(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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
(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 July 31, 2004 80,015,297
CLASS B COMMON STOCK as of July 31, 2004 4,010,929
Index
DILLARD'S, INC.
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of July 31, 2004, January 31, 2004 and August 2, 3
2003.
Consolidated Statements of Operations and Retained Earnings for the Three, Six and
Twelve Month Periods Ended July 31, 2004 and August 2, 2003. 4
Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2004 and
August 2, 2003. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 20
Item 4. Controls and Procedures. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 21
Item 3. Defaults Upon Senior Securities. 21
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 5. Other Information. 22
Item 6. Exhibits. 23
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DILLARD'S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
July 31, January 31, August 2,
2004 2004 2003
-------------------------------- -----------------
Assets
Current Assets:
Cash and cash equivalents $ 82,787 $ 160,873 $ 150,451
Accounts receivable, net 1,036,566 1,191,489 1,159,297
Merchandise inventories 1,723,319 1,632,377 1,742,148
Other current assets 32,334 38,952 40,715
-------------------------------- -----------------
Total current assets 2,875,006 3,023,691 3,092,611
Property and Equipment, net 3,146,779 3,197,469 3,248,255
Goodwill 36,731 36,731 39,214
Other Assets 171,485 153,206 126,270
-------------------------------- -----------------
Total Assets $6,230,001 $ 6,411,097 $6,506,350
================================ =================
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable and accrued expenses $ 731,389 $ 679,854 $ 764,890
Current portion of capital lease obligations 2,214 2,126 1,895
Current portion of long-term debt 254,970 166,041 135,621
Federal and state income taxes 113,566 106,487 14,942
Other short-term borrowings 122,000 50,000 -
Current portion of Guaranteed Preferred Beneficial
Interest's in the Company's Subordinated Debentures - 331,579 -
-------------------------------- -----------------
Total current liabilities 1,224,139 1,336,087 917,348
Long-term Debt 1,755,685 1,855,065 2,019,438
Capital Lease Obligations 16,538 17,711 17,681
Other Liabilities 150,407 147,901 138,074
Deferred Income Taxes 616,328 617,236 669,881
Guaranteed Preferred Beneficial Interests in the
Company's Subordinated Debentures 200,000 200,000 531,579
Stockholders' Equity:
Common stock 1,174 1,169 1,167
Additional paid-in capital 722,740 713,974 711,351
Accumulated other comprehensive loss (11,281) (11,281) (4,496)
Retained earnings 2,222,659 2,201,623 2,172,897
Less treasury stock, at cost (668,388) (668,388) (668,570)
-------------------------------- -----------------
Total stockholders' equity 2,266,904 2,237,097 2,212,349
-------------------------------- -----------------
Total Liabilities and Stockholders' Equity $6,230,001 $6,411,097 $6,506,350
================================ =================
See notes to consolidated financial statements.
3
DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended Twelve Months Ended
----------------------------- --------------------------- ----------------------------
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
-------------- -------------- ------------- ------------- ------------- -------------
Net Sales $1,671,380 $1,721,485 $3,525,775 $3,535,396 $7,589,313 $7,717,537
Service Charges, Interest and Other Income 58,675 58,842 116,159 136,257 244,636 328,040
-------------- -------------- ------------- ------------- ------------- -------------
1,730,055 1,780,327 3,641,934 3,671,653 7,833,949 8,045,577
Costs and Expenses:
Cost of sales 1,145,846 1,186,418 2,333,346 2,398,390 5,105,129 5,228,797
Advertising, selling, administrative
and general expenses 500,124 507,803 1,009,908 1,017,486 2,090,369 2,130,840
Depreciation and amortization 74,248 74,561 148,486 148,588 290,559 295,735
Rentals 12,940 13,789 26,658 27,959 62,800 65,835
Interest and debt expense 37,566 59,364 75,518 102,789 153,794 191,800
Asset impairment and store closing
charges - 17,063 4,680 17,063 31,344 70,149
-------------- -------------- ------------- ------------- ------------- -------------
Total Costs and Expenses 1,770,724 1,858,998 3,598,596 3,712,275 7,733,995 7,983,156
-------------- -------------- ------------- ------------- ------------- -------------
Income (Loss) Before Income Taxes (40,669) (78,671) 43,338 (40,622) 99,954 62,421
Income Taxes (Benefit) (14,640) (28,325) 15,605 (14,625) 36,880 21,270
-------------- -------------- ------------- ------------- ------------- -------------
Net Income (Loss) (26,029) (50,346) 27,733 (25,997) 63,074 41,151
Retained Earnings at Beginning
of Period 2,252,045 2,226,633 2,201,623 2,205,674 2,172,897 2,145,295
Cash Dividends Declared (3,357) (3,390) (6,697) (6,780) (13,312) (13,549)
-------------- -------------- ------------- ------------- ------------- -------------
Retained Earnings at End of Period $2,222,659 $2,172,897 $2,222,659 $2,172,897 $ 2,222,659 $ 2,172,897
============== ============== ============= ============= ============= =============
Earnings (Loss) Per Share:
Basic $ (0.31) $ (0.60) $0.33 $(0.31) $0.76 $0.49
============== ============== ============= ============= ============= =============
Diluted $ (0.31) $ (0.60) $0.33 $(0.31) $0.75 $0.49
============== ============== ============= ============= ============= =============
Cash Dividends Declared Per Common Share $0.04 $0.04 $0.08 $0.08 $0.16 $0.16
See notes to consolidated financial statements.
