Segment Analysis

Industry Trends Competitive Analysis Future Outlook

Dollar Stores Segment

Strategic Intelligence
July 13, 2010 www.fdreports.com

Segment Analysis
Private Client Group
www.fdreports.com I July 13, 2010

Dollar Stores Segment

INTRODUCTION
Due to the prolonged economic downturn and recessionary environment, including record high unemployment rates, stock market losses, and the housing market decline, consumers have made significant shifts in spending. In addition to cutting back on discretionary purchases, shoppers are seeking the lowest prices on necessities. The dollar store segment, once a less acceptable and lower quality shopping alternative to other retail channels, has flourished in recent years. While shoppers previously made occasional trips to dollar stores to purchase party supplies or general merchandise items, todays price-conscious consumer, increasingly insisting on the best deal, more frequently visits dollar stores to purchase necessities. Store and brand loyalty has taken a backseat to savings, and customers are looking outside of traditional channels to purchase groceries, health and beauty products, and other non-discretionary items. This trend has spread to include not only low-income consumers but both middle- and higher-income shoppers as well. The main issues for the industry, then, include its ability to persist as general economic conditions improve, the strategies that will keep both sales and profit thriving, and the survival and success of its major players.

CHANNEL OVERVIEW
The U.S. dollar store industry includes more than 20,000 retail stores with combined annual revenue of over $50.00 billion. The industry is highly concentrated, with top companies Family Dollar, Dollar General and Dollar Tree operating almost 60% of stores. Dollar stores, often called small-box retailers, range in size from 7,000 10,000 square feet depending on geographic location and typically customize product mix based on region. Stores carry both soft and hard goods, including household items like paper products, detergents and cleaners; health and beauty aids (HBA); and consumables (including food, snacks, candy and pet food). Consumables account for at least 20% (but often over 50%) of sales for most major companies, while housewares, seasonal items, and apparel each account for roughly 10% 15% of sales. Although some dollar stores adhere to a fixed-price strategy of selling goods for $1, many typically sell less than 25% of items at that price while offering additional products for less than $10 per item. Also common are multi-quantity price points, such as two-for-$1 and three-for-$1 deals. Stores offer a variety of product categories but usually have a limited selection within each type. Dollar store retailers often purchase opportunistically, so offerings may be inconsistent week to week. Consequently, the shopping experience is often dubbed treasure hunting. The selection is a mix of private label brands, select name brands, second- and third-tier brands, merchandise no longer being marketed by manufacturers, and specially packaged sizes or quantities that meet price points. Because product mix is so varied, companies use a wide range of suppliers, generally receiving less than 10% of goods from any one vendor. Products are often imported, with up to 50% coming from overseas manufacturers, as profit margin is typically higher for imports compared to domestically sourced items. Some companies utilize domestic manufacturers that import goods. Dollar stores also procure goods in the course of other retailers liquidation processes. Large retail companies that liquidate inventory will often sell at a discount, which dollar stores purchase and turn around to their own customers.

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July 13, 2010

As the economy has made consumer thriftiness more essential and appealing, the stigma previously ascribed to shopping at dollar stores has faded. According to Nielsen, over the past four years, household penetration for dollar stores has jumped from 55% to 66%, and the average number of annual dollar store shopping trips increased from 10 to 13. Penetration remains at its peak among low-income groups; roughly 80% of households with incomes of up to $20,000 shop at dollar stores. Nonetheless, while it previously targeted these lower-income consumers, the industry has experienced a rise in middle- and higher-income shoppers due to the recession. Many stores have even altered product mix to attract higher-income customers. Additionally, more than 70% of dollarstore shoppers are women and approximately one-third are over the age of 55. Dollar store operators face strong competition from within the industry as well as from retailers in the discount, grocery, warehouse club and drug channels. Many of these retailers offer low-cost and $1 items, and some are currently testing concepts that would position them more directly against dollar stores. Regardless, dollar stores have managed to make competitive gains in recent years, positioning the industry to expand at a rapid pace, respond to a more value-oriented shopper, improve traffic and increase trips per household.
% Weekly Shoppers (2009) % Change (2008 - 09)

Channel Supermarkets Traditional supermarkets Price impact supermarkets Health/natural supermarkets Warehouse clubs Discounters Target (general merchandise) SuperTarget Kmart Walmart Supercenter Dollar stores Drug stores Specialty food Convenience stores Gasoline purchase Merchandise purchase
Source: RetailForward

