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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended August 3, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 1-79
THE MAY DEPARTMENT STORES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 43-1104396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
611 Olive Street, St. Louis, Missouri 63101
(Address of principal executive offices) (Zip Code)
(314) 342-6300
(Registrant's telephone number,
including area code)
Indicate by check mark 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 and (2) has been subject to such filing
requirements for the past 90 days. 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. 288,216,516 shares of common
stock, $.50 par value, as of August 31, 2002.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions)
Aug. 3, Aug. 4, Feb. 2,
ASSETS 2002 2001 2002
Current assets:
Cash and cash equivalents $ 96 $ 58 $ 52
Accounts receivable, net 1,579 1,731 1,938
Merchandise inventories 2,993 3,140 2,875
Other current assets 55 115 60
Total current assets 4,723 5,044 4,925
Property and equipment, at cost 9,301 8,675 8,996
Accumulated depreciation (3,952) (3,506) (3,732)
Property and equipment, net 5,349 5,169 5,264
Goodwill 1,433 1,286 1,433
Intangible assets, net 177 163 179
Other assets 118 90 119
Total assets $ 11,800 $ 11,752 $ 11,920
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 191 $ 78
Current maturities of
long-term debt 268 113 255
Accounts payable 1,087 1,013 1,023
Accrued expenses 933 910 900
Income taxes payable 115 145 272
Total current liabilities 2,403 2,372 2,528
Long-term debt 4,327 4,419 4,403
Deferred income taxes 716 603 696
Other liabilities 374 332 370
ESOP preference shares 279 292 286
Unearned compensation (152) (204) (204)
Shareowners' equity 3,853 3,938 3,841
Total liabilities and
shareowners' equity $ 11,800 $ 11,752 $ 11,920
The accompanying notes to condensed consolidated financial
statements are an integral part of these balance sheets.
2
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Millions, except per share) 13 Weeks Ended 26 Weeks Ended
Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
Revenues $ 3,093 $ 3,173 $ 6,262 $ 6,326
Cost of sales:
Recurring 2,151 2,183 4,386 4,385
Nonrecurring - division
combination markdowns 20 - 20 -
Selling, general, and
administrative expenses 688 718 1,387 1,406
Division combination costs 39 - 79 -
Interest expense, net 86 89 169 175
Earnings before income taxes 109 183 221 360
Provision for income taxes 40 72 82 140
Net earnings $ 69 $ 111 $ 139 $ 220
Basic earnings per share $ .22 $ .36 $ .45 $ .71
Diluted earnings per share $ .22 $ .35 $ .45 $ .69
Dividends paid per
common share $.23-3/4 $.23-1/2 $.47-1/2 $ .47
Weighted average shares
outstanding:
Basic 288.4 299.2 288.0 299.0
Diluted 308.9 320.9 308.9 321.1
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
3
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions) 26 Weeks Ended
Aug. 3, Aug. 4,
2002 2001
Operating Activities:
Net earnings $ 139 $ 220
Depreciation and other amortization 262 238
Goodwill and other intangible amortization 5 22
Division combination costs 99 -
Working capital changes:
Accounts receivable, net 358 382
Merchandise inventories (137) (166)
Other current assets 3 (12)
Accounts payable 65 48
Accrued expenses (22) (8)
Income taxes payable (158) (148)
Other, net 31 17
Cash flows from operations 645 593
Investing Activities:
Net additions to property and equipment (377) (392)
Business combination - (304)
Cash flows used for investing activities (377) (696)
Financing Activities:
Net issuances (repayments):
Short-term debt (78) 191
Long-term debt (13) (42)
Net issuances of common stock 12 5
Dividend payments, net of tax benefit (145) (149)
Cash flows (used for) provided by
financing activities (224) 5
Increase(Decrease) in cash and cash equivalents 44 (98)
Cash and cash equivalents,
beginning of period 52 156
Cash and cash equivalents,
end of period $ 96 $ 58
Cash paid during the period:
Interest $ 183 $ 155
Income Taxes 212 265
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
4
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interim Results. These unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q of the
Securities and Exchange Commission and should be read in conjunction with the
Notes to Consolidated Financial Statements (pages 29-35) in the 2001 Annual
Report. In the opinion of management, this information is fairly presented
and all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the results for the interim periods have
been included; however, certain items are included in these statements based
on estimates for the entire year. Also, operating results of periods which
exclude the Christmas season may not be indicative of the operating results
that may be expected for the fiscal year.
