The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the thirteen-week periods ended May 26, 2012, and May 28, 2011 ("third quarter of fiscal 2012" and "third quarter of fiscal 2011", respectively), and the thirty-nine-week periods ended May 26, 2012, and May 28, 2011 ("first three quarters of fiscal 2012" and "first three quarters of fiscal 2011", respectively). This discussion should be read in conjunction with, and is qualified by, the financial statements included in this Report, the financial statements for the fiscal year ended August 27, 2011 ("fiscal 2011"), and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in our Annual Report on Form 10-K for fiscal 2011. This discussion also should be read in conjunction with the "Cautionary Statement Regarding Forward Looking Statements" set forth following this MD&A, and the "Risk Factors" set forth in Part I - Item 1A of our Annual Report on Form 10-K for fiscal 2011.

Executive Overview

We operate a chain of more than 7,200 general merchandise retail discount stores in 45 states, providing primarily low- and 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 the first three quarters of fiscal 2012, as compared with the first three quarters of fiscal 2011, our net sales increased 8.6% to $7.0 billion, our net income increased 10.6% to $341.3 million, and our diluted net income per common share increased 18.0% to $2.89. Comparable store sales (stores open more than 13 months) for the first three quarters of fiscal 2012 increased 4.5% compared with the first three quarters of fiscal 2011.

During the third quarter of fiscal 2012, as compared with the third quarter of fiscal 2011, our net sales increased 9.6% to $2.4 billion, our net income increased 12.1% to $124.5 million, and our diluted net income per common share increased 16.5% to $1.06. Comparable store sales for the third quarter of fiscal 2012 increased 5.0% compared with the third quarter of fiscal 2011.

Our performance during the third quarter and first three quarters of fiscal 2012 was driven primarily by our strong sales performance, particularly in the Consumables and Seasonal and Electronics categories. Many of the initiatives we launched over the past several years continue to deliver results, including the expansion of our global sourcing efforts, increased investment in our private brands assortment, our multi-year comprehensive store renovation program and the expansion of our key consumables categories. During fiscal 2012, we remain focused on continuing to strengthen our value and convenience proposition. In addition, we are accelerating our new store growth, continuing to aggressively renovate our stores, and expanding our consumable assortment further.

During the first three quarters of fiscal 2012, we opened 287 stores and closed 43 stores for a net addition of 244 stores, compared with the opening of 206 stores and closing of 48 stores for a net addition of 158 stores during the first three quarters of fiscal 2011. During the third quarter of fiscal 2012, we opened 103 stores and closed 7 stores for a net addition of 96 stores, compared with the opening of 60 stores and closing of 5 stores for a net addition of 55 stores during the third quarter of fiscal 2011. We plan to open approximately 450 to 500 new stores during fiscal 2012, compared with 300 new store openings in fiscal 2011.

In today's uncertain economic environment, value and convenience continues to resonate with consumers. Our strategy of providing customers with value and convenience continues to attract not only our core low-income customers, but also middle-income families with more frequency. We continue to invest aggressively in our merchandise assortment to respond to the challenging macro-economic environment and customer demand. In the second half of fiscal 2011, we executed an expansion in key consumable categories in more than 5,700 stores. Additionally, in the third quarter of fiscal 2012, we completed a further expansion of health and beauty aids in more than 2,500 stores and began selling tobacco in approximately 1,300 stores. We expect to continue these expansions as well as further expand our food assortment in the fourth quarter of fiscal 2012. As a result of these Consumables merchandise expansions, in the third quarter and first three quarters of fiscal 2012, our Consumables sales increased by 12.2% in both periods, as compared to the third quarter and first three quarters of fiscal 2011. Consumables sales, as a percentage of net sales, increased to 68.9% and 67.8% in the third quarter and first three quarters of fiscal 2012, respectively, from 67.3% and 65.7% in the third quarter and first three quarters of fiscal 2011, respectively. The investments we are making in global sourcing, private brands and price management capabilities have resulted in more favorable purchase markups that continue to offset much of the pressure created by the shift in sales mix to lower margin Consumables.