4
DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Six Months Ended
------------------------------
July 31, August 2,
2004 2003
--------------- --------------
Operating Activities:
Net income (loss) $ 27,733 $ (25,997)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 150,769 152,128
Asset impairment and store closing charges 4,680 17,063
Provision for loan losses 12,848 18,908
Gain on sale of joint venture - (15,624)
Income tax benefit on nonqualified stock options 1,139 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 142,075 159,875
Increase in merchandise inventories and other current assets (84,324) (133,893)
(Increase) decrease in other assets (20,562) 2,217
Increase in trade accounts payable and accrued expenses,
other liabilities and income taxes 59,702 60,545
--------------- --------------
Net cash provided by operating activities 294,060 235,222
Investing Activities:
Purchases of property and equipment (101,966) (98,215)
Net proceeds from sale of joint venture - 34,579
--------------- --------------
Net cash used in investing activities (101,966) (63,636)
Financing Activities:
Principal payments on long-term debt and capital lease obligations (11,536) (137,641)
Net proceeds from short-term borrowings 72,000 -
Retirement of Guaranteed Preferred Beneficial Interest in the
Company's Subordinated Debentures (331,579) -
Proceeds from issuance of common stock 7,632 27
Cash dividends paid (6,697) (6,780)
Purchase of treasury stock - (19,097)
--------------- --------------
Net cash used in financing activities (270,180) (163,491)
(Decrease) Increase in Cash and Cash Equivalents (78,086) 8,095
Cash and Cash Equivalents, Beginning of Period 160,873 142,356
--------------- --------------
Cash and Cash Equivalents, End of Period $ 82,787 $ 150,451
============== ==============
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 (“GAAP”) 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, six and twelve month periods ended July 31, 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 Six Months Ended Twelve Months Ended
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
------------ ------------- ------------- ------------ ------------ -------------
Net Income (Loss):
As reported $(26,029) $(50,346) $27,733 $(25,997) $63,074 $41,151
Deduct: Total stock based employee
compensation expense determined under
fair value based method, net of taxes
(438) (647) (922) (1,546) (1,939) (3,616)
------------ ------------- ------------- ------------ ------------ -------------
Pro forma $(26,467) $(50,993) $(26,811) $(27,543) $61,135 $37,535
============ ============= ============= ============ ============ =============
Basic Earnings Per Share:
As reported $(0.31) $(0.60) $0.33 $(0.31) $0.76 $0.49
Pro forma (0.32) (0.61) 0.32 (0.33) 0.73 0.45
------------ ------------- ------------- ------------ ------------ -------------
Diluted Earnings Per Share:
As reported $(0.31) $(0.60) $0.33 $(0.31) $0.75 $0.49
Pro forma (0.32) (0.61) 0.32 (0.33) 0.73 0.44
------------ ------------- ------------- ------------ ------------ -------------
6
| 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 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. |
| 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 July 31, 2004, January 31, 2004 and August 2, 2003. |
| At July 31, 2004, the Company had $122 million in outstanding short-term borrowings with a maturity date of September 30, 2004 under its accounts receivable conduit facilities related to seasonal financing needs. Remaining available short-term borrowings under these conduit facilities at July 31, 2004 were $258 million. At August 2, 2003, there were no borrowings. |
| During the six months ended July 31, 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 first quarter of 2004. The write-down to fair value was deemed necessary due to the deterioration in these stores’ market values in the first quarter of 2004. The Company does not expect to incur significant additional exit costs during fiscal 2004 related to these stores. |
| During the quarter and six months ended August 2, 2003, the Company recorded $17.1 million for asset impairment and store closing charges related to seven stores. The charges consist of property and equipment write-downs to fair value for these under-performing stores and further deterioration of the estimated market value of certain assets held for sale. |
| During the six months ended August 2, 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 six months ended August 2, 2003. This amount was recorded in service charges, interest and other income. |
| During the six months ended August 2, 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. |
7
| 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 securitization conduit facilities. No gain or loss was incurred related to the redemption. The Company paid down all of these borrowings with cash from operating activities. |
| During the quarter ended July 31, 2004, the Company repurchased $6.0 million of its 8.2% notes due in 2022. During the six months ended July 31, 2004, the Company repurchased $8.6 million of its outstanding unsecured notes prior to their related maturity dates. Interest rates on the repurchased securities ranged from 6.3% to 8.2% for the six months ended July 31, 2004. Maturity dates ranged from 2008 to 2022 for the six months ended July 31, 2004. A gain of $60,000 was recorded from the unsecured notes during the six months ended July 31, 2004. On Monday, August 2, 2004, the Company retired $163.4 million of its maturing 6.43% notes. |