Division Combinations. On August 3, 2002, The May Department Stores Company
(the company or the parent) completed its previously announced plan to combine
its Kaufmann's division with its Filene's division, and its Meier & Frank
division with its Robinsons-May division. Total nonrecurring pre-tax charges
associated with the division combinations are expected to be approximately
$110 million or $.22 per share, of which $59 million or $.12 per share were
recognized in the second quarter consisting of $20 million as cost of sales
and $39 million as other operating expenses. The company incurred
approximately $40 million or $.08 per share of division combination costs in
the first quarter and expects to incur the remaining division combination
costs of approximately $11 million or $.02 per share over the third and fourth
quarters.
The significant components of the division combination costs and status of the
related liability are summarized below:
(Millions) Non-cash Balance at
Charges Payments Uses Aug. 3, 2002
Severance and relocation benefits $ 58 $ 27 $ - $ 31
Inventory alignment 20 - 19 1
Central office closure 12 1 11 -
Other 9 4 - 5
Total $ 99 $ 32 $ 30 $ 37
Severance and relocation benefits include severance for approximately
1,600 associates and the costs to relocate certain employees. Inventory
alignment includes the markdowns incurred to conform merchandise assortments
and to synchronize pricing and promotional strategies. Central office closure
primarily includes accelerated depreciation of fixed assets to close central
offices.
The company anticipates that the division combinations will save approximately
$60 million pre-tax or $.13 per share annually. Net earnings excluding
division combination costs for the second quarter of 2002 were $106 million or
$.34 per share. Net earnings excluding division combination costs for the
first six months of 2002 were $201 million or $.65 per share.
Income Taxes. The effective income tax rate for the first six months of 2002
was 37.0%, compared with 38.8% in the first six months of 2001. The effective
income tax rate for the second quarter of 2002 was 36.6%, compared with 38.8%
in the second quarter of 2001, reflecting the adjustment to record the year-
to-date provision at the expected annual effective tax rate of 37.0%. The
rate reduction for the first six months of 2002 is due to the favorable impact
of eliminating goodwill amortization, corporate structure changes, and changes
in tax regulations.
5
Inventories. Merchandise inventories are principally valued at the lower of
LIFO (last-in, first-out) cost basis or market using the retail method. Based
upon current estimates, the company does not expect a LIFO provision or credit
in 2002, compared to a fiscal 2001 LIFO credit of $30 million. No LIFO
provision was recorded in the second quarter or first six months of 2002,
compared with an $8 million provision and a $16 million provision in the
second quarter and first six months of 2001, respectively.
Impact of New Accounting Pronouncements. In the first quarter of fiscal 2002,
the company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," which eliminates goodwill
amortization and prescribes a new approach for assessing potential goodwill
impairments. The company completed the transitional goodwill impairment test
required by SFAS No. 142 and identified no potential impairment. The following
table illustrates the impact of goodwill amortization on the results of the
second quarter and first six months of 2001.
(Millions, except per share) 13 Weeks Ended 26 Weeks Ended
Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
Reported net income $ 69 $ 111 $ 139 $ 220
Add back: Goodwill amortization - 9 - 17
Adjusted net income $ 69 $ 120 $ 139 $ 237
Basic earnings per share:
Reported net income $ .22 $ .36 $ .45 $ .71
Add back: Goodwill amortization - .03 - .06
Adjusted net income $ .22 $ .39 $ .45 $ .77
Diluted earnings per share:
Reported net income $ .22 $ .35 $ .45 $ .69
Add back: Goodwill amortization - .03 - .06
Adjusted net income $ .22 $ .38 $ .45 $ .75
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the
requirement to classify gains and losses from the extinguishment of
indebtedness as extraordinary, requires certain lease modifications to be
treated the same as a sale-leaseback transaction, and makes other non-
substantive technical corrections to existing pronouncements. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with earlier adoption
encouraged. The company expects the only impact of adopting SFAS No. 145 to be
the reclassification of prior year extraordinary losses to interest expense
and income taxes.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 changes the timing of when
certain costs associated with exit or disposal activities are recognized. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002, with early application encouraged. The company does not expect SFAS
No. 146 to have a material impact on its consolidated operating results or
financial position.
