(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 1-6140
DILLARD'S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 71-0388071
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive office)
(Zip Code)
(501) 376-5200
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter time that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No_
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2).
Yes x No _
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
CLASS A COMMON STOCK as of May 1, 2004 79,505,584
CLASS B COMMON STOCK as of May 1, 2004 4,010,929
Index DILLARD'S, INC. Page PART I. FINANCIAL INFORMATION Number Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets as of May 1, 2004, January 31, 2004 and May 3, 2003 3 Consolidated Statements of Income and Retained Earnings for the Three and Twelve Month Periods Ended May 1, 2004 and May 3, 2003 4 Consolidated Statements of Cash Flows for the Three Months Ended May 1, 2004 and May 3, 2003 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DILLARD'S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
May 1, January 31, May 3,
2004 2004 2003
-------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 67,063 $ 160,873 $ 248,220
Accounts receivable, net 1,092,699 1,191,489 1,211,114
Merchandise inventories 1,969,475 1,632,377 2,005,451
Other current assets 26,289 38,952 37,355
-------------------------------------------------
Total current assets 3,155,526 3,023,691 3,502,140
Property and Equipment, net 3,161,812 3,197,469 3,287,002
Goodwill 36,731 36,731 39,214
Other Assets 156,108 153,206 159,297
-------------------------------------------------
Total Assets $ 6,510,177 $ 6,411,097 $ 6,987,653
=================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable and accrued expenses $ 1,083,971 $ 679,854 $ 1,040,732
Current portion of long-term debt 165,692 166,041 137,053
Federal and state income taxes 141,893 106,487 39,950
Current portion of capital lease obligations 2,240 2,126 1,883
Other short-term borrowings - 50,000 -
Current portion of Guaranteed Preferred Beneficial
Interest in the Company's Subordinated Debentures - 331,579 -
-------------------------------------------------
Total current liabilities 1,393,796 1,336,087 1,219,618
Long-term Debt 1,852,105 1,855,065 2,146,047
Capital Lease Obligations 17,060 17,711 18,138
Other Liabilities 147,497 147,901 128,779
Deferred Income Taxes 611,923 617,236 673,600
Guaranteed Preferred Beneficial Interests in the
Company's Subordinated Debentures 200,000 200,000 531,579
Stockholders' Equity:
Common stock 1,169 1,169 1,167
Additional paid-in capital 714,251 713,974 711,324
Accumulated other comprehensive loss (11,281) (11,281) (4,496)
Retained earnings 2,252,045 2,201,623 2,226,633
Less treasury stock, at cost (668,388) (668,388) (664,736)
-------------------------------------------------
Total stockholders' equity 2,287,796 2,237,097 2,269,892
-------------------------------------------------
Total Liabilities and Stockholders' Equity $ 6,510,177 $ 6,411,097 $ 6,987,653
=================================================
See notes to consolidated financial statements.
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DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Twelve Months Ended
------------------------------ -----------------------------
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------------- --------------- -------------- --------------
Net Sales $1,854,395 $1,813,911 $7,639,418 $7,814,028
Service Charges, Interest and Other Income 57,484 77,415 244,803 336,963
------------- --------------- -------------- --------------
1,911,879 1,891,326 7,884,221 8,150,991
------------- --------------- -------------- --------------
Costs and Expenses:
Cost of sales 1,187,500 1,211,972 5,145,701 5,239,678
Advertising, selling, administrative
and general expenses 509,784 509,683 2,098,048 2,153,997
Depreciation and amortization 74,238 74,027 290,872 298,067
Rentals 13,718 14,170 63,649 67,049
Interest and debt expense 37,952 43,425 175,592 188,468
Asset impairment and store closing charges 4,680 - 48,407 52,224
------------- --------------- -------------- --------------
Total Costs and Expenses 1,827,872 1,853,277 7,822,269 7,999,483
------------- --------------- -------------- --------------
Income Before Income Taxes 84,007 38,049 61,952 151,508
Income Taxes 30,245 13,700 23,195 53,345
------------- --------------- -------------- --------------
Net Income 53,762 24,349 38,757 98,163
Retained Earnings at Beginning
of Period 2,201,623 2,205,674 2,226,633 2,142,020
Cash Dividends Declared (3,340) (3,390) (13,345) (13,550)
------------- --------------- -------------- --------------
Retained Earnings at End of Period $2,252,045 $2,226,633 $2,252,045 $2,226,633
============= =============== ============== ==============
Earnings Per Share:
Basic $0.64 $0.29 $0.46 $1.16
============= =============== ============== ==============
Diluted $0.64 $0.29 $0.46 $1.15
============= =============== ============== ==============
Cash Dividends Declared Per Common Share $0.04 $0.04 $0.16 $0.16
See notes to consolidated financial statements.
