(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 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 October 30, 2004 78,116,624
CLASS B COMMON STOCK as of October 30, 2004 4,010,929
Index
DILLARD'S, INC.
Page
Part I. FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of October 30, 2004, January 31, 2004 and
November 1, 2003. 3
Consolidated Statements of Operations and Retained Earnings for the Three, Nine and Twelve
Month Periods Ended October 30, 2004 and November 1, 2003. 4
Consolidated Statements of Cash Flows for the Nine Months Ended October 30, 2004 and
November 1, 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. 21
Item 4. Controls and Procedures. 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
Item 3. Defaults Upon Senior Securities. 23
Item 4. Submission of Matters to a Vote of Security Holders. 23
Item 5. Other Information. 23
Item 6. Exhibits. 24
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DILLARD'S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
October 30, January 31, November 1,
2004 2004 2003
-------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 56,484 $ 160,873 $ 110,368
Accounts receivable, net 2,601 1,191,489 1,119,926
Merchandise inventories 2,178,312 1,632,377 2,287,665
Other current assets 76,317 38,952 85,570
Assets held for sale 995,643 - -
-------------------------------------------------
Total current assets 3,309,357 3,023,691 3,603,529
Property and Equipment, net 3,154,680 3,197,469 3,241,622
Goodwill 36,731 36,731 39,214
Other Assets 158,896 153,206 130,855
-------------------------------------------------
Total Assets $6,659,664 $ 6,411,097 $7,015,220
=================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable and accrued expenses $1,210,898 $ 679,854 $1,278,793
Current portion of capital lease obligations 2,164 2,126 1,923
Current portion of long-term debt 91,660 166,041 297,899
Federal and state income taxes 78,351 106,487 -
Other short-term borrowings 333,000 50,000 20,500
Current portion of Guaranteed Preferred Beneficial
Interests in the Company's Subordinated Debentures - 331,579 -
Liabilities related to assets held for sale 400,000 - -
-------------------------------------------------
Total current liabilities 2,116,073 1,336,087 1,599,115
Long-term Debt 1,350,750 1,855,065 1,855,648
Capital Lease Obligations 16,026 17,711 17,245
Other Liabilities 152,732 147,901 137,763
Deferred Income Taxes 616,624 617,236 680,457
Guaranteed Preferred Beneficial Interests in the
Company's Subordinated Debentures 200,000 200,000 531,579
Stockholders' Equity:
Common stock 1,175 1,169 1,167
Additional paid-in capital 725,726 713,974 711,588
Accumulated other comprehensive loss (11,281) (11,281) (4,496)
Retained earnings 2,200,608 2,201,623 2,153,724
Less treasury stock, at cost (708,769) (668,388) (668,570)
-------------------------------------------------
Total stockholders' equity 2,207,459 2,237,097 2,193,413
-------------------------------------------------
Total Liabilities and Stockholders' Equity $6,659,664 $6,411,097 $7,015,220
=================================================
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 Nine Months Ended Twelve Months Ended
---------------------------- ---------------------------------------------------------
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
---------------------------- ---------------------------------------------------------
Net Sales $1,698,897 $1,764,484 $5,224,672 $5,299,880 $7,523,726 $7,687,771
Service Charges, Interest and Other Income 56,250 55,952 172,409 192,209 244,934 320,629
---------------------------- ---------------------------------------------------------
1,755,147 1,820,436 5,397,081 5,492,089 7,768,660 8,008,400
Costs and Expenses:
Cost of sales 1,140,898 1,200,053 3,474,244 3,598,443 5,045,974 5,237,413
Advertising, selling, administrative
and general expenses 521,002 517,176 1,530,910 1,534,662 2,094,195 2,108,247
Depreciation and amortization 74,547 74,187 223,033 222,775 290,919 292,984
Rentals 12,715 14,725 39,373 42,684 60,790 65,645
Interest and debt expense 35,188 37,338 110,706 140,127 151,644 186,612
Asset impairment and store closing charges - 1,702 4,680 18,765 29,642 71,851
---------------------------- ---------------------------------------------------------
Total Cost and Expenses 1,784,350 1,845,181 5,382,946 5,557,456 7,673,164 7,962,752
---------------------------- ---------------------------------------------------------
Income (Loss) Before Income Taxes (29,203) (24,745) 14,135 (65,367) 95,496 45,648
Income Taxes (Benefit) (10,515) (8,910) 5,090 (23,535) 35,275 15,230
---------------------------- ---------------------------------------------------------
Net Income (Loss) (18,688) (15,835) 9,045 (41,832) 60,221 30,418
Retained Earnings at Beginning
of Period 2,222,659 2,172,897 2,201,623 2,205,674 2,153,724 2,136,811
Cash Dividends Declared (3,363) (3,338) (10,060) (10,118) (13,337) (13,505)
---------------------------- ---------------------------------------------------------
Retained Earnings at End of Period $2,200,608 $2,153,724 $2,200,608 $2,153,724 $ 2,200,608 $ 2,153,724
============================ =========================================================
Earnings (Loss) Per Share:
Basic $(0.23) $(0.19) $ 0.11 $ (0.50) $0.72 $0.36
============================ =========================================================
Diluted $(0.23) $(0.19) $ 0.11 $ (0.50) $0.72 $0.36
============================ =========================================================
Cash Dividends Declared Per Common Share $0.04 $0.04 $0.12 $0.12 $0.16 $0.16
See notes to consolidated financial statements.