| During the quarter ended August 2, 2003, the Company called the remaining $125.9 million of its 6.39% Reset Put Securities (“REPS”) due August 1, 2013 prior to their maturity dates. These notes were subject to mandatory repricing on August 1, 2003. A call premium of $15.6 million related to this early retirement is included in interest expense for the quarter ended August 2, 2003. |
| During the six months ended August 2, 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 six months ended August 2, 2003. Maturity dates ranged from 2004 to 2005 for the six months ended August 2, 2003. No gains or losses resulted from the repurchase of the unsecured notes during the six months ended August 2, 2003. |
| For the three months ended August 2, 2003, the Company repurchased approximately 294,000 shares of Class A Common Stock valued at approximately $3.8 million under its existing $200 million share repurchase authorization. During the six months ended August 2, 2003, the Company repurchased approximately 1.5 million shares of Class A common stock for $19.1 million. No shares were repurchased during the six months ended July 31, 2004. The Company’s board of directors authorized the program in May of 2000. Approximately $56 million in share repurchase authorization remained under this open-ended plan at July 31, 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 Six Months Ended Twelve Months Ended
------------------------- ------------------------- ---------------------------
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
------------------------- ------------------------- ---------------------------
Basic:
Net income (loss) $(26,029) $(50,346) $27,733 $(25,997) $63,074 $41,151
========================= ========================= ===========================
Weighted average shares of common
stock outstanding 83,738 83,417 83,620 83,951 83,477 84,314
========================= ========================= ===========================
Basic Earnings Per Share $ (0.31) $ (0.60) $ 0.33 $ (0.31) $ 0.76 $ 0.49
========================= ========================= ===========================
8
Three Months Ended Six Months Ended Twelve Months Ended
-------------------------- ------------------------- ---------------------------
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
-------------------------- -------------------------- --------------------------
Diluted:
Net income (loss) $(26,029) $(50,346) $27,733 $(25,997) $63,074 $41,151
========================== ========================== ==========================
Weighted average shares of common
stock outstanding 83,738 83,417 83,620 83,951 83,477 84,314
Stock options - - 474 - 387 383
-------------------------- -------------------------- --------------------------
Total weighted average equivalent
shares 83,738 83,417 84,094 83,951 83,864 84,697
========================== ========================== ==========================
Diluted Earnings Per Share $ (0.31) $ (0.60) $ 0.33 $ (0.31) $ 0.75 $ 0.49
========================== ========================== ==========================
| Total stock options outstanding were 6,158,764 and 9,411,422 at July 31, 2004 and August 2, 2003, respectively. Of these, options to purchase 4,402,049 and 8,197,745 shares of Class A common stock at prices ranging from $24.01 to $40.22 and $15.74 to $40.22 per share at July 31, 2004 and August 2, 2003, respectively, were not included in the computation of diluted earnings per share because they would be antidilutive. No stock options were included for the three months ended July 31, 2004 and the three and six months ended August 2, 2003 computation of diluted earnings per share because they would be antidilutive due to the net loss. |
| Accumulated other comprehensive loss consists only 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 Six Months Ended Twelve Months Ended
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
------------ ------------- ------------- ------------- ------------ -------------
Net Income (Loss) $(26,029) $(50,346) $27,733 $(25,997) $63,074 $41,151
Other Comprehensive Loss:
Minimum pension liability
adjustment, net of taxes - - - - (6,785) (4,496)
------------ ------------- ------------- ------------- ------------ -------------
Total Comprehensive Income (Loss) $(26,029) $(50,346) $27,733 $(25,997) $56,289 $36,655
============ ============= ============= ============= ============ =============
| 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 loan of up to $54.3 million for a joint venture as of July 31, 2004. At July 31, 2004, the joint venture had $13.8 million outstanding on the loan. At July 31, 2004, letters of credit totaling $100.1 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 |
9
| 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 participant distributions of $1.6 million during the six months ended July 31, 2004. The Company expects to make participant distributions of approximately $1.8 million for the remainder of fiscal 2004. |
The components of net periodic benefit costs are as follows (in thousands):