4
DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
--------------------------------
May 1, May 3,
2004 2003
-------------- ---------------
Operating Activities:
Net income $ 53,762 $ 24,349
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 75,532 75,811
Provision for loan losses
8,900 12,617
Gain on the sale of joint venture - (15,624)
Asset impairment and store closing charges 4,680 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 89,890 113,938
Increase in merchandise inventories and other current assets (324,435) (393,425)
Increase in other assets (4,196) (32,904)
Increase in trade accounts payable and accrued expenses,
other liabilities and income taxes 433,296 355,819
-------------- ---------------
Net cash provided by operating activities 337,429 140,581
-------------- ---------------
Investing Activities:
Net proceeds from sale of joint venture - 34,579
Purchases of property and equipment (42,751) (41,488)
-------------- ---------------
Net cash used in investing activities (42,751) (6,909)
-------------- ---------------
Financing Activities:
Principal payments on long-term debt and capital lease obligations (3,846) (9,155)
Net principal payments on short-term debt (50,000) -
Retirement of Guaranteed Preferred Beneficial Interest in the
Company's Subordinated Debentures (331,579) -
Proceeds from issuance of common stock 277 -
Cash dividends paid (3,340) (3,390)
Purchase of treasury stock - (15,263)
-------------- ---------------
Net cash used in financing activities (388,488) (27,808)
-------------- ---------------
(Decrease) Increase in Cash and Cash Equivalents (93,810) 105,864
Cash and Cash Equivalents, Beginning of Period 160,873 142,356
-------------- ---------------
Cash and Cash Equivalents, End of Period $ 67,063 $ 248,220
============== ===============
See notes to consolidated financial statements.
5
| The accompanying unaudited consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, each as promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and twelve month periods ended May 1, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending January 29, 2005 due to the seasonal nature of the business. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2004 filed with the Securities and Exchange Commission on April 13, 2004. |
| The Company periodically grants stock options to employees. Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” the Company accounts for stock-based employee compensation arrangements using the intrinsic value method. No compensation expense has been recorded in the consolidated financial statements with respect to option grants. The Company has adopted only the disclosure provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123". If compensation cost for the Company’s stock option plans had been determined in accordance with the fair value method prescribed by SFAS No. 123, the Company’s net income would have been (in thousands, except per share data): |
Three Months Ended Twelve Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
----------- ------------- ------------- -----------
Net Income:
As reported $53,762 $24,349 $38,757 $98,163
Deduct: Total stock based employee compensation expense
determined under fair value based method, net
of taxes (485) (870) (2,241) (8,276)
----------- ------------- ------------- -----------
Pro forma $53,277 $23,479 $36,516 $89,887
=========== ============= ============= ===========
Basic Earnings Per Share:
As reported $0.64 $0.29 $0.46 $1.16
Pro forma 0.64 0.28 0.44 1.06
----------- ------------- ------------- -----------
Diluted Earnings Per Share:
As reported $0.64 $0.29 $0.46 $1.15
Pro forma 0.64 0.28 0.44 1.05
----------- ------------- ------------- -----------
| As part of its credit card securitizations, the Company transfers credit card receivable balances to a Trust in exchange for certificates representing undivided interests in such receivables. The Trust securitizes balances by issuing certificates representing undivided interests in the Trust’s receivables to |
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| outside investors. In each securitization, the Company retains certain subordinated interests that serve as a credit enhancement to outside investors and expose the Trust assets to possible credit losses on receivables sold to outside investors. The investors and the Trust have no recourse against the Company beyond Trust assets. In order to maintain the committed level of securitized assets, the Trust reinvests cash collections on securitized accounts in additional balances. The Company also receives annual servicing fees as compensation for servicing the outstanding balances. |
| All borrowings under the Company’s receivable financing conduit are recorded on balance sheet. The Company had $400 million of long-term debt outstanding under this agreement on the consolidated balance sheet as of May 1, 2004, January 31, 2004 and May 3, 2003. |
| At May 1, 2004 and May 3, 2003, the Company had no outstanding short-term borrowings under its accounts receivable conduit facilities related to seasonal financing needs. Remaining available short-term borrowings under these conduit facilities at May 1, 2004 were $400 million with a maturity date of September 30, 2004. |
