 million. The credit facility replaced our $250 million unsecured revolving credit facility that was scheduled to mature on January 29, 2009. The credit facility has an initial term of 364 days and includes two one-year extensions that require lender consent. The credit facility also includes a one year term-out option that does not require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates.

We also maintain a $350 million unsecured revolving credit facility expiring on August 24, 2011. Any borrowings under this credit facility also accrue interest at a variable rate based on short-term market interest rates. Outstanding standby letters of credit ($202.3 million as of August 29, 2009) reduce the borrowing capacity of the $350 million credit facility.

There were no borrowings under the credit facilities during fiscal 2009, compared with $736.3 million borrowed and repaid in fiscal 2008. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of August 29, 2009, we were in compliance with all such covenants.

Notes

On September 27, 2005, we obtained $250 million through a private placement of unsecured Senior Notes (the "Notes") to a group of institutional accredited investors. The Notes were issued in two tranches at par and rank pari passu in right of payment with our other unsecured senior indebtedness. The first tranche has an aggregate principal amount of $169 million, is payable in a single installment on September 27, 2015, and bears interest at a rate of 5.41% per annum from the date of issuance. The second tranche has an aggregate principal amount of $81 million, matures on September 27, 2015, with amortization commencing in the sixth year, and bears interest at a rate of 5.24% per annum from the date of issuance. The second tranche has a required principal payment of $16.2 million on September 27, 2011, and on each September 27 thereafter to and including September 27, 2015. Interest on the Notes is payable semi-annually in arrears on the 27th day of March and September of each year. The sale of the Notes was effected in transactions not requiring registration under the Securities Act of 1933, as amended. The Notes contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. At the end of fiscal 2009, we were in compliance with all such covenants.

Other Considerations

Our merchandise inventories at the end of fiscal 2009 were 3.8% lower than at the end of fiscal 2008. Inventory per store at the end of fiscal 2009 was approximately 5.0% lower than inventory per store at the end of fiscal 2008. The decrease in total inventory and inventory per store during fiscal 2009 was due to a decrease in discretionary merchandise. During fiscal 2009, we reduced our purchases of discretionary merchandise and focused on meeting higher customer demand for consumable merchandise.

Our merchandise inventories at the end of fiscal 2008 were 3.1% lower than at the end of fiscal 2007. Inventory per store at the end of fiscal 2008 was approximately 5.2% lower than inventory per store at the end of fiscal 2007. The decrease in total inventory and inventory per store during fiscal 2008 resulted from efforts to improve our inventory productivity, including the continuation of an aggressive markdown strategy that began in fiscal 2007.

Capital expenditures for fiscal 2009 were $155.4 million compared with $167.9 million in fiscal 2008 and $131.6 million in fiscal 2007. The decrease in capital expenditures during fiscal 2009 as compared to fiscal 2008 was due primarily to a decrease in distribution and corporate office related projects, which offset increases in technology-related projects and improvements and upgrades to existing stores. The increase in capital expenditures during fiscal 2008 as compared to fiscal 2007 was due to an increase in existing store improvements and upgrades and an increase in technology investments. Capital expenditures for fiscal 2010 are expected to be between $160 and $180 million and relate primarily to store technology infrastructure and other technology related projects; new store openings; existing stores, to include expansions, relocations and renovations; and distribution center improvements.

In fiscal 2009, we opened 180 stores, closed 96 stores and expanded, relocated, or renovated 51 stores. In addition, during fiscal 2009, we initiated efforts to re-align space in our stores to accommodate strong customer demand for consumable merchandise and improve the in-store shopping experience. Approximately 48% of the chain was impacted by these efforts during fiscal 2009. We plan to continue re-aligning the space in our stores during fiscal 2010. We occupy most of our stores under operating leases. Store opening, closing, expansion, relocation, and renovation plans, as well as overall capital expenditure plans, are continuously reviewed and may change. During fiscal 2010, we plan to open approximately 200 stores and close approximately 80 stores.

During fiscal 2009, we purchased 2.3 million shares of our common stock at a cost of $71.1 million. During fiscal 2008, we purchased 3.7 million shares at a cost of $97.7 million, and during fiscal 2007, we purchased 8.2 million shares at a cost of $257.5 million. As of August 29, 2009, we had outstanding authorizations to purchase a total of $62.0 million of our common stock. The timing and amount of any shares repurchased have been and will continue to be determined by management based on its evaluation of market conditions and other factors. Our repurchase program does not have a stated expiration date, and purchases may be made through open market purchases, private market transactions or transactions structured through investment banking institutions.

Our wholly-owned captive insurance subsidiary maintains certain balances in cash and cash equivalents and investment securities that are used in connection with our retained workers' compensation, general liability and automobile liability risks and are not designated for general corporate purposes. As of the end of fiscal 2009, these cash and cash equivalents and investment securities balances were $58.6 million and $59.3 million, respectively.

Cash flows from operating activities

Cash provided by operating activities increased $14.1 million during fiscal 2009 as compared to fiscal 2008. The increase was due primarily to an increase in net income, partially offset by changes in income tax receivable/payable amounts. The changes in the income tax receivable/payable amounts were primarily due to a tax refund received during fiscal 2008 in connection with the formation of our captive insurance subsidiary.

Cash provided by operating activities increased $100.0 million during fiscal 2008 as compared to fiscal 2007. The increase was due primarily to changes in merchandise inventories and other working capital items in the ordinary course of business.

Cash flows from investing activities

During fiscal 2009, we had a cash outflow from investing activities of $109.4 million compared to a cash outflow of $199.6 million in fiscal 2008. The change is due primarily to changes in the purchase/sale of investment securities. Due to volatility in the financial markets and the liquidity issues surrounding our . . .