4
DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Nine Months Ended
---------------------------------
October 30, November 1,
2004 2003
---------------------------------
Operating Activities:
Net income (loss) $ 9,045 $ (41,832)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 226,521 228,045
Provision for loan losses 12,835 24,763
Asset impairment and store closing charges 4,680 18,765
Gain on sale of joint venture - (15,624)
Income tax benefit on nonqualified stock options 1,259 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 183,938 192,980
Increase in merchandise inventories and other current assets (583,720) (723,854)
(Increase) decrease in other assets (10,044) 276
Increase in trade accounts payable and accrued expenses,
other liabilities and income taxes 505,358 569,771
---------------------------------
Net cash provided by operating activities 349,872 253,290
Investing Activities:
Purchases of property and equipment (188,732) (171,845)
Proceeds from sales of property and equipment 2,076 -
Net proceeds from sale of joint venture - 34,579
---------------------------------
Net cash used in investing activities (186,656) (137,266)
Financing Activities:
Principal payments on long-term debt and capital lease obligations (180,343) (139,561)
Net proceeds from short-term borrowings 283,000 20,500
Retirement of Guaranteed Preferred Beneficial Interests in the
Company's Subordinated Debentures (331,579) -
Proceeds from issuance of common stock 11,758 264
Cash dividends paid (10,060) (10,118)
Purchase of treasury stock (40,381) (19,097)
---------------------------------
Net cash used in financing activities (267,605) (148,012)
Decrease in Cash and Cash Equivalents (104,389) (31,988)
Cash and Cash Equivalents, Beginning of Period 160,873 142,356
---------------------------------
Cash and Cash Equivalents, End of Period $ 56,484 $ 110,368
=================================
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, nine and twelve month periods ended October 30, 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 Statement of Financial Accounting Standard (“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 Nine Months Ended Twelve Months Ended
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
--------------- ---------------- --------------- ---------------- --------------- ----------------
Net Income (Loss):
As reported $(18,688) $(15,835) $ 9,045 $(41,832) $60,221 $30,418
Deduct: Total stock based employee
compensation expense determined
under fair value based method, net
of taxes (303) (584) (1,168) (2,097) (1,720) (3,090)
--------------- ---------------- --------------- ---------------- --------------- ----------------
Pro forma $(18,991) $(16,419) $7,877 $(43,929) $58,501 $27,328
=============== ================ =============== ================ =============== ================
Basic Earnings (Loss) Per Share:
As reported $(0.23) $(0.19) $0.11 $(0.50) $0.72 $0.36
Pro forma (0.23) (0.20) 0.09 (0.53) 0.70 0.32
--------------- ---------------- --------------- ---------------- --------------- ----------------
Diluted Earnings (Loss) Per Share:
As reported $(0.23) $(0.19) $0.11 $(0.50) $0.72 $0.36
Pro forma (0.23) (0.20) 0.09 (0.53) 0.70 0.32
--------------- ---------------- --------------- ---------------- --------------- ----------------
| The Company did not grant any options during the three, nine and twelve month periods ended October 30, 2004 and November 1, 2003. |
6
| On November 1, 2004, the Company completed its previously announced agreement to sell substantially all the assets of its private label credit card business to GE Consumer Finance. GE Consumer Finance has purchased substantially all of the assets of Dillard National Bank for approximately $1.1 billion, which includes the assumption of $400 million of securitization liabilities, the purchase of owned accounts receivable and an undisclosed premium. The purchase price was originally estimated at $1.25 billion based upon estimated calendar year-end accounts receivable balances. The actual purchase price reflects the earlier closing date and the seasonal nature of the accounts receivable balances, which are expected to increase during the last two months of the calendar year. Instead of being received at closing, Dillard’s anticipates that the amount attributable to seasonal sales increases will now be realized through daily cash settlements with GE Consumer Finance during the remainder of the calendar year. |
| As part of the transaction, Dillard’s and GE Consumer Finance have entered into a long-term marketing and servicing alliance with an initial term of 10 years. GE Consumer Finance will own the accounts and balances generated during the term of the alliance and will provide all key customer service functions supported by ongoing credit marketing efforts. |
| The financial impact of the transaction on Dillard’s ongoing financial results will reflect the effects of Company’s use of proceeds as well as the effect of income generated under the long-term marketing and servicing alliance. Dillard’s expects to use net proceeds to reduce debt outstanding, to repurchase its common stock and for general corporate purposes. |
| In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reclassified on its balance sheet as of October 30, 2004 substantially all of the assets of its private label credit card business and the related liabilities to “assets held for sale” and “liabilities related to assets held for sale”, respectively. The carrying amounts of the major classes of these assets and liabilities at October 30, 2004 were as follows (in thousands): |