| During the quarter ended May 1, 2004, the Company recorded pre-tax expense of $4.7 million for asset impairment and store closing costs. The expense includes a $4.2 million write down to fair value for two previously closed stores and a $500,000 future lease obligation on a store closed during the quarter. The write down to fair value was deemed necessary due to the current quarter deterioration in those stores market values. The Company does not expect to incur significant additional exit costs during fiscal 2004 related to these stores. |
| During the quarter ended May 3, 2003, the Company sold its interest in the Sunrise Mall and its associated center in Brownsville, Texas for $80.7 million including the assumption of the $40.0 million mortgage note. The net assets, excluding the assumed debt, of the mall property were approximately $58.4 million and were included as a non-cash item in the consolidated statement of cash flows. The Company recorded a pretax gain of $15.6 million pertaining to the sale of its interest in Sunrise Mall for the three months ended May 3, 2003. This amount was recorded in services charges, interest and other income. |
| During the quarter ended May 3, 2003, the Company recorded a $12.3 million pretax credit in advertising, selling, administrative and general expenses due to the resolution of certain liabilities originally recorded in conjunction with the purchase of Mercantile Stores Company, Inc. that were deemed not necessary based upon current information. |
| The Company redeemed the $331.6 million liquidation amount of Preferred Securities of Horatio Finance V.O.F., a wholly owned subsidiary of the Company, effective February 2, 2004. The Company redeemed the securities with $100 million borrowed under its amended revolving credit agreement and the balance borrowed under the Company’s accounts receivable securtization conduit facilities. As of May 1, 2004, the Company had paid down all of these borrowings from cash from operations generated during the first quarter of fiscal 2004. No gain or loss was incurred related to the redemption. |
| During the quarter ended May 1, 2004, the Company repurchased $2.6 million of its 6.3% notes due February of 2008. During the quarter ended May 3, 2003, the Company repurchased $6.0 million of its outstanding unsecured notes prior to their related maturity dates. Interest rates on the repurchased securities ranged from 6.4% to 6.9% for the quarter ended May 3, 2003. Maturity dates ranged from |
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| 2004 to 2005 for the quarter ended May 3, 2003. No gains or losses resulted from the repurchase of the unsecured notes during the quarters ended May 1, 2004 and May 3, 2003. |
| For the three months ended May 3, 2003, the Company repurchased approximately 1.2 million shares of Class A Common Stock valued at approximately $15.3 million under its existing $200 million share repurchase authorization. Approximately $56 million in share repurchase authorization remained under this open-ended plan at May 1, 2004. |
| The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the periods indicated (in thousands, except per share data). |
Three Months Ended Twelve Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------------------------ ------------------------
Basic:
Net Income $ 53,762 $ 24,349 $ 38,757 $ 98,163
======================== ========================
Weighted average shares of common stock outstanding 83,501 84,486 83,397 84,609
======================== ========================
Earnings per Share-Basic $ 0.64 $ 0.29 $ 0.46 $ 1.16
======================== ========================
Three Months Ended Twelve Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------------------------- ------------------------
Diluted:
Net Income $ 53,762 $ 24,349 $ 38,757 $ 98,163
========================= ========================
Weighted average shares of common stock outstanding 83,501 84,486 83,397 84,609
Stock options 370 209 297 634
------------------------- ------------------------
Total weighted average equivalent shares 83,871 84,695 83,694 85,243
========================= ========================
Earnings per Share-Diluted $ 0.64 $ 0.29 $ 0.46 $ 1.15
========================= ========================
| Total stock options outstanding were 7,283,394 and 10,581,237 at May 1, 2004 and May 3, 2003, respectively. Of these, options to purchase 6,590,896 and 9,280,488 shares of Class A common stock at prices ranging from $18.13 to $40.22 and $15.74 to $40.22 per share were outstanding at May 1, 2004 and May 3, 2003, respectively, but were not included in the computation of diluted earnings per share because they would be antidilutive. |
| Accumulated other comprehensive loss only consists of the minimum pension liability, which is calculated annually in the fourth quarter. The following table shows the computation of comprehensive income (in thousands): |
Three Months Ended Twelve Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
-------------- ------------- ------------ --------------
Net Income $53,762 $24,349 $38,757 $98,163
Other Comprehensive Loss:
Minimum pension liability adjustment, net of taxes - - (6,785) (4,496)
-------------- ------------- ------------ --------------
Total Comprehensive Income $53,762 $24,349 $31,972 $93,667
============== ============= ============ ==============
8
| Various legal proceedings in the form of lawsuits and claims, which occur in the normal course of business, are pending against the Company and its subsidiaries. In the opinion of management, disposition of these matters is not expected to materially affect the Company’s financial position, cash flows or results of operations. |
