General

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the year ended January 30, 2009. It also should be read in conjunction with the disclosure under "Cautionary Disclosure Regarding Forward-Looking Statements" in this report.

Executive Overview

We are the largest discount retailer in the United States by number of stores, with 8,577 stores located in 35 states as of July 31, 2009, primarily in the southern, southwestern, midwestern and eastern United States. We offer a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products and pet supplies, and non-consumable products such as seasonal merchandise, home decor and domestics, and apparel. Our merchandise includes high quality national brands from leading manufacturers, as well as comparable quality private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box (small store) locations.

The customers we serve are value-conscious, and Dollar General has always been intently focused on helping our customers make the most of their spending dollars. We believe our convenient store format and broad selection of high quality products at compelling values have driven our substantial growth and financial success over the years. Like other companies, we are operating in a very difficult economic environment. Consumers are facing heightened economic challenges, including high rates of unemployment, fluctuating food, gasoline and energy costs, and a continued weakness in housing and credit markets, and the timetable for economic recovery is uncertain. Nonetheless, as a result of our long-term mission of serving the value-conscious customer, coupled with a vigorous focus on improving our operating and financial performance, our 2009 year-to-date financial results have been strong, and we remain cautiously optimistic with regard to our operating priorities for the remainder of the year.

We have been keenly focused on executing the following four operating priorities which we defined at the beginning of 2008:

·

Drive productive sales growth;

·

Increase gross margins;

·

Leverage process improvements and information technology to reduce costs; and

Strengthen and expand Dollar General's culture of "serving others."

Focus on these priorities has resulted in continued improvement in our financial performance in the 2009 second quarter over the comparable 2008 period in each of our key financial metrics, as follows:

·

Total sales increased 11.2% to $2.90 billion and sales in same-stores increased 8.6%. Average sales per square foot for all stores over the 52-week period ended July 31, 2009 increased to approximately $188, up from $171 for the comparable prior 52-week period. Strong sales performance was driven by our increased efforts in food, candy and snacks, pet supplies, health and beauty products and seasonal merchandise.

·

Gross profit, as a percentage of sales, improved to 31.2% compared to 29.1% in the 2008 period as a result of higher average markups driven by our focused effort to reduce our merchandise purchase costs while maintaining our everyday low prices (including strategic changes we have made to the mix of merchandise, such as increasing private brand items which generally are associated with higher average markups), continued improvement in our inventory shrink rate, reduced transportation and distribution costs and a lower LIFO charge.

·

Selling, general and administrative expenses or SG&A, as a percentage of sales, was 23.2%, compared to 23.6% in the 2008 quarter. The improvement is primarily attributable to leverage resulting from our significant sales increase.

·

Inventory turnover improved to 5.1 times on a rolling four-quarter basis compared to 5.0 times for the corresponding prior year period.

·

We reported net income of $93.6 million compared to net income of $27.7 million in the 2008 quarter.

We generated $243.9 million of cash from operating activities during the first two quarters of 2009; and as of July 31, 2009, we had a cash balance of $515.4 million. Through the 2009 second quarter, we opened 225 new stores, remodeled or relocated 213 stores, and closed 10 stores.

The above discussion is a summary only. Readers should refer to the detailed discussion of our operating results below for the full analysis of our financial performance in the current year period as compared with the prior year period.

Results of Operations

Accounting Periods. We follow the concept of a 52-53 week fiscal year that ends on the Friday nearest to January 31. The following text contains references to years 2009 and 2008, which represent 52-week fiscal years ending or ended January 29, 2010 and January 30, 2009, respectively. Consequently, references to quarterly accounting periods for 2009 and 2008

Seasonality. The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, sales in the fourth quarter have historically been higher than sales achieved in each of the first three quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.

The following table contains results of operations data for the second quarter and year to date periods of each of 2009 and 2008, and the dollar and percentage variances among those periods:

                     13 Weeks Ended          2009 vs. 2008          26 Weeks Ended          2009 vs. 2008
(amounts in       Jul. 31,     Aug. 1,      Amount      %        Jul. 31,     Aug. 1,      Amount     %
millions)           2009         2008       change    change       2009         2008       change   change
Net sales by
category:
Consumables      $ 2,053.2    $  1,796.0   $  257.2   14.3  %   $ 4,049.0    $ 3,476.9    $  572.1   16.5  %
% of net sales      70.75%       68.83%                            71.26%       69.36%
Seasonal             423.3        384.5        38.8   10.1          779.7        706.6        73.1   10.3
% of net sales      14.59%       14.74%                            13.72%       14.10%
Home products        212.2        219.5        (7.3)  (3.3)         429.1        424.0         5.0    1.2
% of net sales       7.31%        8.41%                             7.55%        8.46%
Apparel              213.2        209.3         3.9    1.9          424.0        405.3        18.7    4.6
% of net sales       7.35%        8.02%                             7.46%        8.08%
Net sales        $ 2,901.9    $ 2,609.4    $  292.5   11.2  %   $ 5,681.8    $ 5,012.9    $  669.0   13.3  %
Cost of goods
sold               1,995.9      1,851.3       144.5    7.8        3,920.4      3,561.8       358.7   10.1
% of net sales      68.78%       70.95%                            69.00%       71.05%
Gross profit         906.0        758.0       148.0   19.5        1,761.4      1,451.1       310.3   21.4
% of net sales      31.22%       29.05%                            31.00%       28.95%
Selling, general
and
administrative
expenses             672.8        615.0        57.8    9.4        1,303.3      1,197.2       106.1    8.9
% of net sales      23.19%       23.57%                            22.94%       23.88%
Operating profit     233.2        143.1        90.2   63.0          458.1        253.9       204.2   80.4
% of net sales       8.04%        5.48%                             8.06%        5.07%
Interest income       (0.0)        (1.2)        1.2  (98.8)          (0.1)        (2.2)        2.1  (95.0)
% of net sales     (0.00)%      (0.05)%                           (0.00)%      (0.04)%
Interest expense      89.9         99.4        (9.5)  (9.5)         179.2        200.3       (21.1) (10.5)
% of net sales       3.10%        3.81%                             3.15%        4.00%
Other (income)
expense               (2.4)         0.3        (2.7)     -           (0.7)         0.6        (1.3)     -
% of net sales      (0.08)%       0.01%                           (0.01)%        0.01%
Income before
income taxes         145.7         44.5        101.1 227.0          279.7         55.2       224.5  406.7
% of net sales       5.02%        1.71%                             4.92%        1.10%
Income taxes          52.1         16.8        35.3  209.6          103.1         21.6        81.6  378.2
% of net sales       1.80%        0.64%                             1.82%        0.43%
Net income       $    93.6    $    27.7    $   65.9  237.7  %   $   176.6    $    33.6    $  143.0  425.1  %
% of net sales       3.23%        1.06%                             3.11%        0.67%

Net Sales. The net sales increase in the 2009 second quarter reflects a same-store sales increase of 8.6% compared to the 2008 second quarter. Same-stores include stores that have been open for 13 months and remain open at the end of the reporting period. For the 2009 second quarter, there were 8,226 same-stores which accounted for sales of $2.82 billion. The remainder of the sales increase was attributable to new stores, partially offset by sales from closed stores.

We believe that the increase in sales reflects the impact of various operating and merchandising initiatives implemented over the last year, including the impact of improved store standards, the expansion of convenience food and beverage offerings and additional private brand consumables that offer improved quality and value. We have adjusted our store hours to better accommodate our customers, resulting in increased customer traffic. In addition, we have increased the utilization of store square footage and have made good progress on improving the timing, selection and management of our seasonal and apparel merchandise, adding items that are more trend relevant. As indicated by our growth in sales during this challenging economic period, value-conscious customers are relying on our stores for value and convenience more than ever.

Gross Profit. The gross profit rate as a percentage of sales was 31.2% in the 2009 second quarter compared to 29.1% in the 2008 second quarter. Several factors contributed significantly to our gross profit rate expansion:

·

Average markups increased as a result of our focus on lowering costs from our vendors, while maintaining our every day low prices, and changes we have made to the mix of merchandise, such as the increase in private brand items which generally represent higher gross profit rates.

·

Distribution and transportation costs decreased as a result of lower fuel costs and improved efficiencies arising from changes in our distribution processes.
In addition, higher sales volumes resulted in improved cost leverage.

·

Inventory shrink as a percentage of sales declined.

·

The estimated LIFO provision in the 2009 second quarter was negligible compared to a provision of $16.0 million in the 2008 second quarter reflecting a flattening of merchandise cost increases for comparable items based on our 2009 year-to-date trends and our current estimates for the 2009 fiscal year.

SG&A Expenses. SG&A decreased to 23.2% as a percentage of sales in the 2009 second quarter, from 23.6% in the 2008 second quarter, a decrease of 38 basis points, primarily attributable to leverage attained from significantly higher net sales as discussed above. As a percentage of sales, waste management costs declined primarily as a result of cardboard recycling efforts, electricity and store occupancy costs decreased, and professional fees (primarily legal expenses) and incentive compensation expense were lower in the 2009 period. In addition, workers' compensation costs and general liability insurance expense decreased as a

Interest Income. Interest income consists primarily of interest on investments. The decrease in interest income in the 2009 second quarter compared to the 2008 second quarter was the result of lower interest rates.