October 30,
2004
----------------
Accounts receivable, net $992,115
Other current assets 420
Property and equipment, net 2,242
Other assets 866
----------------
Total assets held for sale $ 995,643
================
Long-term debt $ 400,000
----------------
Total liabilities related to assets held for sale $ 400,000
================
| 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. |
7
| All borrowings under the Company’s receivable financing conduit are recorded on the balance sheet. The Company had $400 million of long-term debt outstanding under this agreement on the consolidated balance sheet as of October 30, 2004, January 31, 2004 and November 1, 2003. |
| At October 30, 2004 and November 1, 2003, the Company had $333.0 million and $20.5 million, respectively, in outstanding short-term borrowings under its accounts receivable conduit facilities related to seasonal financing needs. |
| Concurrent with the closure of the sale of the assets of the private label credit card business to GE Consumer Finance, the Company terminated its $400 million accounts receivable conduit facilities. On the closing, the Company paid the related outstanding short term conduit financing in the amount of $333 million (See Note 3). |
| During the nine months ended October 30, 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 ended November 1, 2003, the Company recorded a $1.7 million write-off of a beneficial lease on one store. During the nine months ended November 1, 2003, the Company recorded $18.8 million for asset impairment and store closing charges related to eight 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. |
| During the nine months ended November 1, 2003, the Company sold its interest in 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 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 nine months ended November 1, 2003. The gain on the sale was recorded in service charges, interest and other income. |
| During the nine months ended November 1, 2003, the Company recorded a $12.3 million pretax credit as a reduction of 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. No gain or loss was incurred related to the redemption. |
| During the quarter ended October 30, 2004, the Company repurchased $4.5 million of its outstanding unsecured notes prior to their related maturity dates. During the nine months ended October 30, 2004, the Company repurchased $13.1 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 nine months ended October 30, 2004. Maturity dates ranged from 2008 to 2028 for the nine months ended |
8
| October 30, 2004. A gain of $108,000 and $153,000 were recorded from the unsecured notes during the three and nine months ended October 30, 2004, respectively. |
| During the quarter ended October 30, 2004, the Company retired $163.4 million of its maturing 6.4% notes. On November 1, 2004 the Company called the remaining $26.1 million of its publicly outstanding 8.2% notes of Mercantile Stores Company, Inc. |
| During the nine months ended November 1, 2003, the Company called the remaining $125.9 million of its 6.4% 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 nine months ended November 1, 2003. |
| During the nine months ended November 1, 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%. Maturity dates ranged from 2004 to 2013. No gains or losses resulted from the repurchase of the unsecured notes during the nine months ended November 1, 2003. |
| During the quarter and nine months ended October 30, 2004, the Company repurchased approximately 2.0 million shares of Class A common stock for $40.4 million. During the quarter ended November 1, 2003, the Company did not repurchase any Class A common stock. During the nine months ended November 1, 2003, the Company repurchased approximately 1.5 million shares of Class A common stock for $19.1 million. The Company’s board of directors authorized the program in May of 2000. Approximately $16 million in share repurchase authorization remained under this open-ended plan at October 30, 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 Nine Months Ended Twelve Months Ended
------------------------------ ------------------------------ -----------------------------
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
------------------------------ ------------------------------ -----------------------------
Basic:
Net income (loss) $(18,688) $(15,835) $9,045 $(41,832) $60,221 $30,418
============================== ============================== =============================
Weighted average shares of common
stock outstanding 82,894 83,303 83,378 83,735 83,375 83,971
============================== ============================== =============================
Basic Earnings (Loss) Per Share $ (0.23) $ (0.19) $ 0.11 $ (0.50) $ 0.72 $ 0.36
============================== ============================== =============================
Three Months Ended Nine Months Ended Twelve Months Ended
----------------------------- ----------------------------- ------------------------------
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
----------------------------- ----------------------------- ------------------------------
Diluted:
Net income (loss) $(18,688) $(15,835) $9,045 $(41,832) $60,221 $30,418
============================= ============================= ==============================
Weighted average shares of common
stock outstanding 82,894 83,303 83,378 83,735 83,375 83,971
Stock options - - 487 - 443 271
----------------------------- ----------------------------- ------------------------------
Total weighted average equivalent
shares 82,894 83,303 83,865 83,735 83,818 84,242