| The Company is a guarantor on a $7.0 million letter of credit for a joint venture of as of May 1, 2004. At May 1, 2004, letters of credit totaling $69.9 million were issued under the Company’s $1 billion line of credit facility. |
| The Company has a nonqualified defined benefit plan for certain officers. The plan is noncontributory and provides benefits based on years of service and compensation during employment. Pension expense is determined using various actuarial cost methods to estimate the total benefits ultimately payable to officers and allocates this cost to service periods. The pension plan is unfunded. The actuarial assumptions used to calculate pension costs are reviewed annually. The Company made contributions of $785,000 during the quarter ended May 1, 2004. The Company expects to make a contribution to the pension plan of approximately $2.6 million for the remainder of fiscal 2004. |
The components of net periodic benefit costs are as follows (in thousands):
Three Months Ended Twelve Months Ended
------------------------------ ------------------------------
May 1, 2004 May 3, 2003 May 1, 2004 May 3, 2003
-------------- --------------- --------------- --------------
Components of net periodic benefit costs:
Service cost $ 442 $ 248 $1,188 $1,310
Interest cost 1,183 1,059 4,359 3,753
Net actuarial gain 346 32 444 (84)
Amortization of prior service cost 157 157 626 156
-------------- --------------- --------------- --------------
Net periodic benefit costs $2,128 $1,496 $6,617 $5,135
============== =============== =============== ==============
| In December 2003, the FASB issued SFAS No. 132 (Revised) (“SFAS No. 132-R”), Employer’s Disclosure about Pensions and Other Postretirement Benefits. SFAS No. 132-R retains disclosure requirements of the original SFAS No. 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS No. 132-R is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of the disclosure provisions of SFAS No. 132-R did not have a material effect on the Company’s financial position or results of operations. |
Dillard’s, Inc. (“the Company” or “we”) operates 328 retail department stores in 29 states. Our stores are located in suburban shopping malls and offer a broad selection of fashion apparel and home furnishings.
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We offer an appealing and attractive assortment of merchandise to our customers at a fair price. We seek to enhance our income by maximizing the sale of this merchandise to our customers. We do this by promoting and advertising our merchandise and by making our stores an attractive and convenient place for our customers to shop.
Fundamentally, the Company’s business model is to offer the customer a compelling price/value relationship through the combination of high quality products and services at a competitive price. The Company seeks to deliver a high level of profitability and cash flow. Highlights of the quarter ended May 1, 2004 include the following:
o A comparable store sales increase of 2%.
o Gross profit improvement of 280 basis points of sales compared to the three months ended May 3, 2003.
o A reduction of advertising, selling, administrative and general expenses of $12.2 million after consideration of a $12.3 million credit in the first quarter of 2003.
o Debt reduction of $385.4 million during the first quarter of 2004, including the redemption of $331.6 million Preferred Securities on February 2, 2004.
A summary of guidance on key financial measures for 2004, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), is shown below.
(In millions of dollars) 2004 2003
Estimated Actual
- -------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 295 $ 291
Rental expense 62 64
Interest and debt expense 155 181
Capital expenditures 260 227
- -------------------------------------------------------------------------------------------------------------------
General
Net Sales. Net sales include sales of comparable stores, non-comparable stores and lease income on leased departments. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores, sales from new stores opened in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.
Service Charges, Interest and Other Income. Service Charges, Interest and Other Income include interest and service charges, net of service charge write-offs, related to the Company’s proprietary credit card sales. Other income relates to joint ventures accounted for by the equity method, rental income, shipping and handling fees and gains (losses) on the sale of property and equipment and joint ventures.
Cost of Sales. Cost of sales includes the cost of merchandise sold, bank card fees, freight to the distribution centers, employee and promotional discounts, non-specific vendor allowances and direct payroll for salon personnel.
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Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying and occupancy, selling, distribution, warehousing, store management and corporate expenses, including payroll and employee benefits, insurance, employment taxes, advertising, management information systems, legal, bad debt costs and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
Depreciation and amortization. Depreciation and amortization expenses include depreciation and amortization on property and equipment.
Rentals. Rentals include expenses for store leases and data processing equipment rentals.
