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GOODLETTSVILLE, TN—Dollar General Corp.’s agreement to be acquired by a private equity firm earlier this month raises questions about the off-price retailer’s ambitious store reorganization program launched last November, but no matter what lies in the future, the plan wreaked havoc on the bottom line in FY 2006, according to company results issued yesterday.

Although same-store sales performed respectably, DG took a hit due to its bifurcated campaign to jettison 400 underperforming stores and change the way inventory is handled, efforts which required dumping substantial amounts of merchandise at deep discounts, particularly in the third and fourth quarters. The gross profit rate as a percentage of sales fell from 28.7% in 2005 to 25.8%. The company acceded there were “significant” markdowns totaling $279.1 million at cost during 2006, more than double the markdowns of $106.5 million at cost in FY 2005. Meanwhile, DG listed charges and expenses of $32.7 million relating to the real estate and inventory initiatives, including $8.1 million in future lease payments on closed stores and services needed to shutter the units.

Upon announcing the $7.3 billion bid by New York-based Kohlberg Kravis Roberts & Co. LP, DG cancelled a conference call set to discuss FY 2006 results. In a press release, management concurred that the closings and inventory strategies impacted financials, but also insisted “the company is pleased with the results of its efforts to date on these initiatives.” DG reported net income for FY 2006 of $137.9 million versus $350.2 million in FY 2005, even though sales were up a healthy 6.8% to $9.17 billion this year. The fourth quarter registered a 3% gain year-over-year to $2.55 billion, but gross profit as a percentage of sales in the final three 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 stores and a like amount incurred expanding its distribution network, a hefty portion of which was attributed to a 1.1-msf warehouse that opened in Marion, IN, in August. Another $38 million was spent refurbishing existing stores.

The strategy approved in November had DG actively shuffling the mix of 8,260 stores through the closings, renovations or relocation of retail units. The stores average 6,800-sf and are located in 35 states, with a solid presence in the mid-Atlantic and southeast US. The future prototype of 9,000-sf will be positioned based on market analysis and strict financial thresholds, company officials said last year, but will be introduced at a slower rate than normal in FY 2007 and FY 2008, during which 300 and 400 new stores are anticipated, respectively.

Under the November plan, the figure would jump to 700 openings in FY 2009, a year in which another 450 stores were to be relocated or remodeled. Founded in Kentucky in 1939, DG touts itself as the first chain to advance the dollar-store concept, having done so in 1955. The firm went public in 1968 but has seen the bulk of its expansion since 1997, at which time there were 3,000 stores nationally.

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