============================= ============================= ==============================
Diluted Earnings (Loss) Per Share $ (0.23) $ (0.19) $ 0.11 $ (0.50) $ 0.72 $ 0.36
============================= ============================= ==============================
| Total stock options outstanding were 5,951,674 and 9,361,875 at October 30, 2004 and November 1, 2003, respectively. Of these, options to purchase 4,258,369 and 7,985,625 shares of Class A common |
9
| stock at prices ranging from $24.01 to $40.22 and $15.74 to $40.22 per share at October 30, 2004 and November 1, 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 October 30, 2004 or the three and nine months ended November 1, 2003 computation of diluted earnings per share because they would be antidilutive due to the net loss. |
| 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 Nine Months Ended Twelve Months Ended
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
---------------- --------------- ---------------- --------------- ---------------- --------------
Net Income (Loss) $(18,688) $(15,835) $9,045 $(41,832) $60,221 $30,418
Other Comprehensive Loss:
Minimum pension liability
adjustment, net of taxes - - - - (6,785) (4,496)
---------------- --------------- ---------------- --------------- ---------------- --------------
Total Comprehensive Income
(Loss) $(18,688) $(15,835) $9,045 $(41,832) $53,436 $25,922
================ =============== ================ =============== ================ ==============
| 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 $54.3 million loan for a joint venture as of October 30, 2004. At October 30, 2004, the joint venture had $26.7 million outstanding on the loan. At October 30, 2004, letters of credit totaling $78.2 million were issued under the Company’s $1 billion 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 participant distributions of $2.5 million during the nine months ended October 30, 2004. The Company expects to make participant distributions of approximately $0.9 million for the remainder of fiscal 2004. |
The components of net periodic benefit costs are as follows (in thousands):
Three Months Ended Nine Months Ended Twelve Months Ended
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
------------- ---------------- ------------- ------------- -------------- -------------
Components of net periodic benefit costs:
Service cost $ 442 $ 248 $1,327 $ 745 $1,576 $1,099
Interest cost 1,145 1,059 3,434 3,176 4,493 4,074
Net actuarial gain 286 32 859 98 892 59
Amortization of prior service cost 157 157 470 470 626 470
------------- ---------------- ------------- ------------- -------------- -------------
Net periodic benefit costs $2,030 $1,496 $ 6,090 $ 4,489 $7,587 $5,702
============= ================ ============= ============= ============== =============
10
| In December 2003, the Financial Accounting Standards Board (“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 FASB issued a proposed interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations”. This proposed interpretation clarifies the scope and timing of liability recognition for conditional asset retirement obligations under SFAS No. 143, and would be effective no later than the end of our 2005 fiscal year. The Company has determined that this interpretation, and the adoption of SFAS 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 SFAS 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 is expected to be effective for fiscal periods beginning after June 15, 2005. The Company currently accounts for stock options under APB No. 25. The pro-forma impact of expensing options is disclosed in Note 2. |
Dillard’s, Inc. (the “Company”, “we”, “us”, or “our”) operates 331 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 October 30, 2004 include the following:
o The announcement of a definitive agreement with GE Consumer Finance to sell substantially all of the
assets of the Company's private label credit card business. The sale was completed on November 1, 2004.
o A comparable store sales decrease of 4%.
11
o Gross profit improvement of 80 basis points of sales compared to the three months ended November 1, 2003.
o Inventory in comparable stores declined 6% compared to inventory position at November 1, 2003.
o An increase of advertising, selling, administrative and general expenses of $3.8 million compared to the
three months ended November 1, 2003.
o Decrease in interest and debt expense of $2.1 million compared to the three months ended November 1, 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 60 64
Interest and debt expense 140 181
Capital expenditures 265 227
- --------------------------------------------------------------------------------------------------------------------
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, 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.
12
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 and 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.
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 is 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. Subsequent to the current quarter ended October 30, 2004, the Company sold substantially all of its accounts receivable to GE Consumer Finance and will no longer need to maintain an allowance for doubtful accounts.
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
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allowances are recognized as a reduction of cost purchases when received. 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 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.