Interest and debt expense. Interest and debt expense includes interest relating to the Company’s unsecured notes, mortgage notes, credit card receivables financing, the guaranteed beneficial interests in the Company’s subordinated debentures, gains and losses on note repurchases, amortization of financing intangibles and interest on capital lease obligations.
Asset impairment and store closing charges. Asset impairment and store closing charges consist of write downs to fair value of under-performing properties including property and equipment and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. As disclosed in this note, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results will differ from these under different assumptions or conditions.
Management of the Company believes the following critical accounting policies significantly affect its judgments and estimates used in preparation of the consolidated financial statements.
Merchandise inventory. Approximately 97% of the inventories are valued at lower of cost or market using the retail last-in, first-out (“LIFO”) inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management believes that the Company’s RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 3% of the inventories are valued at lower of cost or market using the specific identified cost method.
Allowance for doubtful accounts. The accounts receivable from the Company’s proprietary credit card sales are subject to credit losses. The Company maintains allowances for uncollectible accounts for estimated losses resulting from the inability of its customers to make required payments. The adequacy of the allowance is based on historical experience with similar customers including write-off trends, current
11
aging information and year-end balances. Bankruptcies and recoveries used in the allowance calculation are projected based on qualitative factors such as current and expected consumer and economic trends. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated losses in the reported credit card receivable portfolio under current conditions; however, significant deterioration in any of the above-noted factors or in the overall health of the economy could materially change these expectations.
Vendor Allowances. The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising, payroll reimbursements and markdown reimbursement programs. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred. All other vendor allowances are recognized as a reduction of cost purchases. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses.
Insurance accruals. The Company’s consolidated balance sheets include liabilities with respect to self-insured workers’ compensation and general liability claims. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity).
Finite-lived assets. The Company evaluates the fair value and future benefits of finite-lived assets whenever events and changes in circumstances suggest. The Company performs an analysis of the anticipated undiscounted future net cash flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company’s strategies change, the conclusion regarding impairment may differ from the current estimates.
Goodwill.The Company evaluates goodwill annually or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates.
Accounts receivable securitizations. As part of the credit card securitizations, the Company transfers credit card receivable balances to the Trust in exchange for certificates representing undivided interests in such receivables. The Trust securitizes balances by issuing certificates representing undivided interests in the Trust’s receivables to outside investors. In each securitization the Company retains certain subordinated interests that serve as a credit enhancement to outside investors and expose the Trust assets to possible credit losses on receivables sold to outside investors. The investors and the Trust have no recourse against the Company beyond Trust assets. In order to maintain the committed level of securitized assets, the Trust reinvests cash collections on securitized accounts in additional balances. Interest paid to outside investors is recorded as interest expense.
Currently all borrowings under our receivable financing conduit are recorded on balance sheet and included in “Long-term Debt” on the consolidated balance sheet. As of May 1, 2004 and May 3, 2003 we had $400 million of debt, respectively, outstanding under this agreement.
Income Taxes. Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management’s
12
estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company’s actual results differ from estimated results due to changes in tax laws, new store locations or tax planning, the Company’s effective tax rate and tax balances could be affected. As such these estimates may require adjustment in the future as additional facts become known or as circumstances change.
Discount rate. The discount rate that the Company utilizes for determining future pension obligations is based on the Moody’s AA corporate bond index. The indices selected reflect the weighted average remaining period of benefit payments. The discount rate determined on this basis had decreased to 6.0% as of January 31, 2004 from 6.75% as of February 1, 2003. The actuarial assumptions used to calculate pension costs are reviewed annually.