43.5% 9.3% 4.9% 9.2% 8.8% 5.4% 4.7% 28.7% 14.8% 20.6% 6.9% 41.1% 16.4%

2.4% 0.3% 0.2% 1.1% 1.1% 0.5% 1.0% 0.8% 0.4% -0.6% 1.1% -2.2% -2.3%

Retail Outlet Convenience Drug Supermarkets Dollar stores Mass merchants Supercenters Warehouse clubs
Source: Nielsen

U.S. Store Count 2009 143,997 37,658 32,211 20,788 6,457 3,401 1,207 2001 124,516 40,102 31,183 13,151 6,421 1,583 907 % Chg 15.6% -6.1% 3.3% 58.1% 0.6% 114.8% 33.1%

Trips Per Household 2009 13 14 59 13 14 26 11 2001 15 15 72 11 24 20 10 % Chg -13.3% -6.7% -18.1% 18.2% -41.7% 30.0% 10.0%

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July 13, 2010

INCREASED FOOD OFFERINGS

Dollar stores have increased and improved food offerings in recent years, which has buoyed sales amidst the economic downturn and positioned them as reasonable cost alternatives to grocery stores andin some cases discount and other channels. Consumers shop at dollar stores to buy food staples like milk, cheese and eggs, as well as pastas, cereals, snack foods, fresh produce, prepared foods and frozen items, and segment retailers are adding new products, installing freezer and cooler sections, and pricing competitively with supermarkets in order to drive traffic, with a particular eye on becoming the destinations for fill-in shopping trips. With large store bases, efficient distribution and volume purchasing, the major dollar store chains have been able to add and increase food offerings at prices that are competitive with discounters like Walmart and generally beat the prices of convenience formats, including drug stores. This has become integral to the success of dollar stores, as low pricing is built into the industrys business model and aligns with the demands of its customer base. Food items, in particular, provide among the lowest profit margins for dollar stores; however, the resulting increased store traffic has benefited general merchandise sales, and in many cases, dollar store comps outperform those of the largest supermarket operators. Most major dollar store retailers now accept electronic benefits transfer (EBT) transactions, which includes food stamps and other government benefits like temporary cash assistance and food assistance. For the fiscal period ended in September 2009, close to 200,000 U.S. retailers accepted food stamps, representing an increase of 17% over the same period two years prior. For some food retailers, EBT represented 10% or more of 2009 revenues, and that figure is expected to grow as allocated benefits increase each year. Dollar General accepts food stamps and expects a significant increase in this payment method as a percentage of sales. Family Dollar began accepting EBT as payment earlier this year. Dollar Tree now accepts EBT and food stamps in 75% of its stores and plans to further expand the system this year.

PRIVATE LABEL VS. NAME BRAND

The macroeconomic environment has driven consumers to seek lower-priced alternatives, often at the expense of brand loyalty. Many shoppers now choose low prices over name brands across a wide range of goods for which branding was previously considered important, including food, apparel and electronics. According to Nielsen, as of March 2010, private label (PL) or store brands, accounted for 17.3% of dollar share and 21.9% of unit share across all channels, representing an increase from 15.2% of dollar share and 20% of unit share in 2007. Nonetheless, national or name brands still controlled 82.7% of dollar share and 78.1% of unit sales as of March 2010 and have been recently launching and accelerating initiatives to regain their cost-conscious customer base. Private label sales in the U.S. rose 2.5%, while name brands grew 0.4%. During 2009, every channel saw PL sales increase both dollar and unit share. Compared to other channels, dollar stores held among the lowest PL unit and dollar shares in 2009, though still represented a significant percentage:

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July 13, 2010

Private Label: Unit vs. Dollar Share (2009)

20.0% 25.6% 18.1% Walmart Supercenters Warehouse Clubs Drug Stores Dollar Stores Mass Merch 0.0% 5.0% 10.0% 12.7% 15.5% 15.0% 20.0% 25.0% 30.0% 18.3% 22.7% 17.6% 17.7% 15.9% 17.6% 16.3% 16.8% Unit share Dollar share 23.0%