Leveraging our concept renewal efforts, enhanced merchandising and supply chain capabilities, a refreshed store technology platform, and a better trained and more productive workforce, we continue to deliver on our multi-year comprehensive renovation program intended to re-energize the Family Dollar brand. During the first three quarters of fiscal 2012, we renovated, relocated or

expanded 583 stores under this new format. We plan to renovate, relocate or expand approximately 1,000 stores in this new format in fiscal 2012. The renovations address both the interior and exterior of the stores, create more customer-focused assortments and layouts, and position more customer-centric teams.

During the third quarter of fiscal 2012, we completed a sale-leaseback transaction under which we sold 137 stores and received net proceeds of $177.6 million. Subsequent to the end of the third quarter of fiscal 2012, we completed and additional sale-leaseback transaction under which we sold an additional 137 stores and received net proceeds of $178.8 million. Concurrent with these sales, we entered into agreements to lease the properties back from the purchasers over an initial lease term of 15 years. The leases for all stores under these transactions qualify for operating lease treatment.

Results of Operations

Our results of operations for the third quarter and first three quarters of
fiscal 2012 and the third quarter and first three quarters of fiscal 2011 are
highlighted in the table below and discussed in the following paragraphs:



                                            Quarter Ended                         Three Quarters Ended
(in thousands)                    May 26, 2012         May 28, 2011         May 26, 2012         May 28, 2011
Net sales                        $    2,359,957       $    2,153,395       $    6,966,880       $    6,413,505

Cost and expenses:
Cost of sales                         1,514,684            1,373,639            4,506,636            4,106,817
% of net sales                            64.2%                63.8%                64.7%                64.0%
Selling, general and
administrative                          645,867              595,403            1,904,800            1,800,388
% of net sales                            27.4%                27.7%                27.3%                28.1%

Cost of sales and operating
expenses                              2,160,551            1,969,042            6,411,436            5,907,205
% of net sales                            91.6%                91.4%                92.0%                92.1%


Operating profit                        199,406              184,353              555,444              506,300
% of net sales                             8.4%                 8.6%                 8.0%                 7.9%

Investment income                           274                  455                  716                1,264
% of net sales                             0.0%                 0.0%                 0.0%                 0.0%

Interest expense                          5,635                7,144               18,772               15,244
% of net sales                             0.2%                 0.3%                 0.3%                 0.2%


Income before income taxes              194,045              177,664              537,388              492,320
% of net sales                             8.2%                 8.3%                 7.7%                 7.7%

Income taxes                             69,505               66,563              196,079              183,724
% of net sales                             2.9%                 3.1%                 2.8%                 2.9%


Net Income                       $      124,540       $      111,101       $      341,309       $      308,596
% of net sales                             5.3%                 5.2%                 4.9%                 4.8%

Third quarter Results

Net Sales

Net sales increased 9.6% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. The net sales increase in the third quarter of fiscal 2012 reflects an increase in comparable store sales of 5.0%, with the balance of the increase due primarily 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.

The 5.0% increase in comparable store sales in the third quarter of fiscal 2012 resulted from both an increase in customer traffic, as measured by the number of register transactions in comparable stores, and the dollar value of the average customer transaction. Sales during the third quarter of fiscal 2012, on a comparable store basis, were strongest in the Seasonal and Electronics and Consumables categories.

The average number of stores in operation during the third quarter of fiscal 2012 was 4.5% higher than the average number of stores in operation during the third quarter of fiscal 2011. We had 7,267 stores in operation at the end of the third quarter of fiscal 2012 compared with 6,943 stores in operation at the end of the third quarter of fiscal 2011, representing an increase of 4.7%. As of May 26, 2012, we had, in the aggregate, approximately 51.9 million square feet of selling space compared to 49.4 million as of May 28, 2011.