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 November 1, 2003 we had $400 million of long-term debt outstanding under this agreement. The $400 million of long-term debt was reclassed to “Liabilities related to assets held for sale” as of October 30, 2004. As of October 30, 2004 and November 1, 2003 we had $333 million and $20.5 million in other short-term borrowings outstanding, respectively.
Concurrent with the closure of the sale of the assets of the private label credit card business to GE Consumer Finance, the Company terminated its $400 million accounts receivable conduit facilities. On the closing, the Company paid the related outstanding short term conduit financing in the amount of $333 million.
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
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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 Nine Months Ended Twelve Months Ended
----------------------------- ----------------------------- ----------------------------
October 30, November 1, October 30, November 1, October 30, November 1,
2004 2003 2004 2003 2004 2003
-------------- ------------- ------------- -------------- ------------- -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 67.2 68.0 66.5 67.9 67.1 68.1
-------------- ------------- ------------- -------------- ------------- -------------
Gross profit 32.8 32.0 33.5 32.1 32.9 31.9
Advertising, selling, administrative
and general expenses 30.7 29.3 29.3 29.0 27.8 27.4
Depreciation and amortization 4.4 4.2 4.2 4.2 3.9 3.8
Rentals 0.7 0.9 0.8 0.8 0.8 0.9
Interest and debt expense 2.0 2.1 2.1 2.6 2.0 2.4
Asset impairment and store closing
charges - 0.1 0.1 0.3 0.4 1.0
-------------- ------------- ------------- -------------- ------------- -------------
Total operating expenses 37.8 36.6 36.5 36.9 34.9 35.5
Service charges, interest and other
income 3.3 3.2 3.3 3.6 3.3 4.2
-------------- ------------- ------------- -------------- ------------- -------------
Income (loss) before income taxes (1.7) (1.4) 0.3 (1.2) 1.3 0.6
Income taxes (benefit) (0.6) (0.5) 0.1 (0.4) 0.5 0.2
-------------- ------------- ------------- -------------- ------------- -------------
Net income (loss) (1.1) % (0.9) % 0.2 % (0.8) % 0.8 % 0.4 %
============== ============= ============= ============== ============= =============
The percent change by category in the Company’s sales for the three and nine months ended October 30, 2004 compared to the three and nine months ended November 1, 2003 is as follows:
% Change
-------------------------------------------- ------------- -------------
Three Months Nine Months
-------------------------------------------- ------------- -------------
Cosmetics 0.6% 0.5%
Women's and Juniors' Clothing -7.8% -3.0%
Children's Clothing -1.7% -4.6%
Men's Clothing and Accessories -8.4% -3.8%
Shoes, Accessories and Lingerie 2.7% 3.5%
Home -1.0% 2.1%
-------------------------------------------- ------------- -------------
Net sales decreased 4% on a total and a comparable store basis for the three-month period ended October 30, 2004 compared to the three-month period ended November 1, 2003. Sales were strongest in cosmetics and shoes, accessories and lingerie during the third quarter of 2004, with those areas performing
15
significantly above the Company average trend of a 4% decline for the period. Sales in the children’s areas and home areas were above the average trend for total Company sales performance. Sales were weakest in the men’s and women’s and juniors’ categories, trending significantly below the average Company performance for the period.
During the three month period ended October 30, 2004, sales were strongest in the Company’s Western region and strongly exceeded the average company sales performance for the quarter. Sales in the Central region were in line with trend. The Company’s Eastern region’s sales were slightly below trend and were negatively affected by the Florida hurricanes.
Dillard’s continues to focus on improvement in its merchandise mix. The Company’s efforts to drive differentiation by offering more upscale, more fashion-forward and younger – focused product choices are key strategies in this process. The Company seeks to provide such merchandise from both national and exclusive brand sources. Under-performing lines of product from both national and exclusive sources will continue to be eliminated and replaced with more promising brands in the Company’s ongoing efforts to improve its merchandise mix.
Net sales declined 1% for the nine-month period ended October 30, 2004 compared to the same period in 2003. Sales in comparable stores declined 2% for the nine-month period ended October 30, 2004.
Cost of sales, as a percentage of net sales, decreased to 67.2% for the quarter ended October 30, 2004, from 68.0% for the quarter ended November 1, 2003. This decrease of 80 basis points in cost of sales for the three months ended October 30, 2004, is attributable to improved levels of markups partially offset by higher levels of markdown activity as the Company 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 1.1% of sales. The higher level of markdown activity increased the cost of sales by 0.3% of sales. Improved gross margins were noted in children’s, cosmetics and men’s categories. The remaining categories had lower gross margins during the quarter ended October 30, 2004. Inventory in comparable stores at October 30, 2004 declined 6% compared to the inventory balance at November 1, 2003.