The following table sets forth the results of operations, expressed as a percentage of net sales, for the periods indicated:
Three Months Ended Twelve Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
---------- ---------- ----------- -----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 64.0 66.8 67.4 67.0
---------- ---------- ----------- -----------
Gross profit 36.0 33.2 32.6 33.0
Advertising, selling, administrative
and general expenses 27.5 28.1 27.5 27.6
Depreciation and amortization 4.0 4.1 3.8 3.8
Rentals 0.7 0.8 0.8 0.9
Interest and debt expense 2.1 2.4 2.3 2.4
Asset impairment and store closing
charges 0.3 - 0.6 0.7
---------- ---------- ----------- -----------
Total operating expenses 34.6 35.4 35.0 35.4
Service charges, interest and other income 3.1 4.3 3.2 4.3
---------- ---------- ----------- -----------
Income before income taxes 4.5 2.1 0.8 1.9
Income taxes 1.6 0.8 0.3 0.6
---------- ---------- ----------- -----------
Net income 2.9 % 1.3 % 0.5 % 1.3 %
========== ========== =========== ===========
The percent change by category in the Company’s sales for the three months ended May 1, 2004 compared to the three months ended May 3, 2003 is as follows:
% Change
04-03
Cosmetics 1.5%
Women's and Juniors' Clothing 1.6%
Children's Clothing -4.8%
Men's Clothing and Accessories 3.3%
Shoes, Accessories and Lingerie 7.6%
Home -3.7%
Net sales increased 2% on a total basis and a comparable store basis for the three month period ended May 1, 2004, compared to the three month period ended May 3, 2003. Sales increased in all merchandising
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categories with the exception of children’s clothing and home. Sales performance was strongest in shoes, accessories, and lingerie during the first quarter of 2004. Sales in men’s clothing and accessories were above the average trend, while sales in women’s and juniors clothing and cosmetics were slightly below trend. Dillard’s management reiterates their strong beliefs that merchandise differentiation by the Company is crucial to its future success in the marketplace. During the first quarter of 2004, Dillard’s continued its long-term strategy of refining its merchandise mix to appeal to customers seeking merchandise in the “better” (more upscale) categories. Additionally, the Company continued its commitment to present merchandise with a younger focus and more fashion-forward attitude. The Company is working to accomplish improvement in its assortments by offering selections from promising new upscale national brands. Net sales decreased 2% for the twelve month period ended May 3, 2003 compared to the same period in 2002. These decreases were primarily due to decreases in comparable store sales.
Cost of sales as a percentage of sales decreased to 64.0% during the first quarter of 2004 compared with 66.8% for the first quarter of 2003. The increase of 280 basis points in gross profit during 2004 was due to a lower level of markdown activity which decreased cost of sales by 1.7% of sales. Improved levels of markups were responsible for a decrease in cost of sales of 1.1% of sales. All product categories had increased gross margins during 2004 except cosmetics, which was unchanged from 2003. The company is enhancing its exclusive brand program to include more selections in the better categories. Dillard’s will continue to de-emphasize or eliminate under-performing brands from both national brand and exclusive brand sources. In an effort to further tune its merchandise mix, the Company will continue to revise merchandise assortments on a location by location basis, tailoring the merchandise mix to meet the differing demands of each local market demographic.
Comparable store inventory at May 1, 2004 declined 3% compared to May 3, 2003.
Advertising, selling, administrative and general expenses (“SG&A expenses”) for the three months ended May 1, 2004 increased $0.1 million compared with May 3, 2003. SG&A expenses, as a percentage of net sales, were 27.5% for the three and twelve month periods ended May 1, 2004 compared to 28.1% and 27.6% for the comparable 2003 periods.
SG&A expenses for the three months ended May 3, 2003 include a $12.3 million pretax credit recorded due to the resolution of certain liabilities originally recorded in conjunction with the purchase of Mercantile Stores Company, Inc. that were deemed not necessary based upon current information. After consideration of this credit, SG&A expenses for the three months ended May 1, 2004 declined $12.2 million. During the quarter ended May 1, 2004 the Company experienced notable savings in bad debt expense. Bad debt expense declined $5.0 million as a result of the Company’s improved credit card portfolio attributable in part to improvement in credit granting operations. Savings were noted in most other expense categories, as well, and the Company capitalized on the leverage of positive comparable store sales.
Depreciation and amortization expense as a percentage of sales was 4.0% and 3.8% for the three and twelve month periods ended May 1, 2004, respectively, compared to 4.1% and 3.8% for the comparable periods in 2003.
Interest and debt expense for the three months ended May 1, 2004 decreased to $38.0 million or 2.1% of net sales compared to $43.4 million or 2.4% of net sales for the three months ended May 3, 2003. This
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reduction is due primarily to a $429 million decrease in the average amount of outstanding debt in the first quarter of 2004 compared to the first quarter of 2003. The Company redeemed $331.6 million Preferred Securities on February 2, 2004 as planned, with $100 million borrowed under its amended $1 billion revolving credit facility and the balance borrowed under the Company’s accounts receivable securitization conduit facilities. As of May 1, 2004, the Company had paid down all of these borrowings from cash from operations generated during the first quarter of fiscal 2004.