Three Months Ended Six Months Ended Twelve Months Ended
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
----------- ------------ ----------- ------------ ------------ ------------
Components of net periodic benefit
costs:
Service cost $ 442 $ 248 $ 885 $ 497 $1,382 $1,205
Interest cost 1,145 1,059 2,289 2,117 4,407 3,914
Net actuarial gain 286 32 573 65 638 (13)
Amortization of prior service cost 157 157 313 313 626 313
----------- ------------ ----------- ------------ ------------ ------------
Net periodic benefit costs $2,030 $1,496 $ 4,060 $ 2,992 $7,053 $5,419
=========== ============ =========== ============ ============ ============
| 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, results of operations or cash flows. |
| In June 2004, the Financial Accounting Standards Board (FASB) issued a proposed interpretation of FASB No. 143, “Accounting for Asset Retirement Obligations”. This proposed interpretation clarifies the scope and timing of liability recognition for conditional asset retirement obligations under FASB No. 143, and would be effective no later than the end of our 2005 fiscal year. We have determined that this interpretation, and the adoption of FASB No. 143, will not have a material impact on our consolidated financial position, results of operations or cash flows. |
| In March 2004, the FASB published an Exposure Draft, “Shares-Based Payment”, an amendment of FASB Statements No. 123 and No. 95. Under this FASB proposal, all forms of share-based payment to employees, including employee stock options, would be treated as compensation and recognized in the income statement. This proposed statement would be effective for the beginning of our 2005 fiscal year. The Company currently accounts for stock options under APB No. 25. The pro-forma impact of expensing options is disclosed in Note 2. |
| On August 8, 2004, the Company announced it has entered into a definitive agreement to sell substantially all the assets of its private label credit card subsidiary, to GE Consumer Finance for approximately $1.25 billion, which includes the assumption of $400 million of securitization liabilities, the purchase of owned accounts receivable and an undisclosed premium. The Company expects to use net proceeds to reduce debt outstanding, to repurchase its common stock and for general corporate purposes. |
10
| As part of the transaction, the Company and GE Consumer Finance will also enter into a long-term marketing and servicing alliance with an initial term of 10 years. The Company and GE Consumer Finance will share in the income generated by the long-term marketing and servicing alliance. The transaction is expected to close by the end of the current fiscal year, subject to customary regulatory review and closing conditions. |
Dillard’s, Inc. ( the “Company”, “we”, “us”, or “our”) operates 329 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. 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. Noteworthy items for the quarter ended July 31, 2004 include the following:
o A comparable store sales decrease of 3%.
o Gross profit improvement of 30 basis points of sales compared to the three months ended August 2, 2003.
o Inventory in comparable stores declined 2% compared to inventory position at August 2, 2003.
o A reduction of advertising, selling, administrative and general expenses of $7.7 million compared to the three months ended
August 2, 2003.
o Decrease in interest expense of $6.3 million excluding a $15.6 call premium recorded during the three months ended August 2,
2003.
2004 Guidance
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 61 64
Interest and debt expense 150 181
Capital expenditures 270 227
- ---------------------------------------------------------------------------------------------------------------------------------------
11
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, service charges and other fees, 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.
Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying and occupancy, selling, distribution, warehousing, store 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 preferred beneficial interests in the Company’s subordinated debentures, gains and losses on note repurchases, amortization of financing intangibles, call premium 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 stores including property and equipment, goodwill 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.
Management of the Company believes the following critical accounting policies significantly affect its judgments and estimates used in preparation of the consolidated financial statements.
12
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 and estimates 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 by 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 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.
13
Accounts receivable securitizations. As part of the 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 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” or “Other short-term borrowings” on the consolidated balance sheet. As of July 31, 2004 and August 2, 2003, we had $400 million of long-term debt outstanding under this agreement. As of July 31, 2004 we had $122 million in other short-term borrowings outstanding.