Stock Option and Stock-Related Plans. Effective February 2, 2003, the company
will begin expensing the fair value of employee stock options. In accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," the company will
adopt the fair value method prospectively. The expense associated with stock
options is expected to be approximately $.02 per share in 2003, growing to
approximately $.08 per share by 2006.
6
Reclassifications. Certain prior period amounts have been reclassified to
conform with current year presentation.
Earnings per Share. The following tables reconcile net earnings and weighted
average shares outstanding to amounts used to calculate basic and diluted
earnings per share ("EPS") for the periods shown (millions, except per share).
13 Weeks Ended
Aug. 3, 2002 Aug. 4, 2001
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 69 $ 111
ESOP preference shares'
dividends (5) (4)
Basic EPS 64 288.4 $ .22 107 299.2 $ .36
ESOP preference shares 4 18.7 4 19.7
Assumed exercise of
options (treasury
stock method) - 1.8 - 2.0
Diluted EPS $ 68 308.9 $ .22 $ 111 320.9 $ .35
26 Weeks Ended
Aug. 3, 2002 Aug. 4, 2001
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 139 $ 220
ESOP preference shares'
dividends (9) (9)
Basic EPS 130 288.0 $ .45 211 299.0 $ .71
ESOP preference shares 8 18.9 9 19.7
Assumed exercise of
options (treasury
stock method) - 2.0 - 2.4
Diluted EPS $ 138 308.9 $ .45 $ 220 321.1 $ .69
Condensed Consolidating Financial Information. The parent has fully and
unconditionally guaranteed certain long-term debt obligations of its wholly-
owned subsidiary, The May Department Stores Company, New York ("Subsidiary
Issuer"). Other subsidiaries of the parent include May Department Stores
International, Inc. (MDSI), Leadville Insurance Company, Snowdin Insurance
Company, Priscilla of Boston, and David's Bridal, Inc. and subsidiaries,
including After Hours Formalwear, Inc.
Condensed consolidating balance sheets as of August 3, 2002, August 4,
2001,and February 2, 2002, the related condensed consolidating statements of
earnings for the thirteen week and twenty-six week periods ended August 3,
2002 and August 4, 2001, and the related condensed consolidating statements of
cash flows for the twenty-six week periods ended August 3, 2002 and August 4,
2001, are presented below.
7
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Balance Sheet
As of August 3, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 77 $ 19 $ - $ 96
Accounts receivable, net - 1,571 44 (36) 1,579
Merchandise inventories - 2,891 102 - 2,993
Other current assets - 37 18 - 55
Total current assets - 4,576 183 (36) 4,723
Property and equipment, at cost - 9,130 171 - 9,301
Accumulated depreciation - (3,913) (39) - (3,952)
Property and equipment, net - 5,217 132 - 5,349
Goodwill - 1,129 304 - 1,433
Intangible assets, net - 8 169 - 177
Other assets - 108 10 - 118
Intercompany (payable)
receivable (892) 528 364 - -
Investment in subsidiaries 4,878 - - (4,878) -
Total assets $ 3,986 $11,566 $ 1,162 $ (4,914) $11,800
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ - $ - $ - $ -
Current maturities of long-
term debt - 268 - - 268
Accounts payable - 993 94 - 1,087
Accrued expenses 6 885 78 (36) 933
Income taxes payable - 92 23 - 115
Total current liabilities 6 2,238 195 (36) 2,403
Long-term debt - 4,326 1 - 4,327
Intercompany note payable
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 649 67 - 716
Other liabilities - 835 9 (470) 374
ESOP preference shares 279 - - - 279
Unearned compensation (152) (152) - 152 (152)
Shareowners' equity 3,853 470 4,090 (4,560) 3,853
Total liabilities and
shareowners' equity $ 3,986 $11,566 $ 1,162 $ (4,914) $11,800
8
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended August 3, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 2,953 $ 451 $ (311) $ 3,093
Cost of sales - 2,107 350 (286) 2,171
Selling, general, and
administrative expenses - 658 59 (29) 688