Grocery

Source: SymphonyIRI Group

Dollar stores continue to increase PL offerings to salvage already-slim profit margins and, literally, get more bang for the buck. Retailers stock a range of store brands that sell at a 10% 25% discount to national brand prices, which they position to customers as value-driven alternatives. By stocking private labels, dollar store retailers save on the built-in advertising and R&D costs of the name brands, thereby reducing the cost of goods sold and potentially increasing profits. Family Dollar, which added a PL team to its management structure earlier this year, saw double-digit improvement in PL sales in 2009. Dollar Generals store brands now account for 1,300 items, representing over 20% of consumable sales. PL programs are well established among dollar store retailers, with some variation in depth; recent initiatives include the addition of PL products as well as repackaging and reformulating efforts.

MARKETING & ADVERTISING

With the rising numbers of middle- and high-income consumers making purchases at dollar stores, major retailers must adapt to the changing demographic and respond to a more varied customer base. The recession has created an opportunity for dollar stores to bring in customers that never before patronized the channel. While most large companies have been increasing their focus on product quality and, to some extent, improving store appearance, they have also begun more customer-focused measures, including better marketing and merchandising, to attract and retain customers and to improve their bottom lines. These initiatives undoubtedly aim to enrich the shopping experience in the event that pure price play becomes insufficient motivation to shoppers as the economy improves. Both traditional and newer technology-based methods of marketing and advertising are being used to draw consumers to stores. Direct-to-customer marketing methods include circulars, in-store promotions, eye-catching product displays, and web-based initiatives. Some major retailers use social networking websites like Facebook and Twitter and advertise at sporting events. Another traditional advertising method, free-standing insert (FSI) pages, or flyers announcing promotions or offering coupons inserted into newspapers, were utilized quite heavily last year. In 2009 alone, Dollar General increased its FSIs by 386%, and Family Dollar upped its FSIs by 227%. The larger companies use websites as hubs for information, coupons, promotions, and announcements. Dollar Tree is currently the only major retailer offering online shopping, with either shipping or in-store pickup.

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July 13, 2010

MERCHANDISING & INVENTORY

Major retailers are finding that increased efficiency is crucial to staying competitive in the current economic environment. Because dollar store prices are already at a low point, companies are attempting to cut costs and improve margins by developing and refining inventory-control initiatives. By lowering inventory levels and eliminating the need to store unsold items, retailers can cut labor and overhead costs while also improving sales per square foot productivity. In recent years, major companies have installed POS systems with scanner registers to track sales data per item, including physical counts and turnaround times for product sellout. Family Dollar decreased its system-wide inventory by approximately 4% in fiscal 2009 compared to the prior year and cut inventory per store roughly 5% in the same period. Dollar Tree has had a Supply Chain Management Initiative in place for a number of years, to help management make merchandising and inventory decisions and to adapt product mix on a store-by-store basis to address demographic differences. Store layout and displays are also often tweaked to improve the shoppers experience to help them more easily and quickly locate what they need and to respond to changes in consumer behavior. Retailers also adjust shelf and aisle placement and signage in ways that prominently reinforce competitive pricing and adjust to changes in merchandise mix. In order to accommodate an increased selection of consumables, Family Dollar completed layout changes to realign space in more than half of its stores by the end of its 2010 first quarter, resulting in performance improvements at those stores.