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 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 Six Months Ended Twelve Months Ended
----------------------- ------------------------ ----------------------- ---------- ----------
July 31, August 2, July 31, August 2, July 31, August 2,
2004 2003 2004 2003 2004 2003
---------- ---------- --------- ----------- ---------- ----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 68.6 68.9 66.2 67.8 67.3 67.8
---------- ---------- --------- ----------- ---------- ----------
Gross profit 31.4 31.1 33.8 32.2 32.7 32.2
Advertising, selling, administrative
and general expenses 29.9 29.5 28.6 28.8 27.6 27.6
Depreciation and amortization 4.4 4.3 4.2 4.2 3.8 3.8
Rentals 0.8 0.8 0.8 0.8 0.8 0.9
Interest and debt expense 2.2 3.5 2.2 2.9 2.0 2.5
Asset impairment and store closing charges - 1.0 0.1 0.5 0.4 0.9
---------- ---------- --------- ----------- ---------- ----------
Total operating expenses 37.3 39.1 35.9 37.2 34.6 35.7
Service charges, interest and other income 3.5 3.4 3.3 3.9 3.2 4.3
---------- ---------- --------- ----------- ---------- ----------
Income (loss) before income taxes (2.4) (4.6) 1.2 (1.1) 1.3 0.8
Income taxes (benefit) (0.8) (1.7) 0.4 (0.4) 0.5 0.3
---------- ---------- --------- ----------- ---------- ----------
Net income (loss) (1.6) % (2.9) % 0.8 % (0.7) % 0.8 % 0.5 %
========== ========== ========= =========== ========== ==========
14
The percent change by category in the Company’s sales for the three and six months ended July 31, 2004 compared to the three and six months ended August 2, 2003 is as follows:
% Change
-------------------------------------------- ------------- -------------
Three Months Six Months
-------------------------------------------- ------------- -------------
Cosmetics -0.6% 0.5%
Women's and Juniors' Clothing -3.1% -0.7%
Children's Clothing -7.7% -6.1%
Men's Clothing and Accessories -6.3% -1.4%
Shoes, Accessories and Lingerie 0.1% 3.9%
Home -2.4% -3.0%
-------------------------------------------- ------------- -------------
Net sales decreased 3% on a total and a comparable store basis for the three month period ended July 31, 2004 compared to the three month period ended August 2, 2003. Sales were strongest in cosmetics, home and accessories, shoes and lingerie during the second quarter of 2004, with those areas performing above the Company average trend of a 3% decline for the period. Sales in the women’s and juniors’ categories were in line with the total Company sales performance. Sales were weakest in the men’s and children’s areas, with sales in children’s trending significantly below the average Company performance for the period.
During the three month period ended July 31, 2004, sales in the Eastern region were stronger than the Company average sales trend. Sales in the Western region were slightly above trend, and the Central region reported below-trend sales.
The Company continues to focus on improving its merchandise mix in an effort to create more differentiation from its peers. These efforts include:
o Introducing new, younger-focused and more upscale national brands;
o Increasing storewide penetration of exclusive brands, with special emphasis on presenting
more fashion-forward and upscale exclusive brands;
o Eliminating or de-emphasizing national and exclusive brands that are not producing satisfactory
sales and gross margins; and
o Fine-tuning merchandise mix by store location to meet the differing needs of the local demographic.
Net sales were flat for the six month period ended July 31, 2004 compared to the same period in 2003. Sales in comparable stores declined 1% for the six month period ended July 31, 2004.
Storewide sales penetration of exclusive brand merchandise for the six month period ended July 31, 2004 was 22.1% compared to 18.8% during the six month period ended August 2, 2003.
Net sales declined 2% for the twelve month period ended July 31, 2004 compared to the same period in 2003 as a result of comparable store sales declines.
Cost of sales, as a percentage of net sales, decreased to 68.6% for the quarter ended July 31, 2004, from 68.9% for the quarter ended August 2, 2003. This decrease of 30 basis points in cost of sales for the three months ended July 31, 2004, is attributable to slightly improved levels of markups partially offset by higher levels of markdown activity as the Company experienced lower than expected consumer demand
15
and worked to maintain control over inventory levels in a period of declining sales. The increased markup percentage was responsible for a decrease in cost of sales of 0.90% of sales. The higher level of markdown activity increased the cost of sales by 0.60% of sales. Improved gross margins were noted in all product categories except women’s and junior and home categories. Inventory in comparable stores at July 31, 2004 declined 2% compared to the inventory balance at August 2, 2003.