Cost of Sales

Cost of sales increased 10.3% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. The increase was due primarily to additional sales volume. Cost of sales, as a percentage of net sales, was 64.2% in the third quarter of fiscal 2012 and 63.8% in the third quarter of fiscal 2011. Cost of sales, as a percentage of net sales, was negatively impacted by the shift in sales mix to lower-margin consumable merchandise, higher markdowns, and an increase in inventory shrinkage. These pressures were offset by an increase in the markups on the sales of merchandise, as well as lower freight expense, as a percentage of net sales. The growth in sales of lower-margin consumables (68.9% of net sales in the third quarter of fiscal 2012 compared with 67.3% of net sales in the third quarter of fiscal 2011) continues to pressure gross profit as a percentage of net sales. Markdowns in our stores increased primarily in the Consumables category as we cleared discontinued SKUs in preparation for our expanded merchandise assortment as noted above and increased promotional activities. Inventory shrinkage increased during the quarter as a result of increased activities in the stores including renovations and significant merchandise expansions. We continue to focus on improving our purchase markups through the continued development of our private brand assortment, the expansion of our global sourcing efforts and improved price management capabilities.

Selling, General and Administrative Expenses

SG&A expenses increased 8.5% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. The increases in these expenses were due in part to additional sales volume and additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 27.4% in the third quarter of fiscal 2012 compared to 27.7% in the third quarter of fiscal 2011. Most costs in the third quarter of fiscal 2012 were leveraged as a result of a 5.0% increase in comparable store sales. As a percentage of net sales, SG&A costs were leveraged as a result of a decrease in insurance expense (approximately 0.2% of net sales) and a decrease in store payroll costs (approximately 0.2% of net sales), which was offset by increased legal fees (approximately 0.2% of net sales). Insurance expense continues to benefit from favorable trends in workers' compensation, general liability, and medical claims reflecting improvements we have made in our store operations and risk management processes. The decrease in store payroll costs was a result of the continued benefit from improvements we implemented in fiscal 2011 to re-engineer many of our core store processes, which has increased workforce productivity. Legal fees associated with litigation increased during the third quarter of fiscal 2012.

Investment Income

The change in investment income in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011 was not material.

Interest Expense

The change in interest expense in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011 was not material.

Income Taxes

The effective tax rate was 35.8% for the third quarter of fiscal 2012 compared with 37.5% for the third quarter of fiscal 2011. The decrease in effective tax rate was due primarily to the change in the valuation of uncertain tax positions and lower state income taxes.

Year-to-date Results

Net Sales

Net sales increased 8.6% in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011. The net sales increase in the first three quarters of fiscal 2012 reflects an increase in comparable store sales of 4.5%, with the balance of the increase due primarily to sales from new stores opened as part of our store growth program.

The 4.5% increase in comparable store sales in the first three quarters of fiscal 2012 resulted from both an increase in customer traffic, as measured by the number of register transactions in comparable stores, and the dollar value of the average customer transaction. Net sales during the first three quarters of fiscal 2012, on a comparable store basis, were strongest in the Consumables and Seasonal and Electronic categories.

The average number of stores in operation during the first three quarters of fiscal 2012 was 4.1% higher than the average number of stores in operation during the first three quarters of fiscal 2011.

Cost of Sales

Cost of sales increased 9.7% in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011. The increase was due primarily to additional sales volume. Cost of sales, as a percentage of net sales, was 64.7% in the first three quarters of fiscal 2012 compared to 64.0% in the first three quarters fiscal 2011. Cost of sales, as a percentage of net sales, was negatively impacted by the shift in sales mix to lower-margin consumable merchandise, higher markdowns, and an increase in inventory shrinkage. These pressures were offset by an increase in the markups on the sales of merchandise. The growth in sales of lower-margin consumables (67.8% of net sales in the first three quarters of fiscal 2012 compared with 65.7% of net sales in the first three quarters of fiscal 2011) continues to pressure gross profit as a percentage of net sales. We continue to use markdowns in our stores to drive revenue growth during challenging macro-economic times as well as increase market share. Inventory shrinkage increased during the quarter as a result of increased activities in the stores including renovations and significant merchandise expansions. We continue to focus on improving our purchase markups through the continued development of our private brand assortment, the expansion of our global sourcing efforts and improved price management capabilities.