COMPETITIVE LANDSCAPE
Dollar stores continue to pose a threat to discounters, supercenters and warehouse clubs; the dollar store channel is one of few experiencing consistent increases in net profit despite the prolonged recessionary environment. Dollar store retailers have taken measures to attract new shoppers and build customer loyalty, which has some retailers within other segments trying to maintain or gain groundand for good reason. According to consulting firm WSL Strategic Retail, nearly 70% of Walmarts core shoppers, those with household incomes under $40,000, visited dollar stores in the first three months of 2010, and one quarter of shoppers are now at dollar stores every week. Major retailers across all segments have succumbed to economic pressures and competitive activity, resulting in extreme price cuts and razor thin margins. A number of retailers across the grocery, mass merchandise and drug channels hold advertised weekly or seasonal dollar promotions. Though supercenters and discounters have the most similar merchandise mix to dollar stores, grocery and drug retailers are also responding to the competition from the dollar store segments increased and improved offerings. Walmart remains one of the biggest and most intimidating rivals. In 2004, the Company experimented with adding dollar sections called Pennies-n-Cents to some of its stores but abandoned the idea after it failed to yield a profit. However, Walmart more recently announced it was working on a smaller-format concept, approximately 20,000 square-foot stores (one-tenth of the size of its Supercenters) that would offer discount groceries. If executed, these stores will likely compete with dollar stores, not only because of the downscaled layout but because the size will allow Walmart to enter many of the urban food deserts it has thus far been unable to penetrateareas that many dollar stores currently serve. Target has found success with its Dollar Spot sections, offering select general merchandise items priced at $1, most of which are discounted store items. In terms of grocery items and food fill-in trips, discount grocer Aldi is emerging as one of the dollar store segments most formidable competitors. Consumers have been increasingly receptive to Aldis low-price limited assortment format, and the Company is in the process of rapidly expanding across several markets. At an average of 10,000 square feet, Aldis stores are similarly sized with dollar stores, and the Companys limited assortment and private label offerings also are reminiscent of the dollar store food and beverage sections. Another grocery competitor is SUPERVALUs discount format, Save-A-Lot, which has been successful in both low- and high-income areas. The Company plans to double Save-A-Lots 1,200-store footprint over the next five years. Retailers in the drug segment have also been ramping up food offerings, adding fresh and prepared foods in many urban locations. With their smaller size and mix of general merchandise, drug stores are becoming increasingly competitive with dollar stores. In February, Walgreen indicated it would add fresh and prepared foods to some of its stores and may develop its own private label foods. Last month, CVS announced it would double the size of food sections in 3,000 of its 7,000 stores by the end of 2010. The blurring of lines is expected to continue as retailers struggle with too narrow of a product offering, making it increasingly difficult to be considered a shopping destination.
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July 13, 2010

INDIVIDUAL CHAIN PROFILES

Dollar General, based in Goodlettsville, TN and under the leadership of Safeway and Duane Reade veteran Rick Dreiling, is the nations largest dollar store retailer. The Company operated 8,828 stores as of January 29, the end of its 2009 fiscal year, in 35 states primarily in the southern, southwestern, eastern and Midwestern areas of the country. Three years ago, Dollar General was taken private in a $6.90 billion leveraged buyout by Kohlberg Kravis Roberts & Co. In November 2009, Dollar General went public again with an IPO of 34.1 million shares of its common stock at $21 per share; net proceeds totaled approximately $445.2 million. For its first quarter ended April 30, Dollar General reported a 64% increase in profit to $136.0 million, with a 12% revenue increase to $3.11 billion and a 6.7% comps gain. Gross margin benefited from higher purchase markups and reduced merchandise costs reflecting improved global sourcing capabilities, lifting EBITDA and operating income 23.5% and 30.7%, respectively. Dollar General reported $3.40 billion in debt for the quarter, an 18% decline from a year earlier. As of the end of the first quarter, liquidity was more than adequate, with the Companys cash position further supported by over 90% availability under its $1.031 billion revolver. Capital expenditures in fiscal 2009 totaled $250.7 million, compared to $205.5 million the previous year, and the Company expects capital expenditures in 2010 to be approximately $325.0 million $350.0 million, which will be funded with operating cash flow and proceeds from its revolver if necessary. During fiscal 2009, the Company opened 500 new stores, remodeled 291 stores and relocated 159 stores. Dollar General has attributed some of its more recent bottom-line gains to better distribution and transportation, stronger sales volume, improved global sourcing, and higher average markups. For fiscal 2010, Dollar General expects revenue to increase 8% 10%, including a comp increase of 4% 6%. The Company continues to expand its apparel, home and beauty aids offerings as well as private label brands, which generally have higher gross profit rates. Management expects 2010 will be another strong year for the Company, forecasting EPS growth of 18% 24%. Over the past year, Dollar General has increased its consumables from less than 70% to more than 72% of sales. During its 2010 first quarter, the Companys consumables category rose 12%. Within the category, the Company carries approximately 1,300 private label products; PL accounts for more than 20% of consumables sales. PL sales are crucial to the Companys margins, and Dollar General has said it plans to continue its push of store brands in 2010 and beyond. In June 2010, the Company rebranded its DG Everyday private brand to the name DG Home, launched its DG Baby line of products, and redesigned its Clover Value grocery line to attract more shoppers to the brands. The Company also plans to add and re-launch select store brands, including its Bobbie Brooks women's apparel line, its True Living home line, and its Holiday Style and Perfect Harvest seasonal line. During 2010, Dollar General plans to open 600 new stores, as well as remodel or relocate 500 stores. The Company has previously indicated that the downturn in the real estate market has been beneficial to its store expansion and relocation, as in some cases Dollar General is using the decline in rates to move into better locations. Finally, according to the Company, food stamps accounted for approximately 4% of 2009 sales, and this form of payment as a percent of sales is growing roughly 10% year over year.
Total Sales (in m illions) $14,000.0 $10,457.7 $11,796.4 10,000 8,222 Store Count 8,362 8,828