Asset Impairment and Store Closing Charges
During the quarter ended May 1, 2004, the Company recorded pre-tax expense of $4.7 million for asset impairment and store closing costs. The expense includes a $4.2 million write down to fair value for two previously closed stores and a $500,000 future lease obligation on a store closed during the quarter. The write down to fair value was deemed necessary due to the current quarter deterioration in those stores market values. The Company does not expect to incur significant additional exit costs during fiscal 2004 related to these stores.
Service charges, interest and other income for the three months ended May 1, 2004 decreased to $57.5 million or 3.1% of net sales compared to $77.4 million or 4.3% of net sales for the three months ended May 3, 2003. Included in service charges, interest and other income for the three months ended May 3, 2003 is a pretax gain of $15.6 million pertaining to the Company’s sale of its interest in Sunrise Mall and its associated center in Brownsville, Texas. Dillard’s sold its interest in the property for $80.7 million including the assumption of $40.0 million of long-term debt during the first quarter of 2003. After consideration of this gain, service charges, interest and other income for the three months ended May 1, 2004 declined $4.3 million. Service charge income decreased due to a $145 million decrease in the average amount of outstanding accounts receivable during the first three months of 2004 compared to 2003.
The federal and state income tax rate for the three month periods ended May 1, 2004 and May 3, 2003 was 36%.
(in thousands of dollars) May 1, 2004 May 3, 2003 $ Change % Change Cash and cash equivalents $ 67,063 $ 248,220 (181,157) -73.0 Current portion of long-term debt 165,692 137,053 28,639 20.9 Long-term debt 1,852,105 2,146,047 (293,942) -13.7 Guaranteed Beneficial Interests 200,000 531,579 (331,579) -62.4 Stockholders' equity 2,287,796 2,269,892 17,904 0.8 Current ratio 2.26% 2.87% Debt to capitalization 49.2% 55.4%
Net cash flows from operations were $337.4 million for the three months ended May 1, 2004 and were adequate to fund the Company’s operations for the quarter. Cash flows from operations increased from 2003 levels due primarily to a $77 million increase related to changes in accounts payable in the current year compared with the prior year. Cash flows also benefited from a $69 million decline related to changes in inventory in the current year compared to the prior year. Comparable store inventory at May 1, 2004 declined 3% compared to May 3, 2003. Net cash flow from operations was positively impacted by higher net income during fiscal 2004.
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Capital expenditures were $42.8 million for the three months ended May 1, 2004. These expenditures consist primarily of the construction of new stores, remodeling of existing stores and investments in technology. During the quarter, the Company opened one new store, Coastal Grand, Myrtle Beach, South Carolina; and three replacement stores, The Shoppes at EastChase in Montgomery, Alabama; Colonial University Village in Auburn, Alabama; and Greenbrier Mall in Chesapeake, Virginia. These four stores totaled approximately 160,000 square feet, net of replaced square footage. Capital expenditures for 2004 are expected to be approximately $260 million. The Company plans to open four additional new stores in fiscal 2004 totaling 407,000 square feet, net of replaced square footage. Historically, the Company has financed such capital expenditures with cash flow from operations. The Company believes that it will continue to finance capital expenditures in this manner during fiscal 2004.
During the quarter ended May 3, 2003, the Company recorded a gain of $15.6 million and received proceeds of $34.6 million from the sale of its interest in Sunrise Mall and its associated center in Brownsville, Texas.
Cash used in financing activities for the three months ended May 1, 2004 totaled $388.5 million compared to cash used of $27.8 million for the three months ended May 3, 2003. During the three months ended May 1, 2004, the Company redeemed its $331.6 million Preferred Securities. The Company also reduced its short term borrowings $50 million. During the quarters ended May 1, 2004 and May 3, 2003, the Company repurchased $2.6 million and $6.0 million, respectively, of its outstanding unsecured notes prior to their related maturity dates.
During the three months ended May 3, 2003, the Company repurchased approximately 1.2 million shares of Class A common stock for approximately $15.3 million under its existing $200 million share repurchase authorization. Approximately $56 million in share repurchase authorization remained under this open-ended plan at May 1, 2004.