Selling, General and Administrative Expenses

SG&A expenses increased 5.8% in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011. The increases in these expenses were due in part to additional sales volume and additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 27.3% in the first three quarters of fiscal 2012 compared to 28.1% in the first three quarters fiscal 2011. Most costs in the first three quarters of fiscal 2012 were leveraged as a result of a 4.5% increase in comparable store sales. As a percentage of net sales, SG&A costs were leveraged as a result of a decrease in insurance expense (approximately 0.4% of net sales) and a decrease in store payroll costs (approximately 0.3% of net sales). Insurance expense continues to benefit from favorable trends in workers' compensation and general liability costs reflecting improvements we have made in our store operations and risk management processes. The decrease in store payroll costs was a result of the continued benefit from improvements implemented in fiscal 2011 to re-engineer many of our core store processes, which has increased workforce productivity.

Investment Income

The change in investment income in the first three quarters of fiscal 2012 compared to the first three quarters of fiscal 2011 was not material.

Interest Expense

On January 28, 2011, we issued $300 million in senior unsecured notes with a coupon rate of 5.00% maturing in 2021. During the first three quarters of fiscal 2012, we incurred $11.5 million in interest expense related to the 2021 Notes compared with $5.0 million during the first three quarters of fiscal 2011.

Income Taxes

The effective tax rate was 36.5% for the first three quarters of fiscal 2012 compared with 37.3% for the first three quarters of fiscal 2011. The decrease in effective tax rate was due primarily to the change in the valuation of uncertain tax positions and lower state income taxes.

Liquidity and Capital Resources

General

We have consistently maintained a strong liquidity position. Our operating cash flows and credit facilities are more than sufficient to fund our regular operating needs, capital expenditure program, share repurchases, cash dividend payments, and principal and interest payments. We have availability under our two credit facilities to borrow up to $700 million (less standby letters of credit needed for collateral for our insurance programs of $56.1 million) to supplement operating cash flows. During the first three quarters of fiscal 2012, to help supplement our operating cash flows and to support the build of inventory for the holiday season and other growth initiatives, we borrowed a total of $306.3 million on our credit facilities and never carried a balance greater than $75.0 million. As of the end of the third quarter of fiscal 2012, no amounts were outstanding under the credit facilities. During the first three quarters of fiscal 2012, our cash and cash equivalents decreased $20.5 million. Despite the decrease in cash and cash equivalents and our borrowings under our credit facilities, our working capital level remains strong. Working capital at the end of the first three quarters of fiscal 2012 was $671.8 million compared to $670.5 million as of the end of the third quarter of fiscal 2011. We believe operating cash flows and capacity under existing credit facilities will continue to provide sufficient liquidity for our ongoing operations and growth initiatives.

Sale-Leaseback Transaction

During the third quarter of fiscal 2012, we completed a sale-leaseback transaction under which we sold 137 stores and received net proceeds of $177.6 million. Subsequent to the end of the third quarter of fiscal 2012, we completed an additional sale-leaseback transaction under which we sold an additional 137 stores and received net proceeds of $178.8 million. Concurrent with these sales, we entered into agreements to lease the properties back from the purchasers over an initial lease term of 15 years. The master leases for each transaction includes an initial term of 15 years and four, five-year renewal options and provides for the Company to evaluate each store individually upon certain events during the life of the lease, including individual renewal options. The leases for all stores qualify for operating lease treatment. Subsequent to completion of these transactions, we now own 318 of our stores.