Interest Expense. The decrease in interest expense in the 2009 second quarter from the 2008 second quarter is due to lower interest rates on our variable rate debt, primarily on our term loan, and lower outstanding borrowings as the result of the repurchase of $44.1 million of the senior subordinated notes in the fourth quarter of 2008. We had outstanding variable-rate debt of $849 million and $623 million, after taking into consideration the impact of interest rate swaps, as of July 31, 2009 and January 30, 2009, respectively. The remainder of our outstanding indebtedness at July 31, 2009 and January 30, 2009 was fixed rate debt.

Income Taxes. The effective income tax rate for the 13-week period ended July 31, 2009 was 35.8% compared to a rate of 37.8% for the 13-week period ended August 1, 2008. Both periods included similar amounts of income tax-related interest, but because the 2009 pretax income was higher, the effective rate was impacted to a lesser degree. In addition, the 2009 period benefited from a reduction in a deferred tax valuation allowance related to state income tax credits that did not occur in 2008.

26 WEEKS ENDED JULY 31, 2009 AND AUGUST 1, 2008

Net Sales. The net sales increase in the 2009 year-to-date period reflects a same-store sales increase of 10.8% compared to the same period in 2008. For the 2009 quarter, there were 8,226 same-stores which accounted for sales of $5.52 billion. The remainder of the sales increase was attributable to new stores, partially offset by sales from closed stores.

Gross Profit. The gross profit rate as a percentage of sales was 31.0% in the 2009 period compared to 28.9% in the 2008 period. Several factors contributed significantly to our gross profit rate expansion:

·

Average markups increased as a result of our focus on lowering costs from our vendors, while maintaining our every day low prices, and changes we have made to the mix of merchandise, such as the increase in private brand items which generally represent higher gross profit rates.

·

Distribution and transportation costs decreased as a result of lower fuel costs and improved efficiencies arising from changes in our distribution processes. In addition, higher sales volumes resulted in improved cost leverage.

·

Inventory shrink as a percentage of sales declined.

The estimated LIFO provision in the 2009 period was $0.5 million compared to a provision of $16.0 million in the 2008 period based on our 2009 year-to-date trends compared to 2008 as discussed above and our current estimates for the 2009 fiscal year.

SG&A Expenses. SG&A decreased to 22.9% as a percentage of sales in the 2009 period from 23.9% in the 2008 period, a decrease of 94 basis points, primarily attributable to leverage attained from significantly higher net sales as discussed above. As a percentage of sales, waste management costs declined primarily as a result of cardboard recycling efforts, electricity, store payroll and occupancy costs decreased, and professional fees (primarily legal expenses) were lower in the 2009 period. In addition, workers' compensation costs and general liability insurance expense decreased as a result of our continued cost reduction and safety efforts. A noncash fixed asset impairment charge of approximately $5.0 million in the 2009 period and increased advertising costs partially offset improvements in SG&A. The overall 8.9% increase in SG&A expense in the 2009 period compared to the 2008 period is primarily the result of amounts required to operate new stores and to support increased same-store sales levels.

Interest Income. Interest income consists primarily of interest on investments. The decrease in interest income in the 2009 period compared to the 2008 period was the result of lower interest rates.

Interest Expense. The decrease in interest expense in the 2009 period from the 2008 period is due to lower interest rates on our variable rate debt, primarily on our term loan, and lower outstanding borrowings as the result of the repurchase of $44.1 million of the senior subordinated notes in the fourth quarter of 2008.

Income Taxes. The effective income tax rate for the 26-week period ended July 31, 2009 was 36.9% compared to a rate of 39.1% for the 26-week period ended August 1, 2008. Both periods included similar amounts of income tax-related interest, but because the 2009 pretax income was higher, the effective rate was impacted to a lesser degree. In addition, the 2009 period benefited from a reduction in a deferred tax valuation allowance related to state income tax credits that did not occur in 2008.

Recently Adopted Accounting Standards

During the second quarter of 2009 we adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 165, Subsequent Events ("SFAS 165"). The objective of SFAS 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this statement has not had a material effect on our consolidated financial statements.

During the first quarter of 2009 we changed our accounting for the fair value of our nonfinancial assets and liabilities in connection with the adoption of SFAS No. 157, Fair Value Measurements ("SFAS 157").

