Although same-store sales performed respectably, DG took a hitdue to its bifurcated campaign to jettison 400 underperformingstores and change the way inventory is handled, efforts whichrequired dumping substantial amounts of merchandise at deepdiscounts, particularly in the third and fourth quarters. The grossprofit rate as a percentage of sales fell from 28.7% in 2005 to25.8%. The company acceded there were "significant" markdownstotaling $279.1 million at cost during 2006, more than double themarkdowns of $106.5 million at cost in FY 2005. Meanwhile, DGlisted charges and expenses of $32.7 million relating to the realestate and inventory initiatives, including $8.1 million in futurelease payments on closed stores and services needed to shutter theunits.

Upon announcing the $7.3 billion bid by New York-based KohlbergKravis Roberts & Co. LP, DG cancelled a conference call set todiscuss FY 2006 results. In a press release, management concurredthat the closings and inventory strategies impacted financials, butalso insisted "the company is pleased with the results of itsefforts to date on these initiatives." DG reported net income forFY 2006 of $137.9 million versus $350.2 million in FY 2005, eventhough sales were up a healthy 6.8% to $9.17 billion this year. Thefourth quarter registered a 3% gain year-over-year to $2.55billion, but gross profit as a percentage of sales in the finalthree months was 25.3%, down from 29.5%.

In other real estate matters, DG's capital expenditures of$261.5 million in FY 2006 included $66 million to open new storesand a like amount incurred expanding its distribution network, ahefty portion of which was attributed to a 1.1-msf warehouse thatopened in Marion, IN, in August. Another $38 million was spentrefurbishing existing stores.