Cost of sales, as a percentage of net sales, for the six months ended July 31, 2004 and August 2, 2003 was 66.2% and 67.8%, respectively. The decrease of 160 basis points in cost of sales for the six months ended July 31, 2004, is attributable to increased markup percentage that was responsible for a decrease in cost of sales of 0.95% of sales and lower levels of markdown activity that decreased the cost of sales by 0.65% of sales. All product categories had increased gross margins during the six months ended July 31, 2004 except home, which declined slightly from 2003 levels.
Advertising, Selling, Administrative and General (“SG&A”) expenses declined $7.7 million for the quarter ended July 31, 2004 compared with the quarter ended August 2, 2003. The decrease was primarily driven by significant savings in bad debt expense of $9.5 million as a result of improvement in the quality of the Company’s credit card portfolio as well as lower average accounts receivable balances. Savings in bad debt expense, combined with decreases in supply expense ($1.2 million) and services purchased ($1.6 million) were partially offset by increases in payroll ($1.8 million), advertising expense ($1.3 million) and property taxes ($1.2 million). SG&A expenses as a percentage of net sales, increased to 29.9% for the quarter ended July 31, 2004 from 29.5% for the quarter ended August 2, 2003 due to a lack of sales leverage.
The comparable relationship between SG&A expenses and net sales for the six months ended July 31, 2004 and August 2, 2003, respectively, was 28.6% and 28.8%. SG&A expenses declined $7.6 million for the six months ended July 31, 2004 compared with the comparable period in 2003. SG&A expenses for the six months ended August 2, 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 six months ended July 31, 2004 declined $19.9 million. The improvement in SG&A expenses was driven by savings in bad debt expense ($14.6 million), advertising ($3.0 million), supplies ($2.9 million) and services purchased ($3.1 million).
Depreciation and amortization expense, as a percentage of net sales, was 4.4% for the three month period ended July 31, 2004 compared to 4.3% for the similar period in 2003. Depreciation and amortization expense, as a percentage of net sales was 4.2% for the six months ended July 31, 2004 and August 2, 2003, respectively. Depreciation expenses were relatively unchanged for the three and six months ended July 31, 2004 compared to the similar periods in 2003.
Interest and debt expense was $37.6 million for the three month period ended July 31, 2004 compared with $59.4 million for the similar periods in 2003. Interest expense for the quarter ended August 2, 2003 includes a call premium related to the early retirement of debt resulting in additional interest expense of $15.6 million. The remainder of the decline in interest and debt expense in the second quarter of 2004 was due to a $475 million reduction in average outstanding debt in 2004 compared to 2003.
Interest and debt expense was $75.5 million for the six month period ended July 31, 2004 compared with $102.8 million for the similar period in 2003. This reduction is partially due to the call premium of $15.6 million discussed above. The remainder of the decline in interest and debt expense in 2004 was due to the
16
reduction in average outstanding debt in 2004 compared to 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.
During the six months ended July 31, 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 these 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 August 2, 2003, the Company recorded pre-tax expense of $17.1 million for asset impairment and store closing charges related to seven stores. The charge consists of property and equipment write-downs to fair value for these under-performing stores and further deterioration of the estimated market value of certain assets held for sale.
Service charges, interest and other income, as a percentage of net sales, was 3.5% and 3.3% for the three months and six months ended July 31, 2004 compared to 3.4% and 3.9% for the same three and six month periods in 2003. Service charges, interest and other income for the three months ended July 31, 2004 were relatively flat compared to the three months ended August 2, 2003. However, due to a reduction in average trade accounts receivable, service charge income declined for the three months ended July 31, 2004 but was offset by increased credit related fees and higher equity investment income.
Service charges, interest and other income for the six months ended July 31, 2004 decreased to $116.2 million from $136.3 million for the six months ended August 2, 2003. This decrease is due to the inclusion of a gain of $15.6 million relating to the sale of the Company’s interest in Sunrise Mall and its associated center in Brownsville, Texas during the first quarter of 2003 and lower average trade accounts receivable during 2004 compared to 2003.
The federal and state income tax rates for the three and six month periods ended July 31, 2004 and August 2, 2003 was 36%.