During fiscal 2004, the Company expects to finance its capital expenditures and its working capital requirements including required debt repayments and stock repurchases, if any, from cash flows generated from operations. As part of its overall funding strategy and for peak working capital requirements, the Company expects to obtain funds through its credit card receivable financing facilities and its revolving credit agreement. The Company’s available receivable financing facilities provide for borrowings of up to $400 million and mature on September 30, 2004. The Company had no borrowings outstanding under these facilities at May 1, 2004. The Company intends to renew maturing receivable financing facilities as they become due. The peak borrowings incurred under the facilities were $381.5 million during 2003. The Company expects peak funding requirements of approximately $600 million during fiscal 2004. This peak demand will be met through a combination of accounts receivable financing and the $1 billion credit agreement. At May 1, 2004, letters of credit totaling $69.9 million were issued under this line of credit facility. Other than peak working capital requirements, management believes that cash generated from operations will be sufficient to cover its reasonably foreseeable working capital, capital expenditure, debt service requirements and stock repurchase. Depending on conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital market transactions, the proceeds of which could be used to refinance current indebtedness or other corporate purposes.
Except as noted above, there have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004 except for reductions of contractual commitments for debt due to the early payoffs during the three months ended May 1, 2004.
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The Company has not created, and is not party to, any special-purpose or off-balance-sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
In December 2003, the FASB issued SFAS No. 132 (Revised) (“SFAS No. 132-R”), Employer’s Disclosure about Pensions and Other Postretirement Benefits. SFAS No. 132-R retains disclosure requirements of the original SFAS No. 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS No. 132-R is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of the disclosure provisions of SFAS No. 132-R did not have a material effect on the Company’s financial position or results of operations.
Statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations include certain “forward-looking statements,” including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities, financing requirements and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “plans” and “believes,” and variations of these words and similar expressions, are intended to identify these forward-looking statements. The Company cautions that forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, contained in this report, the Company’s annual report on Form 10-K, or made by management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors (without limitation) include general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company’s stores are located and the effect of these factors on the buying patterns of the Company’s customers; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount, internet, and mail-order retailers; trends in personal bankruptcies and charge-off trends in the credit card receivables portfolio; changes in consumer spending patterns and debt levels; adequate and stable availability of materials and production facilities from which the Company sources its merchandise; changes in operating expenses, including employee wages, commission structures and related benefits; possible future acquisitions of store properties from other department store operators and the continued availability of financing in amounts and at the terms necessary to support the Company’s future business; potential disruption from terrorist activity and the effect on ongoing consumer confidence; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature.
During the quarter ended May 1, 2004, the Company redeemed the $331.6 million Preferred Securities as planned, with $100 million borrowed under its amended revolving credit agreement and the balance borrowed under the Company’s accounts receivable securtization conduit facilities. As of May 1, 2004,
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the Company had paid down all of these borrowings utilizing cash from operations during the first quarter of 2004.
During the quarter ended May 1, 2004, the Company retired $2.6 million of its 6.3% notes due February of 2008.
Except as disclosed above, there have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
The Company maintains “disclosure controls and procedures”, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s reports, pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of May 1, 2004, the Company carried out an evaluation, with the participation of Company’s management, including William Dillard, II, Chairman of the Board of Directors and Chief Executive Officer (principal executive officer), and James I. Freeman, Senior Vice-President and Chief Financial Officer (principal financial officer), of the effectiveness of the Company’s “disclosure controls and procedures” pursuant to Securities Exchange Act Rule 13a-15. Based on their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the quarter ended May 1, 2004 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None
None
None
None
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Ratio of Earnings to Fixed Charges:
The Company has calculated the ratio of earnings to fixed charges pursuant to Item 503 of Regulation S-K of the Securities and Exchange Act as follows:
Three Months Ended Fiscal Years Ended
- ---------------------------- ----------------------------------------------------------------------------
May 1, May 3, January 31, February 3, February 2, February 3, January 29,
2004 2003 2004 2003 2002 2001* 2000
- -------------- ------------ ------------- -------------- --------------- -------------- --------------
2.92 1.77 1.07 1.94 1.52 1.79 2.00
============== ============ ============= ============== =============== ============== ==============
* 53 week year.
(a) Exhibits
Number Description
10 First Amendment to the Amended and Restated Credit Agreement among Dillard's, Inc. and
JPMorgan Chase Bank and Fleet Retail Group, Inc.
12 Computation of Earnings to Fixed Charges
31(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31(b) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32(a) Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
32(b) Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
(b) Reports of Form 8-K filed during the first quarter:
A current report on Form 8-K dated March 10, 2004 was filed with the Securities and Exchange Commission on
March 11, 2004 to report, under Item 5, that the registrant issued a press release (attached as Exhibit 99
thereto).
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
DILLARD'S Inc.
(Registrant)
Date: June 2, 2004 /s/ James I. Freeman
James I. Freeman
Senior Vice-President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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