Family Dollar Strategic Overview

Address:P O Box 101710401 Old Monroe RdCharlotte, NC 28201-1017 704-847-6961www.familydollar.comSales: $4.16 billionStores: 4,636OperationsThe Company operates a chain of self-service retail discount stores. As of November 1, 2002, there were 4,636 stores in 41 states and the District of ColumbiaDuring fiscal 2002, the Company opened 525 stores and closed 50 stores for a net addition of 475 stores, compared with the opening of 502 stores and closing of 50 stores for a net addition of 452 stores during fiscal 2001. The Company also expanded or relocated 121 stores in fiscal 2002, compared with 210 stores that were expanded or relocated in fiscal 2001.In addition, approximately 42 stores in fiscal 2002 and approximately 184 stores in fiscal 2001 were renovated. The Company currently plans to open approximately 575 stores and close approximately 50 stores for a net addition of 525 stores during fiscal 2003. [Editor's Note: Later revised to between 475 and 500] The Company also currently expects to renovate an additional 50 stores and expand or relocate approximately 150 stores in fiscal 2003.The typical store has approximately 7,500 to 9,500 square feet of total area. The stores are in both rural and urban areas, and they are typically freestanding or located in shopping centers with adequate parking available. There also are storefront locations in urban markets. Historically, about 25% of the stores have been located in urban areas with populations above 75,000. In fiscal 2002, about 40% of new stores opened in urban markets, with particular emphasis on the large urban markets. In the current fiscal year, the Company continues to open large numbers of new stores in small towns and rural areas, but increased emphasis is being given to potential locations in those urban markets where the Company has experienced success. All stores are similar in appearance and display highly visible red and white "Family Dollar Stores" or "Family Dollar" signs.Excluding the non-comparative fifth week in January 2001, sales in existing stores increased approximately 5.8% in fiscal 2002 and 4.1% in fiscal 2001, as compared with the respective prior years, as customers continued to respond favorably to the Company's everyday low pricing strategy and shift in the merchandise mix toward more basic consumable hardlines merchandise. In fiscal 2002, the customer count, as measured by the number of register transactions in existing stores, increased approximately 3.8%, and the average transaction increased approximately 1.9% to $8.75. Increased sales of hardlines merchandise have been the primary contributor to the overall sales increases, with hardlines sales increases in existing stores of approximately 8.4% in fiscal 2002. Hardlines as a percentage of total sales increased to 76.4% in fiscal 2002 compared to 74.5% in fiscal 2001. Softlines as a percentage of sales decreased to 23.6% in fiscal 2002 (with hanging apparel and shoes representing 12.4%, basic apparel 4.5% and domestics 6.7%) compared to 25.5% in fiscal 2001 (with hanging apparel and shoes representing 13.4%, basic apparel 4.9% and domestics 7.2%). MerchandisingThe stores offer a variety of hardlines and softlines merchandise. Hardlines merchandise includes primarily household chemical and paper products, candy, snack and other food, health and beauty aids, electronics, housewares and giftware, toys, stationery and school supplies, seasonal goods, hardware and automotive supplies. Softlines merchandise includes men's, women's, boys', girls' and infants' clothing, shoes, and domestic items such as blankets, sheets and towels. During the fiscal year ended August 31, 2002, hardlines accounted for approximately 76.4% of the Company's sales. Softlines accounted for approximately 23.6% of sales (with hanging apparel and shoes representing 12.4%, basic apparel 4.5% and domestics 6.7%). During the fiscal year ended August 31, 2002, nationally advertised brand merchandise accounted for approximately 33% of sales; Family Dollar label merchandise accounted for approximately 3% of sales and merchandise sold under other labels, or which was unlabeled, accounted for the balance of sales. Irregular merchandise accounted for less than one-quarter of 1% of sales during such period. During the fiscal year ended August 31, 2002, the Company continued to adjust the merchandise selection in the stores. In recent years, more hardline consumables, including brand names, have been added. To make room for the additional hardlines, beginning in May 2000, space allocated to hanging apparel was reduced by about 15% to 20%. The Company purchases its merchandise from approximately 1,800 suppliers. Approximately 62% of the merchandise is manufactured in the United States and substantially all such merchandise is purchased directly from the manufacturer. Purchases of imported merchandise are made directly from the manufacturer or from importers. New fixtures were installed in departments such as giftware, artificial flowers and 2 for $1 greeting cards and aisles were widened. This space reallocation program was completed in October 2000. In the fourth quarter of the fiscal year ended September 1, 2001, the Company began reducing space allocated to shoes. Approximately one-half of the shoe inventories were eliminated in a program that was completed in January 2002, with more hardlines, including consumables, taking the space previously allocated to shoes. The Company has a policy of uniform pricing of most items in its stores. A limited amount of merchandise in stores in the most competitive markets carries lower prices and in the least competitive markets with higher operating costs carries higher prices. Most items of merchandise are priced under $10.00. AdvertisingThe Company advertises through circulars which are inserted in newspapers or mailed directly to consumers' residences. The Company reduced the number of advertising circulars distributed in fiscal 2002 to two, which was one less than was distributed in fiscal 2001. The adverse sales impact of discontinuing one circular was offset by the increased customer traffic generated by the everyday low pricing strategy and shift in the merchandise mix. The two circulars in the fiscal year ended August 31, 2002, were distributed in December 2001, and the Company plans to eliminate one of the two circulars in December 2002. Circulars that are passed out in the stores also continue to be utilized. Most items in the circulars are advertised at the regular everyday low price. Advertising costs, net of co-op recoveries from vendors, are expensed the first time the advertising is run and amounted to $0.5 million, $2.7 million and $8.7 million in fiscal 2002, 2001 and 2000, respectively.

Family Dollar Strategic Overview

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