Cost of sales, as a percentage of net sales, for the nine months ended October 30, 2004 and November 1, 2003 was 66.5% and 67.9%, respectively. The decrease of 140 basis points in cost of sales for the nine months ended October 30, 2004, is attributable to increased markup percentage that was responsible for a decrease in cost of sales of 1.0% of sales and lower levels of markdown activity that decreased the cost of sales by 0.4% of sales.
Advertising, Selling, Administrative and General (“SG&A”) expenses, as a percentage of net sales, increased to 30.7% for the quarter ended October 30, 2004 compared to 29.3% for the quarter ended November 1, 2003. SG&A expenses increased $3.8 million for the quarter ended October 30, 2004 compared with the quarter ended November 1, 2003. The increase was primarily driven by increases in advertising, insurance, utilities and supplies expense totaling $10.9 million. These were partially offset by decreases in payroll, services purchased and bad debt expense totaling $8.7 million. The decrease in payroll was caused primarily by a reduction in incentive based sales payroll which is directly tied to the decrease in sales during 2004. Improvement in the quality of accounts receivable as well as a reduction in outstanding accounts receivable contributed to the lower bad debt expense. Other SG&A expense areas netted to a $1.6 million increase.
The comparable relationship between SG&A expenses and net sales for the nine months ended October 30, 2004 and November 1, 2003, respectively, was 29.3% and 29.0%, with the increase due to a lack of sales leverage as SG&A expenses actually declined by $3.8 million in 2004 compared to the same nine month period in 2003.
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SG&A expenses for the nine months ended November 1, 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. Excluding the credit for 2003, SG&A expenses decreased $16.1 million on a comparable basis. The improvement in SG&A expenses was also driven by savings in bad debts expense ($18.5 million) and services purchased ($5.0 million) partially offset by an increase in advertising, utilities and taxes expense.
Depreciation and amortization expense, as a percentage of net sales, was 4.4% for the three-month period ended October 30, 2004 compared to 4.2% for the similar period in 2003. Depreciation and amortization expense, as a percentage of net sales was 4.2% for the nine months ended October 30, 2004 and November 1, 2003. The increase in the percentage for the three months was the result of a lack of sales leverage as depreciation expenses were relatively unchanged for the three and nine months ended October 30, 2004 compared to the similar periods in 2003.
Rentals, as a percentage of net sales, was 0.7% and 0.8% for the three months and nine months ended October 30, 2004 compared to 0.9% and 0.8% for the same three and nine month periods in 2003, respectively. Rentals declined $2.0 million and $3.3 million for the three and nine month periods ended October 30, 2004 compared to November 1, 2003, respectively. The decrease in rentals is due to a reduction in store rent expense relating to a decline in the number of leased stores and to a reduction in data processing equipment.
Interest and debt expense was $35.2 million for the three-month period ended October 30, 2004 compared with $37.3 million for the similar period in 2003. Interest expense for the quarter ended November 1, 2003 includes a credit of $4.1 million received from the Internal Revenue Service as a result of the Company’s filing of an interest netting claim related to previously settled tax years. Excluding this credit, interest expense declined $6.2 million for the third quarter of 2004. The decline in interest and debt expense in 2004 was due to a $342 million reduction in average outstanding debt in the third quarter 2004 compared to the third quarter of 2003.
Interest and debt expense, as a percent of net sales, was 2.1% for the nine-month period ended October 30, 2004 compared to 2.6% for the similar period in 2003. Interest and debt expense was $110.7 million for the nine-month period ended October 30, 2004 compared with $140.1 million for the similar period in 2003. This reduction is partially due to a call premium of $15.6 million related to the early retirement of debt included in interest expense for the nine months ended November 1, 2003. Interest expense for the nine months ended November 1, 2003 includes the aforementioned credit of $4.1 million received from the Internal Revenue Service. The remainder of the decline in interest and debt expense in 2004 was due to the reduction in outstanding debt in 2004 compared to 2003. The Company redeemed $331.6 million Preferred Securities on February 2, 2004.
During the nine months ended October 30, 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.
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The Company considers holiday sales in the fourth quarter to be an important factor in the determination of store impairment. The Company will perform an evaluation on stores whenever events or circumstances suggest that impairment may have occurred.
During the quarter ended November 1, 2003, the Company recorded a write-off of a beneficial lease on one store in the amount of $1.7 million. During the nine months ended November 1, 2003, the Company recorded $18.8 million for asset impairment and store closing charges related to eight stores. The charge consists of property and equipment write-downs to fair value for these underperforming 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 3.3% for the three months and nine months ended October 30, 2004 compared to 3.2% and 3.6% for the same three and nine month periods in 2003, respectively. Service charges, interest and other income for the three months ended October 30, 2004 were relatively flat compared to the three months ended November 1, 2003. However, due to a reduction in average trade accounts receivable, service charge income declined $4.9 million for the three months ended October 30, 2004 but was offset by increased credit related fees and higher equity investment income.