Click for detailed credit profile

$9,495.2

$7,000.0

5,000

$0.0 FYE2007 FYE2008 FYE2009

0 FYE2007 FYE2008 FYE2009

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July 13, 2010

INDIVIDUAL CHAIN PROFILES (CONT.)

Family Dollar, headquartered in Charlotte, NC, operated 6,724 stores as of May 29, the close of its fiscal 2010 third quarter. Its stores, which are located in 44 states and Washington, DC, sell name brand and private label products, most of which cost between $1 and $10. Prices are on par with those of Walmart, and food prices fall at an estimated 20% 40% below those at traditional supermarkets. Although lowincome shoppers account for roughly two-thirds of the Companys sales, customers with annual incomes of over $40,000 continue to grow as a percentage of new sales. Consumables account for 64% of sales, housewares account for 13% of sales, apparel and accessories account for 11% of sales, and seasonal and electronics account for 11% of sales. The Companys primary strategies for keeping prices down involve choosing locations with very low occupancy costs, i.e., inexpensive real estate, and by offering a disproportionate amount of second- and thirdtier brands. For its third quarter ended May 29, Family Dollars sales increased 8.4% to $1.20 billion, net income jumped 19% to $104.4 million, and comps rose 7%. Sales during the quarter were strongest in the seasonal and consumable categories, and the Company opened 39 new stores during the period. As of the end of the third quarter, liquidity was more than sufficient with cash, up 70% year-over-year to over $510.0 million at quarter-end, further supported by adequate availability under the Companys $600.0 million in unsecured credit facilities. Family Dollar projects comp growth in the mid-single digits for 2010 and expects to commit $190.0 million $210.0 million for capital expenditures for 2010, compared to its fiscal 2009 figures during which the Company opened 180 new stores. Since Family Dollar derives the majority of its revenue from consumables, it has revamped store layouts to accommodate more of these products. In May 2009, Family Dollar expanded selling space devoted to consumables following a roughly 9% increase in 2009 second quarter sales, which was driven in part by a 13% increase in consumables sales. The Company continues to improve its assortment of consumables, resulting in increases in revenue and number of shopping trips. Earlier this year, Family Dollar indicated it would add 200 name brand food and other consumable products. In 2009, private label sales increased into the double digits, and the Company aims to raise private-label penetration to 25%, from its current level of 19%, in the near future. During 2009, the Company put together a team to work with [its] buyers to reposition and rebrand many of our store brands. Family Dollar is looking at ways to improve sales for discretionary products, having seen positive 2009 holiday sales results in the toys and seasonal categories. In spring 2010, the Company launched a private label childrens and toddlers apparel line called Kidgets on the basis that childrens products perform relatively well during recessionary periods. In late 2009, Family Dollar announced a new advertising campaign for its name brand products with the ad slogan: "Exactly the same as the grocery store. We just price them lower." The Company also changed store layout, organizing similar products in one location, improving signage and reducing clutter. Family Dollar plans to focus on new store growth and renovate older stores. In the coming years, the Companys growth strategies involve accelerating the acceptance of food stamps, further improving its advertising campaign, expanding operating hours and increasing its selection of store brands.
Total Sales (in m illions) $8,000.0 $6,834.3 $6,983.6 $7,400.6 8,000 6,430 Store Count 6,655

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6,571

$4,000.0

4,000

$0.0 FYE2007 FYE2008 FYE2009

0 FYE2007 FYE2008 FYE2009

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July 13, 2010

INDIVIDUAL CHAIN PROFILES (CONT.)

