Dollar General 2006 Annual Report Download - page 33

Selling, General and Administrative (“SG&A”) Expense. The increase in SG&A
expense as a percentage of sales in 2006 as compared with 2005 was due to a number of factors,
including but not limited to increases in the following expense categories: impairment charges
on leasehold improvements and store fixtures totaling $9.4 million, including $8.0 million
related to the planned closings of approximately 400 underperforming stores, 128 of which
closed in 2006 and the remainder of which are scheduled to close in 2007, as further discussed
above in the “Executive Overview”; lease contract terminations totaling $5.7 million related to
these stores; higher store occupancy costs (increased 12.1%) due to higher average monthly
rentals associated with our leased store locations; higher debit and credit card fees (increased
40.6%) due to the increased customer usage of debit cards and the acceptance of VISA credit and
check cards at all locations; higher administrative labor costs (increased 29.9%) primarily related
to recent additions to our executive team, particularly in merchandising and real estate, and the
expensing of stock options; higher advertising costs (increased 198.3%) related primarily to the
distribution of several advertising circulars in the current year period and to promotional
activities related to the inventory clearance and store closing activities discussed above; and
higher incentive compensation primarily related to the $9.6 million discretionary bonus
authorized by the Board of Directors for the current fiscal year. These increases were partially
offset by insurance proceeds of $13.0 million received during the current year period related to
losses incurred due to Hurricane Katrina, and depreciation and amortization expenses that
remained relatively constant in fiscal 2006 as compared to fiscal 2005.
The decrease in SG&A expense as a percentage of sales in 2005 as compared with 2004
was due to a number of factors, including but not limited to the following expense categories that
either declined or increased less than the 12.0% increase in sales: employee incentive
compensation expense (decreased 37.8%), based upon our fiscal 2005 financial performance;
professional fees (decreased 32.3%), primarily due to the reduction of consulting fees associated
with the EZstore project and 2004 fees associated with our initial Sarbanes-Oxley compliance
effort; and employee health benefits (decreased 10.0%), due in part to a downward revision in
claim lag assumptions based upon review and recommendation by our outside actuary and
decreased claims costs as a percentage of sales. Partially offsetting these reductions in SG&A
were current year increases in store occupancy costs (increased 17.6%), primarily due to rising
average monthly rentals associated with our leased store locations, and store utilities costs
(increased 22.7%) primarily related to increased electricity and gas expense.
Interest Income. The decline in interest income in 2006 compared to 2005 is due
primarily to the acquisition of the entity which held legal title to the South Boston DC in June
2006 and the related elimination of the notes receivable which represented debt issued by this
entity from which we formerly leased the South Boston DC. The increase in interest income in
2005 compared to 2004 is due primarily to earnings on short-term investments due to increased
interest rates on these investments.
Interest Expense. The increase in interest expense in 2006 is primarily attributable to
increased interest expense of $6.5 million under our revolving credit agreement primarily due to
increased borrowings, an increase in tax-related interest of $4.1 million principally due to the
non-recurrence in 2006 of a 2005 reduction in accrued interest related to contingent tax
liabilities, offset by a reduction in interest expense associated with the elimination of the
financing obligation associated with the June 2006 acquisition of the entity which held legal title
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