(in thousands of dollars) July 31, 2004 August 2, 2003 $ Change % Change - --------------------------------------------------------- ---------------- ------------------ ------------ ------------ Cash and cash equivalents $ 82,787 $ 150,451 (67,664) -45.0 Short-term debt 122,000 - 122,000 - Current portion of long-term debt 254,970 135,621 119,349 88.0 Long-term debt 1,755,685 2,019,438 (263,753) -13.1 Guaranteed Preferred Beneficial Interests 200,000 531,579 (331,579) -62.4 Stockholders' equity 2,266,904 2,212,349 54,555 2.5 Current ratio 2.35 3.37 Debt to capitalization 50.7% 54.8% - --------------------------------------------------------- ---------------- ------------------ ------------ ------------
Cash provided by operating activities totaled $294.1 million and $235.2 million for the six months ended July 31, 2004 and August 2, 2003, respectively, and were adequate to fund the Company’s operations for the six-
17
month period. Cash flows from operating activities increased from 2003 levels due primarily to a $50 million increase related to the change in inventory and other current assets in the current year compared to the prior year partially offset by an $18 million decrease related to the change in accounts receivable and a $23 million decrease related to the change in other assets compared to the prior year. Comparable store inventory at July 31, 2004 declined 2% compared to August 2, 2003. Net cash flow from operating activities was also positively impacted by higher net income during fiscal 2004.
Capital expenditures were $102.0 million for the six months ended July 31, 2004. These expenditures consist primarily of the construction of new stores, remodeling of existing stores and investments in technology. During the six months, 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 $270 million. On August 4, 2004, The Company opened its new 200,000 square foot store at Jordan Creek Town Center in West Des Moines, Iowa and plans to open three additional new stores in fiscal 2004 totaling 207,000 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 six months ended August 2, 2003, the Company recorded a gain of $15.6 million and received net cash 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 six months ended July 31, 2004 totaled $270.2 million compared to cash used of $163.5 million for the six months ended August 2, 2003. During the six months ended July 31, 2004, the Company redeemed its $331.6 million Preferred Securities. The Company increased its short-term borrowings through its available receivable financing facilities by $72 million. During the six month ended July 31, 2004 and August 2, 2003, the Company repurchased $8.6 million and $6.0 million, respectively, of its outstanding unsecured notes prior to their related maturity dates. During the six months ended July 31, 2004 and August 2, 2003, the Company reduced its total level of outstanding debt and capital lease obligations by $11.5 million and $137.6 million, respectively. Subsequent to the current quarter, on August 2, 2004, the Company retired an additional $163.4 million of its maturing 6.43% notes.
During the six months ended August 2, 2003, the Company repurchased approximately 1.5 million shares of Class A common stock for $19.1 million under its existing $200 million share repurchase authorization. Approximately $56 million in share repurchase authorization remained under this open-ended plan at July 31, 2004.
On August 8, 2004, the Company announced it has entered into a definitive agreement to sell substantially all the assets of its private label credit card subsidiary, to GE Consumer Finance for approximately $1.25 billion, which includes the assumption of $400 million of securitization liabilities, the purchase of owned accounts receivable and an undisclosed premium. The Company expects to use net proceeds to reduce debt outstanding, to repurchase its common stock and for general corporate purposes. The Company expects the transaction to be accretive to fiscal 2005 earnings per share.
As part of the transaction, the Company and GE Consumer Finance will also enter into a long-term marketing and servicing alliance with an initial term of 10 years. The Company and GE Consumer Finance will share in the income generated by the long-term marketing and servicing alliance. Depending upon the performance of the alliance, The Company anticipates that income generated could be comparable to the earnings currently generated by its private label credit card operations. The transaction is expected to close by the end of the current fiscal year, subject to customary regulatory review and closing conditions.
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
18
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 is in the process of extending the maturity date on these facilities. The Company had $122 million in borrowings outstanding under these facilities at July 31, 2004. The peak borrowings incurred under the facilities were $381.5 million during 2003. The Company expects peak funding requirements of approximately $500 million during fiscal 2004. This peak demand will be met through a combination of accounts receivable financing and the $1 billion credit agreement. Availability for borrowings and letter of credit obligations under the credit agreement is limited to 75% of the inventory of certain Company subsidiaries (approximately $955 million at July 31, 2004). At July 31, 2004, letters of credit totaling $100.1 million were issued under this line of credit facility, resulting in available borrowings of $855 million. 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. On August 24, 2004, the Company filed a Form S-3 in order to de-register its outstanding shelf registration for securities in the amount of $750 million.
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 six months ended July 31, 2004.
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 is a guarantor on a $54.3 million loan for a joint venture as of July 31, 2004. At July 31, 2004, the joint venture had $13.8 million outstanding on the loan. The Company does not have any additional 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, results of operations or cash flows.