Restricted Cash and Investments

We have restricted cash and investments to serve as collateral for certain of our insurance obligations that are held at our wholly owned captive insurance subsidiary. These restricted funds cannot be withdrawn from our account without the consent of the secured party. As of May 26, 2012, we held $55.0 million in this restricted account, of which $46.2 million was included in Restricted Cash and Investments and $8.8 million was included in Other Assets in the Consolidated Condensed Balance Sheet. The classification between current and non-current is based on the timing of expected payments of the secured insurance obligations. Previously, these obligations were collateralized using standby letters of credit under our revolving credit facilities. We did this to achieve savings in the cost of collateralizing its insurance obligations.

Additionally, in conjunction with the sale-leaseback transaction completed during the third quarter of fiscal 2012, certain proceeds of the transaction were placed into an escrow account with an independent third party in connection with a like-kind exchange transaction, which permits the deferral of a portion of the tax gain associated with the sale of the stores. We intend to use these proceeds to purchase additional new stores and must do so within 180 days to realize the deferral. At the Company's option, the proceeds can be returned for general operating needs, however, the tax gain deferral would not be realized. As of May 26, 2012, we held $36.0 million in this account. These assets are classified as Restricted Cash and Investments in the Consolidated Condensed Balance Sheet.

Credit Facilities

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

On August 17, 2011, we entered into a new five-year unsecured revolving credit facility with a syndicate of lenders for borrowings of up to $300 million. The credit facility matures on August 17, 2016, and provides for two, one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The credit facility replaced our previous five-year $200 million unsecured credit facility.

As noted above, during the first three quarters of fiscal 2012, we borrowed $306.3 million and re-paid $306.3 million under the credit facilities. Our borrowings during the first three quarters of fiscal 2012 had a weighted-average interest rate of 1.6%. As of May 26, 2012, we had no amounts outstanding under the credit facilities. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of May 26, 2012, we were in compliance with all such covenants.

Principal Payment

During the first quarter of fiscal 2012, we made a scheduled principal payment on our private placement notes in the amount of $16.2 million. The next principal payment of $16.2 million is due in September 2012.

Fee Development Program

We occupy most of our stores under operating leases. As part of our new store growth strategy, we have created a Fee Development Program ("Fee Development Program"), intended to provide us with a more cost effective means to finance the construction of new store locations. Previously, developers would use their own capital to fund the construction of new sites, which they would then lease to us. Under the new program, we work with select developers to construct the new sites using our own investment grade credit rating to achieve a lower all-in cost. Upon completion of construction we own the stores. We intend to continue to use sale-leaseback transactions as a source of capital, providing additional liquidity for the Fee Development Program. As a result, we expect to achieve a lower cost of occupancy when compared to the previous program. During the first three quarters of fiscal 2012, we purchased stores at a cost of $70.2 million under this program.

Other Considerations

Our merchandise inventories at the end of the third quarter of fiscal 2012 were $1,387.4 million, as compared to $1,134.4 million at the end of the third quarter of fiscal 2011, an increase of 22.3%. Inventory per store at the end of the third quarter of fiscal 2012 was approximately 17% higher than inventory per store at the end of the third quarter of fiscal 2011. The increases in inventory were driven primarily by the investments we have made to continue to expand our consumable merchandise assortments in the second half of fiscal 2011 and in fiscal 2012.

Capital expenditures for the first three quarters of fiscal 2012 were $391.4 million compared with $230.3 million for the first three quarters of fiscal 2011. The increase in capital expenditures during the first three quarters of fiscal 2012 relate primarily to increased new store openings (including stores opened under our Fee Development Program) and the construction of our tenth distribution center, which opened in June, 2012. As part of our strategy to accelerate new store growth, we have increased the number of stores we initially own through the Fee Development Program. We now expect capital expenditures for fiscal 2012 to be between $650 and $675 million. The planned increase in capital expenditures in fiscal 2012 is due primarily to our efforts to support a greater number of new store openings (including the Fee Development Program), enhance . . .