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MATTHEWS, NC- Executives at Family Dollar Stores Inc.say that fiscal year 2005 will be a “transitionalyear” – one that will position the discount retailerfor future sales and earnings growth.

But during the transition, Family Dollar’s expenseshave increased from 26.5% in the first quarter lastyear to 27.1% in the first quarter this year, causingits net income to plunge from $64.5 million for thefirst quarter of the prior fiscal year to $55.4million. The decrease represents a decrease of 14.1%.

The discount retailer’s transition includes fourstrategic initiatives: urban stores, the addition of”treasure hunt” merchandise, the installation ofcoolers in selected stores and the continuation of an aggressive new store opening program.

“I am exited about the progress we are making on these initiatives,” says chairman & CEO Howard R. Levine. “They provide the foundation for future growth.” In particular, Family Dollar incurred significant expenses due to its urban initiative, expected to improve the operating performance, including higher sales and lower shrinkage.

According to Levine, during the first quarter, investments in process changes, technology and people were completed in 300 stores in 16 urban markets including Dallas, Houston, Atlanta, Baltimore, Tampa, FL and Columbus, OH. The urban initiative will impact 1,000 stores in 30 large urban markets during fiscal year 2005. The chain, which operates 5,571 stores in 44 states, says that sales in existing stores in the four weeks ending January 29, 2005 will increase in the 2% to 3% range. As the fiscal 2005 initiatives are implemented, Family Dollar expect that increases in sales in existing stores will accelerate to the 3% to 5% range in the fourth quarter ending August 27, 2005.

Sales for the first quarter ended November 27, 2004,were $1.4 billion, or 10.8% above sales of $1.2 billion for the same period last year. “Under the circumstances, we are pleased with first quarter comp sales of 2.5%,” says James Kelly, chairman & CFO.

“This comp store increase was the best performance achieved since the first quarter of last year.” During the first quarter, 98 new stores were opened and 9 stores were closed, compared to the opening of 101 stores and closing of 26 stores during the first quarter ended November 29, 2003. The chain plans to open 500 to 560 stores and close 60 to 70 stores during the fiscal year ending August 27, 2005.

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