In June 2004, the Financial Accounting Standards Board (FASB) issued a proposed interpretation of FASB No. 143, “Accounting for Asset Retirement Obligations”. This proposed interpretation clarifies the scope and timing of liability recognition for conditional asset retirement obligations under FASB No. 143, and would be effective no later than the end of our 2005 fiscal year. We have determined that this interpretation, and the adoption of FASB No. 143, will not have a material impact on our consolidated financial position, results of operations or cash flows.
19
In March 2004, the FASB published an Exposure Draft, “Shares-Based Payment”, an amendment of FASB Statements No. 123 and No. 95. Under this FASB proposal, all forms of share-based payment to employees, including employee stock options, would be treated as compensation and recognized in the income statement. This proposed statement would be effective for the beginning of our 2005 fiscal year. The Company currently accounts for stock options under APB No. 25. The pro-forma impact of expensing options is disclosed in Note 2.
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; success in gaining regulatory review and approval of the definitive agreement to sell substantially all the assets of Dillard National Bank and the effectiveness of the performance of the resulting long-term marketing and servicing alliance with GE Consumer Finance; existing market conditions regarding the company’s Class A Common Stock and outstanding debt available for purchase with proceeds from the transaction with GE Consumer Finance; 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; fluctuations in LIBOR and other base borrowing rates; 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 six months ended July 31, 2004, the Company repurchased $8.6 million of its outstanding unsecured notes prior to their related maturity dates. Interest rates on the repurchased securities ranged from 6.3% to 8.2% for the six months ended July 31, 2004. Maturity dates ranged from 2008 to 2022 for the six months ended July 31, 2004.
During the six months ended July 31, 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 securitization conduit facilities. The Company repaid all of these borrowings utilizing cash from operations during the first quarter of 2004.
20
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.
Item 4. Controls and Procedures
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 July 31, 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 July 31, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, in the ordinary course of business, the Company is involved in various legal proceedings. The Company believes
that the ultimate outcome of current litigation will not have a material adverse impact on its results of operations, financial
condition or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
21
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May 15, 2004. The matters submitted to a vote of the stockholders
were as follows:
Votes
Votes For Votes Against Abstained
------------------- ------------------------ ---------------
Election of Directors
Class A Nominees
Robert C. Connor 60,069,958 10,119,525 0
Will D. Davis 59,901,944 10,287,539 0
John Paul Hammerschmidt 59,822,509 10,366,974 0
Peter Johnson 60,454,245 9,735,238 0
Class B Nominees
Drue Corbusier 3,986,760 0 0
Alex Dillard 3,986,760 0 0
William Dillard, II 3,986,760 0 0
Mike Dillard 3,986,760 0 0
James I. Freeman 3,986,760 0 0
Warren A. Stephens 3,986,760 0 0
William H. Sutton 3,986,760 0 0
J. C. Watts 3,986,760 0 0
Other Proposals
Global Human Rights Standards 6,290,710 56,831,585 4,208,595
Ratification of Auditors 72,320,663 1,268,307 587,272
Item 5. Other Information
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:
Six Months Ended Fiscal Years Ended
- ---------------------------- ----------------------------------------------------------------------------
July 31, August 2, January 31, February 3, February 2, February 3, January 29,
2004 2003 2004 2003 2002 2001* 2000
- -------------- ------------ ------------- -------------- --------------- -------------- --------------
1.48 0.63 1.07 1.94 1.52 1.79 2.00
============== ============ ============= ============== =============== ============== ==============
* 53 week year.
22
Item 6. Exhibits
Number Description
2* Purchase, Sale and Servicing Transfer Agreement, dated as of August 7, 2004, among Dillard's, Inc.,
Dillard National Bank, General Electric Capital Corporation and GE Capital Consumer Card Co.
(Exhibit 2.1 to Form 8-K dated as of August 7, 2004 in 1-6140)
10* Private Label Credit Card Program Agreement, dated as of August 7, 2004, by and between Dillard's,
Inc. and GE Capital Consumer Card Co. (Exhibit 2.1 to Form 8-K dated as of August 7, 2004 in
1-6140)
12 Statement re: Computation of Earnings to Fixed Charges
31(a) Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
31(b) Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
32(a) Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32(b) Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference as indicated.
SIGNATURES
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: September 9, 2004 /s/James I. Freeman
James I. Freeman
Senior Vice President & Chief Financial Officer
(Principal Financial & Accounting Officer)