Service charges, interest and other income for the nine months ended October 30, 2004 decreased to $172.4 million from $192.2 million for the nine months ended November 1, 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 service charge income due to lower average trade accounts receivable during 2004 compared to 2003. This decrease was partially offset by higher credit related fees.
The actual federal and state income tax rates for the three and nine-month periods ended October 30, 2004 and November 1, 2003 was 36%.
(in thousands of dollars) October 30, 2004 November 1, 2003 $ Change % Change - ----------------------------------------------- -------------------- --------------------- --------------- ------------- Cash and cash equivalents $ 56,484 $ 110,368 (53,884) -49.0 Short-term debt 333,000 20,500 312,500 * Current portion of long-term debt 91,660 297,899 (206,239) -69.2 Long-term debt 1,350,750 1,855,648 (504,898) -27.2 Guaranteed Preferred Beneficial Interests 200,000 531,579 (331,579) -62.4 Stockholders' equity 2,207,459 2,193,413 14,046 0.6 Current ratio 1.56 2.25 Debt to capitalization 51.8% 55.2% - ----------------------------------------------- -------------------- --------------------- --------------- ------------- * Percent change greater than 100%
Cash provided by operating activities totaled $349.9 million and $253.3 million for the nine months ended October 30, 2004 and November 1, 2003, respectively, and were adequate to fund the Company’s operations for the nine-month period. Cash flows from operating activities increased from 2003 levels due primarily to a $140 million increase related to the change in inventory and other current assets in the current year compared to the prior year partially offset by a $9 million decrease related to the change in accounts receivable, a $10 million decrease related to the change in other assets and a $64 million decrease related to the change in accounts payable, accrued expenses, other liabilities and income taxes compared to
18
the prior year. Substantially all accounts receivable were reclassed to assets held for sale at October 30, 2004. Comparable store inventory at October 30, 2004 declined 6% compared to November 1, 2003. Net cash flow from operating activities was also positively impacted by higher net income during fiscal 2004 compared to a net loss in fiscal 2003. This higher net income was offset by lower impairment charges and lower provision for loan losses during fiscal 2004.
Capital expenditures were $188.7 million for the nine months ended October 30, 2004. These expenditures consist primarily of the construction of new stores, remodeling of existing stores and investments in technology. During the nine months, the Company opened four new stores: Coastal Grand, Myrtle Beach, South Carolina; Jordan Creek Town Center, West Des Moines, Iowa; Eastern Shore, Spanish Fort, Alabama; and South Park Mall, Moline, Illinois; and four replacement stores: The Shoppes at EastChase in Montgomery, Alabama; Colonial University Village in Auburn, Alabama; Greenbrier Mall in Chesapeake, Virginia; and Yuma Palms, in Yuma, Arizona. These eight stores totaled approximately 328,000 square feet, net of replaced square footage. Capital expenditures for 2004 are expected to be approximately $265 million. The Company closed six store locations totaling 641,000 square feet during the nine months ended October 30, 2004.
The Company expects to open four stores totaling approximately 840,000 square feet during the spring season of 2005. Future capital requirements will depend primarily on the number of new stores opened, the number of existing stores remodeled and the timing of these expenditures. Capital expenditures for fiscal 2005 are to be used primarily to fund new store openings, the remodeling of existing stores and technology investments. 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 2005.
During the nine months ended November 1, 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 nine months ended October 30, 2004 totaled $267.6 million compared to cash used of $148.0 million for the nine months ended November 1, 2003. During the nine months ended October 30, 2004, the Company redeemed its $331.6 million Preferred Securities. The Company increased its short-term borrowings through its available receivable financing facilities by $283 million. During the nine months ended October 30, 2004 and November 1, 2003, the Company repurchased $13.1 million and $6.0 million, respectively, of its outstanding unsecured notes prior to their related maturity dates. During the nine months ended October 30, 2004 and November 1, 2003, the Company reduced its total level of outstanding debt and capital lease obligations by $180.3 million and $139.6 million, respectively. Subsequent to the current quarter, on November 1, 2004, the Company called the remaining $26.1 million of its publicly outstanding 8.2% notes of Mercantile Stores Company, Inc.
During the nine months ended October 30, 2004, the Company repurchased approximately 2.0 million shares of Class A common stock for $40.4 million under its existing $200 million share repurchase authorization. During the nine months ended November 1, 2003, the Company repurchased approximately 1.5 million shares of Class A common stock for $19.1 million. Approximately $16 million in share repurchase authorization remained under this open-ended plan at October 30, 2004.