Dollar Tree, based in Chesapeake, VA, operated 3,806 stores at January 30, 2010, its fiscal year end. The Company has stores across 48 states, of which 3,663 units are under its main banner with all goods sold for a dollar, and 143 stores are under the Deal$ banner with most items priced at a dollar and some priced higher. The Companys target customers are low and lower-middle income consumers. It procures the majority of its goods domestically (55% 60%), with the remainder (40% 45%) imported from foreign countries (primarily China). Stores carry an average of 6,000 name brand and private label products, with consumables representing approximately 48% of sales; variety merchandise, including toys, gifts, housewares, HBA and apparel, representing roughly 47% of sales, and seasonal items representing about 5% of sales. Dollar Tree limits closeout items to approximately 10% 15% of its product mix. For Dollar Trees first quarter ended May 1, sales increased 12.6% to $1.35 billion, while profit rose 5.3% to $63.6 million. An increase in customer traffic and higher sales of health care products, food, party goods and items for the home fueled the 6.5% rise in quarterly comps. Debt (the bulk of which is due in 2013) is modest relative to the Companys equity position and liquidity is more than ample; cash of $390.1 million is further supported by full availability under he Company $300.0 million revolver. Looking ahead, Dollar Tree is forecasting second quarter EPS of $0.77 $0.85, an increase of 22% 35% over last years second quarter, and the Company lifted its fullyear guidance to EPS of $4.29 $4.50, up from its prior estimate of $3.76 $4.03 and representing an increase of 21% 26% over last years record $3.56 per share. Capital expenditures were $164.8 million in fiscal 2009, compared to $131.3 million the previous year. Fiscal 2010 CAPEX is estimated at $155.0 million $165.0 million. During fiscal 2009, the Company opened 240 stores, expanded or relocated 75 stores and closed 25 stores. In March 2006, Dollar Tree acquired 138 Deal$ stores for $30.5 million. Since then, the Company opened five new Deal$ stores. Also in 2006, Dollar Tree installed freezers and refrigerators in 240 of its stores to increase its consumables offerings. According to management, for the subsequent annual period, those stores sales jumped an average of 5% 6%, compared with a 1% system-wide comps increase. In 2009, the Company added freezers to 200 stores; as of May 1, 2010, it had frozen and refrigerated merchandise in approximately 1,560 stores, compared to 1,320 stores a year earlier. Dollar Tree has more recently shifted its focus on growing sales of discretionary items, which have higher margins. After experimenting with adding price points over a dollar at its namesake stores, management said results werent compelling and confined the strategy to the Deal$ stores. Thus, unlike its competitors, all products at its Dollar Tree stores are based on the $1 fixed price point concept, giving it the potential to be the price winner in its markets but limiting the Companys ability to pass on inflation to consumers. Dollar Tree accepts food stamps in 75% of stores, which it claims has increased both traffic and the average size of transactions; the Company intends to continue increasing acceptance to more stores this year. As typical in the industry, Dollar Tree has been expanding rapidly in recent years and foresees growing to between 5,000 and 7,000 stores. In March 2010, Dollar Tree debuted a test pilot of a new concept in its hometown of Chesapeake, VA called Dollar Tree Market, which sells groceries and baked goods and puts the Company in closer competition with traditional grocery stores. The 23,000 square-foot store is double the size of the average Dollar Tree and carries a variety of food products, including meat, fresh fruit, and housewares. While the Company will not reap high margins from grocery sales, the goal is to bring in traffic that will drive general merchandise sales. Dollar Tree is the only retailer in the segment to offer product ordering, with shipping or in-store pickup options, on its website.
Total Sales (in m illions) $6,000.0 $4,000.0
2,500 Store Count

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$4,242.6

$4,644.9

$5,231.2

5,000 3,411

3,591

3,806

$2,000.0 $0.0 FYE2007 FYE2008 FYE2009

0 FYE2007 FYE2008 FYE2009

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July 13, 2010

INDIVIDUAL CHAIN PROFILES (CONT.)

