MANAGEMENT’S DISCUSSION & ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS noted in the “Overview.” Selling, General and Administrative Expenses. Selling, general and administrative expenses, as a percentage of net sales, increased to 26.2% in 2004 compared to 25.9% in 2003. The increase is primarily due to the following: Operating Income. Due to the reasons discussed above, operating income margin decreased to 9.4% in 2004 compared to 10.5% for 2003. Interest Expense. Interest expense increased $1.9 million in 2004 as compared to 2003. This increase is due to increased debt in the current year and $0.7 million of deferred financing costs that were charged to interest expense as a result of the refinancing of the $150.0 million credit facility and the repayment of the $142.6 million of variable rate debt in March 2004. Income Taxes. Our effective tax rate was 37.5% in 2004 compared to 38.5% in 2003. The decreased tax rate for 2004 was due primarily to a one-time tax benefit of $2.3 million, or 80 basis points, related to the resolution of a tax uncertainty and approximately $0.6 million, or 20 basis points, related to tax exempt interest on our investments. Net Sales. Net sales increased 18.7% in 2003 compared to 2002. We attribute this $442.0 million increase in net sales primarily to new stores in 2003 and 2002 which are not included in our comparable store net sales calculation and to a comparable store net sales increase of 2.9% in 2003. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and, to a lesser extent, are negatively affected when we open new stores or expand stores near existing stores. Our comparable store net sales increase was due to our expanded and relocated stores. Net sales The following table is presented to compare statements of operations amounts for the fiscal year ended January 31, 2004 to the fiscal year ended February 1, 2003. Amounts for the fiscal year ended February 1, 2003 are not included in the Consolidated Statements of Operations on page 27. • Partially offsetting these increases was an approximate 20 basis point decrease in shrink expense due to the overall improvement in the shrink rate in the current year. • Depreciation expense increased approximately  30 basis points as a result of our larger new and expanded stores and the continued installation of our point-of-sales systems and other technology assets. • Advertising costs increased approximately 15 basis points due to increased electronic media and print advertising in certain markets in the current year. • Insurance and benefits expense increased approximately 10 basis points due to increased healthcare and workers’ compensation expenses  in the current year. • Partially offsetting these rate increases was an approximate 15 basis point decrease in store payroll costs in the current year due to continued improvements in store-level labor productivity. 18 DOLLAR TREE STORES, INC. • 2004 ANNUAL REPORT Fiscal year ended January 31, 2004 compared  to fiscal year ended February 1, 2003  Year Ended Year Ended  January 31, February 1, (In thousands) 2004 2003  Net sales $2,799,872 $2,357,836  Cost of sales 1,781,459 1,499,594  Gross profit 1,018,413 858,242  Selling, general and  administrative expenses 724,816 610,854  Operating income 293,597 247,388  Interest income 2,648 3,445  Interest expense (8,382) (4,812) Changes in fair value of non- hedging interest rate swaps 889 (1,297) Income before income  taxes and cumulative  effect of a change in  accounting principle 288,752 244,724  Provision for income taxes 111,169 94,220  Income before cumulative  effect of a change in  accounting principle 177,583 150,504  Cumulative effect of a change  in accounting principle, net of tax benefit — (5,285) Net income $ 177,583 $ 145,219 