Liquidity and Capital Resources

Credit Facilities

We have two senior secured credit facilities (the "Credit Facilities") which provide financing of up to $3.331 billion. The Credit Facilities consist of a $2.3 billion senior secured term loan facility and a senior secured asset-based revolving credit facility ("ABL Facility"). On July 31, 2009, we amended the ABL Facility. Wells Fargo Retail Finance, LLC, became the successor administrative agent, replacing CIT Group/Business Credit, Inc., whose $94 million in commitments were also terminated. The total commitments under the ABL Facility are now $1.031 billion (of which up to $350.0 million is available for letters of credit), subject to borrowing base availability. The ABL Facility includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swingline loans.

The agreements governing the Credit Facilities provide that we have the right at any time to request up to $325.0 million of incremental commitments under one or more incremental term loan facilities and/or asset-based revolving credit facilities. The lenders under these facilities are not under any obligation to provide any such incremental commitments and any such addition of or increase in commitments will be subject to our not exceeding certain senior secured leverage ratios and certain other customary conditions. Our ability to obtain extensions of credit under these incremental commitments also will be subject to the same conditions as extensions of credit under the Credit Facilities.

The amount available under the ABL Facility (including letters of credit) is subject to certain borrowing base limitations. The ABL Facility includes a "last out" tranche in respect of which we may borrow up to a maximum amount of $101.0 million.

Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable margin for borrowings is (i) under the term loan facility, 2.75% for LIBOR borrowings and 1.75% for base-rate borrowings (ii) as of July 31, 2009, under the ABL

The senior secured credit agreement for the term loan facility requires us to prepay outstanding term loans, subject to certain exceptions, with up to 50% of our annual excess cash flow (as defined in the credit agreement) which will be reduced to 25% and 0% if we achieve and maintain a total net leverage ratio of 6.0 to 1.0 and 5.0 to 1.0, respectively; the net cash proceeds of certain non-ordinary course asset sales or other dispositions of property; and the net cash proceeds of any incurrence of debt other than proceeds from debt permitted under the senior secured credit agreement. Through July 31, 2009, no prepayments have been required under the prepayment provisions listed above.

In addition, the senior secured credit agreement for the ABL Facility requires us to prepay the ABL Facility, subject to certain exceptions, with the net cash proceeds of all non-ordinary course asset sales or other dispositions of revolving facility collateral (as defined in the senior secured credit agreement); and to the extent such extensions of credit exceed the then current borrowing base.

We may voluntarily repay outstanding loans under the ABL Facility at any time without premium or penalty, other than customary "breakage" costs with respect to LIBOR loans.

At July 31, 2009, we had no borrowings, $43.4 million of commercial letters of credit, and $86.0 million of standby letters of credit outstanding under our ABL Facility.

Senior Notes due 2015 and Senior Subordinated Toggle Notes due 2017

We have $1,175.0 million aggregate principal amount of 10.625% senior notes due 2015 (the "senior notes") outstanding, which mature on July 15, 2015, pursuant to an indenture dated as of July 6, 2007 (the "senior indenture"), and $655.9 million aggregate principal amount of 11.875%/12.625% senior subordinated toggle notes due 2017 (the "senior subordinated notes") outstanding, which mature on July 15, 2017, pursuant to an indenture dated as of July 6, 2007 (the "senior subordinated indenture"). The senior notes and the senior subordinated notes are collectively referred to herein as the "notes." The senior indenture and the senior subordinated indenture are collectively referred to herein as the "indentures." We may redeem some or all of the notes at any time at redemption prices described or set forth in the indentures. We have filed with the SEC a registration statement on Form S-1 relating to a proposed initial public offering of our common stock as further discussed below. If the offering is consummated, we intend to use the net proceeds received by us to redeem a portion of the notes at a redemption price of 110.625%, in the case of the senior notes, and 111.875%, in the case of the senior subordinated notes, in each case plus accrued and unpaid interest thereon to the redemption date.

Adjusted EBITDA

Under the agreements governing the Credit Facilities and the indentures, certain limitations and restrictions could arise if we are not able to satisfy and remain in compliance with specified financial ratios. Management believes the most significant of such ratios is the senior secured incurrence test under the Credit Facilities. This test measures the ratio of the senior secured debt to Adjusted EBITDA. This ratio would need to be no greater than 4.25 to 1 to avoid such limitations and restrictions. As of July 31, 2009, this ratio was 1.6 to 1. Senior secured debt is defined as our total debt secured by liens or similar encumbrances less cash and cash equivalents. EBITDA is defined as income (loss) . . .