Dollarama Group Holdings L.P. operated 611 stores throughout all the Canadian provinces (with the majority in Ontario) as of May 2, 2010, the end of its first quarter. Stores sell a variety of name brand and private label products for prices of $1 $2, with select candy offered at $0.69. Fiscal 2010, ended January 31, was the first year the Company sold merchandise at price points above a dollar. An average of 30% of quarterly sales is derived from products sold at its higher price points. To keep prices low, Dollarama sources directly from overseas manufacturers, bypassing importers and local distributors. Dollarama posted a first quarter sales increase of 14.1% to C$311.9 million, a more than 100% rise in profit to C$22.5 million, and a comp gain of 8.6%. The results were fueled by the Companys multiple price point strategy as well as a 1.9% increase in number of transactions and a 6.6% increase in average transaction size. Capital expenditures in fiscal 2009 totaled C$33.8 million, compared to C$40.5 million in the prior year. During fiscal 2009, the Company opened 39 new stores. In October 2009, Dollarama priced an IPO to issue 17.1 million common shares at a price of C$17.50 per share, for total expected net proceeds of C$275.8 million, representing about 24% of the 72.7 million shares that would be outstanding following completion. The Company used proceeds to prepay in full a C$38.2 million term loan due May 2010, repay $70.1 million in promissory notes due certain shareholders, and redeem in full its outstanding US$200.0 million of 8.875% senior subordinated notes. Dollaramas remaining debt consists of a term loan due November 2011 and deferred interest notes payable August 2012, which aggregated C$470.5 million at year-end. Liquidity currently appears satisfactory, with the Companys cash position supported by near full availability under its C$75.0 million revolving credit facility. Though it is headquartered in Montreal, the Company was sold to Boston-based Bain Capital LLC in 2004 for $1.03 billion. Following its IPO, secondary offerings were completed by the selling shareholders (primarily Bain Capital and Larry Rossy) in January and April 2010. Dollarama did not receive any of the proceeds from the secondary offerings. After giving effect to the secondary offerings, Bain Capital owns a 31.9% interest in the Company and Larry Rossy owns 6.4%. Prior to the IPO, Bain Capital and Larry Rossy had owned 80% and 20%, respectively, of Dollaramas common stock. In recent years, Dollarama has improved merchandising and product quality, made significant IT investments and introduced debit card readers to increase average transaction values. In mid-2009, the Company launched its first private label brand. Dollarama also plans to add bar-coding this year. Since Canada has one-third as many dollar stores per capita as the United States, the Company sees adequate room to grow, but has not publicized future expansion plans.

Total Sales (in m illions) $1,500.0 $1,000.0

500

Store Count

$1,253.7 $972.4 $1,089.0

1,000 521 564 603

$500.0 $0.0 FYE2008 FYE2009 FYE2010

0 FYE2008 FYE2009 FYE2010

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July 13, 2010

INDIVIDUAL CHAIN PROFILES (CONT.)

99 Cents Only Stores, headquartered in City of Commerce, CA, is a smaller chain, at 275 stores in California (206), Texas (32), Arizona (25), and Nevada (12) as of March 27, the end of its fiscal year. The Company carries both name brand and private label products, primarily relying on bulk and closeout purchasing. 99 Cents Only derives 97% of sales from its retail stores and 3% of sales from its Bargain Wholesale division, which resells goods to retailers, distributors and exporters. Its primary product categories are: food and grocery (54% of sales), housewares (14%), HBA (9%), hardware, (3%), stationery and party (5%), seasonal (4%) and other (10%). For its fiscal year, 99 Cents Only experienced a 4% increase in sales to $1.36 billion, an over 600% increase in profit to $60.4 million and a 3.5% rise in comps. Gross margin advanced due to a favorable product shift and new buying and merchandising initiatives focused on more direct sourcing and higher margin items. The Company exhibits a solid, nearly debt-free financial structure; it does not utilize external financing and continues to fund its business from cash generated by operations, short-term investments and cash on hand. Capital expenditures in fiscal 2010 were $34.8 million, compared to $34.2 million for fiscal 2009. In fiscal 2010, 99 Cents Only opened eight stores in California and re-opened one Texas store that was closed in fiscal 2009 due to a hurricane. The Company closed 12 stores in Texas and one store in California during fiscal 2010. Looking ahead, fiscal 2011 comps are expected to be in the low single-digits and an increase in earnings before taxes to 7.5% of sales, compared to 6.9% for fiscal 2010. In fiscal 2011, the Company plans to increase its store count by approximately 5%, with the majority of new stores expected to be opened in California during the second half of the fiscal year. Fiscal 2011 capital expenditures are estimated at $54.0 million. In September 2008, 99 Cents Only announced it would raise its prices on all items from 99 cents to 99.99 cents, representing a blanket 1% price increase, in light of rising food and energy prices. In August 2009, 99 Cents Only cancelled plans to exit the Texas market. The Company operated 32 Texas stores at the close of fiscal 2010, compared to 43 stores at the fiscal 2009 close. Comps in Texas increased by 19.5% in the fourth quarter, gross margin jumped 980 basis points, and operating expenses decreased by $2.3 million. As a result, Texas reported operating income of $0.9 million compared to a loss of $4.3 million for the fourth quarter of fiscal 2009. Click for detailed credit profile