On November 1, 2004, Dillard’s completed the sale of substantially all of the assets of the Company’s private label credit card business to GE Consumer Finance. GE Consumer Finance has purchased substantially all of the assets of Dillard National Bank for approximately $1.1 billion, which includes the assumption of $400 million of securitization liabilities, the purchase of owned accounts receivable and an undisclosed premium. As part of the transaction, Dillard’s and GE Consumer Finance have entered into a long-term marketing and servicing alliance with an initial term of 10 years. GE Consumer Finance will own the accounts and balances generated during the term of the alliance and will provide all key customer service functions supported by ongoing credit marketing efforts.
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The financial impact of the transaction will depend upon the Company’s use of proceeds as well as the income generated under the long-term marketing and servicing alliance. Dillard’s expects to use net proceeds to reduce debt outstanding, to repurchase its common stock and for general corporate purposes. As a result of these efforts, Dillard’s expects the transaction to be accretive to fiscal 2005 earnings per share.
The Company’s peak funding requirements during the fourth quarter of fiscal 2004 were met through cash on hand. During the fourth quarter of 2004 at peak working capital demand, total debt outstanding was $1.415 billion and Guaranteed Preferred Beneficial Interests in the Company’s Subordinated Debentures were $200.0 million. During the fourth quarter of 2003 at peak working capital demand, total debt outstanding was $2.404 billion and Guaranteed Preferred Beneficial Interests in the Company’s Subordinated Debentures were $531.6 million. As part of its overall liquidity management strategy, the Company has a $1 billion credit facility. Availability for borrowings and letter of credit obligations under the credit facility is limited to 75% of the inventory of certain Company subsidiaries or $1 billion. At October 30, 2004, letters of credit totaling $78.2 million were issued under this line of credit facility, resulting in an available line of $921.8 million. During fiscal 2005, the Company expects to fund its reasonably foreseeable working capital, capital expenditures, debt service requirements and stock repurchases, if any, from cash flows generated from operations. 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 for other corporate purposes. On August 24, 2004, the Company filed a post effective amendment to Form S-3 in order to de-register its outstanding shelf registration for securities in the amount of $750 million.
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 as noted above and for reductions of contractual commitments for debt due to the early payoffs during the nine months ended October 30, 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 October 30, 2004. At October 30, 2004, the joint venture had $26.7 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.
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In June 2004, the FASB issued a proposed interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations”. This proposed interpretation clarifies the scope and timing of liability recognition for conditional asset retirement obligations under SFAS 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 SFAS 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 SFAS 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 is expected to be effective for fiscal periods beginning after June 15, 2005. 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, critical accounting policies and estimates, financing requirements and other similar forecasts and statements of expectation. Words such as “may”, “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; 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 nine months ended October 30, 2004, the Company repurchased $13.1 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 nine months ended October 30, 2004. Maturity dates ranged from 2008 to 2028 for the nine months ended October 30, 2004.
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During the nine months ended October 30, 2004, the Company redeemed the $331.6 million Preferred Securities.
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-15e and 15d-15e 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 October 30, 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 October 30, 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.
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.
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- ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
(c)Total Number of (d) Approximate
Shares Purchased as Dollar Value that
Part of Publicly May Yet Be Purchased
(a) Total Number of Announced Plans or Under the Plans or
Shares Purchased (b) Average Price Programs Programs
Period Paid per Share
- ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
August 1, 2004 through
August 28, 2004
521,538 $20.86 521,538 $45,605,000
- ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
August 29, 2004 through
October 2, 2004
1,478,462 19.95 1,478,462 16,105,000
- ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
October 3, 2004 through
October 30, 2004
- - - 16,105,000
- ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
Total 2,000,000 $20.19 2,000,000 $16,105,000
- ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
In May 2000, the Company announced that the Board of Directors authorized the repurchase of up to $200 million of its Class A Common Stock. The plan has no expiration date.
None
None
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:
Nine Months Ended Fiscal Year Ended
- ------------------------------ ---------------------------------------------------------------------------
October 30, November 1, January 31, February 3, February 2, February 3, January 29,
2004 2003 2004 2003 2002 2001* 2000
- --------------- ------------- ------------ -------------- -------------- -------------- --------------
1.09 0.57 1.07 1.94 1.52 1.79 2.00
=============== ============= ============ ============== ============== ============== ==============
* 53 week year.
23
Number Description
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
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:December 8, 2004 /s/ James I. Freeman
James I. Freeman
Senior Vice President & Chief Financial Officer
(Principal Financial & Accounting Officer)