Total Sales (in m illions) $1,500.0 $1,000.0 $500.0 $0.0 FYE2008 FYE2009 FYE2010 $1,199.4 $1,302.9 $1,355.2 300 200 100 0 FYE2008 265

Store Count 271 275

FYE2009

FYE2010

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July 13, 2010

SEGMENT OUTLOOK
The dollar store industry has prospered during difficult economic periods, as well it should. Long a staple for the low-income consumer, dollar stores are an appropriate fit for the recent culture of frugality that has pervaded middle-income earners and even, to some extent, the affluent. With the top companies in the industry vying to hold onto new foot traffic driven by the recession, the emerging strategies and resulting growth may signal a significant and lasting shift in the look, feel, development and perception of dollar stores. According to one executive, Its no longer un-cool to shop the dollar store. Between 2001 and 2009, the dollar store segment grew 58.1% in store count and the average annual number of trips per household jumped 18.2%. Industry output is forecast to increase steadily over the next three years and subsequently level out:
Industry Output Growth (2010 - 2014)

6%

5% 4% 4%

4% 2% 2%

3%

0% 2010 2011 2012 2013 2014

Source: Nielsen

Unlike most other retail sectors, dollar store channel sales are up and companies are growing at record paces, adding stores as well as jobs. Creating and expanding food sections, including fresh and frozen items, has been critical among the top companies to reel in the destination shoppers from the discount stores and mass merchandisers as well as attract the convenience store shopper looking to fill-in between trips. Because the profit margin on food is generally low, the development of private label brands has allowed consumers to receive the lowest price and the companies to keep the highest profit. Marketing and advertising has been more of a focus than ever, as dollar store companies are visibly showcasing higher quality products comparable to items for purchase in grocery stores and other retail outlets. The ability of dollar stores to continue to increase profitability will depend somewhat on the rate of store expansion and the companies strategies for selecting locations. The increasing number of retail bankruptcies in recent years has created opportunities for dollar stores; according to one commercial real estate firm, rising retail vacancies have pushed down rents 25% 40% depending on the market. As a result, dollar stores have been able to renegotiate lease arrangements on current locations and pick up dark stores from bankrupt retailers in order to expand, saving significantly on store opening costs. Two of the top threeDollar General and Family Dollarhave been expanding their price points above the $1 mark, making them more resemble mass merchants than dollar stores. Meanwhile, Dollar Tree and 99 Cents Only must contend with adherence to their namesake price points. With rising input costs, it will prove difficult for the two companies to hold out while rivals make gains on even the smallest of price increases. The most immediate question for the industry concerns is whether or not dollar store retailers will be able to sustain growth after the economy has rebounded. Human nature would suggest yes, in that historically consumers long remember difficult times and change spending habits to provide a cushion for the next time. As consumers continue to maintain thriftier spending habits, and dollar store companies keep prices rock bottom, develop strategies to attract customers while having more control over inventory, it is likely the industry will stay on track to grow for several years to come. To the true power-shopper a bargain never goes out of vogue.
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July 13, 2010

INDEX
Section CHANNEL OVERVIEW COMPETITIVE LANDSCAPE INCREASED FOOD OFFERINGS INDIVIDUAL CHAIN PROFILES 99 CENTS ONLY DOLLARAMA DOLLAR GENERAL Page 1 5 3 6 10 9 6 Section DOLLAR TREE FAMILY DOLLAR INTRODUCTION MARKETING & ADVERTISING MERCHANDISING & INVENTORY PRIVATE LABEL VS. NAME BRAND SEGMENT OUTLOOK Page 8 7 1 4 5 3 11

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