Division combination costs - 39 - - 39
Interest expense (income), net:
External - 86 - - 86
Intercompany - 72 (71) (1) -
Equity in earnings of subsidiaries (69) - - 69 -
Earnings before income taxes 69 (9) 113 (64) 109
Provision for income taxes - 1 39 - 40
Net earnings $ 69 $ (10) $ 74 $ (64) $ 69
Condensed Consolidating Statement of Earnings
For the Twenty-six Weeks Ended August 3, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 5,972 $ 806 $ (516) $ 6,262
Cost of sales - 4,268 608 (470) 4,406
Selling, general, and
administrative expenses - 1,322 121 (56) 1,387
Division combination costs - 79 - - 79
Interest expense (income), net:
External - 169 - - 169
Intercompany - 142 (141) (1) -
Equity in earnings of subsidiaries (139) - - 139 -
Earnings before income taxes 139 (8) 218 (128) 221
Provision for income taxes - 2 80 - 82
Net earnings $ 139 $ (10) $ 138 $ (128) $ 139
9
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended August 3, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 139 $ (10) $ 138 $ (128) $ 139
Equity in earnings of subsidiaries (139) - - 139 -
Depreciation and other amortization - 248 14 - 262
Goodwill and intangible amortization - 1 4 - 5
Division combination costs - 99 - - 99
Decrease in working capital - 109 - - 109
Other, net 50 29 (37) (11) 31
50 476 119 - 645
Investing activities:
Net additions to property and
equipment - (355) (22) - (377)
- (355) (22) - (377)
Financing activities:
Net repayments of short-term debt - (78) - - (78)
Net repayments of long-term debt - (13) - - (13)
Net issuances of common stock 3 9 - - 12
Dividend payments, net of
tax benefit (147) 2 - - (145)
Intercompany activity, net 94 - (94) - -
(50) (80) (94) - (224)
Increase in cash and
cash equivalents - 41 3 - 44
Cash and cash equivalents,
beginning of period - 36 16 - 52
Cash and cash equivalents,
end of period $ - $ 77 $ 19 $ - $ 96
10
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Balance Sheet
As of August 4, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 38 $ 20 $ - $ 58
Accounts receivable, net - 1,726 42 (37) 1,731
Merchandise inventories - 3,053 87 - 3,140
Other current assets - 103 12 - 115
Total current assets - 4,920 161 (37) 5,044
Property and equipment, at cost - 8,588 87 - 8,675
Accumulated depreciation - (3,488) (18) - (3,506)
Property and equipment, net - 5,100 69 - 5,169
Goodwill - 1,106 180 - 1,286
Intangible assets, net - 7 156 - 163
Other assets - 87 3 - 90
Intercompany (payable)
receivable (714) 437 277 - -
Investment in subsidiaries 4,747 - - (4,747) -
Total assets $ 4,033 $11,657 $ 846 $ (4,784) $ 11,752
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 191 $ - $ - $ 191
Current maturities of long-
term debt - 113 - - 113
Accounts payable - 919 94 - 1,013
Accrued expenses 7 883 57 (37) 910
Income taxes payable - 143 2 - 145
Total current liabilities 7 2,249 153 (37) 2,372
Long-term debt - 4,418 1 - 4,419
Intercompany note payable
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 600 3 - 603
Other liabilities - 784 - (452) 332
ESOP preference shares 292 - - - 292
Unearned compensation (204) (204) - 204 (204)
Shareowners' equity 3,938 610 3,889 (4,499) 3,938
Total liabilities and
shareowners' equity $ 4,033 $11,657 $ 846 $ (4,784) $ 11,752
11
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended August 4, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 3,093 $ 416 $ (336) $ 3,173
Cost of sales - 2,153 343 (313) 2,183
Selling, general, and
administrative expenses - 710 36 (28) 718
Interest expense (income), net:
External - 89 - - 89
Intercompany - 71 (71) - -
Equity in earnings of subsidiaries 111 - - (111) -
Earnings before income taxes 111 70 108 (106) 183
Provision for income taxes - 32 40 - 72
Net earnings $ 111 $ 38 $ 68 $ (106) $ 111
Condensed Consolidating Statement of Earnings
For the Twenty-six Weeks Ended August 4, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 6,154 $ 750 $ (578) $ 6,326
Cost of sales - 4,317 605 (537) 4,385
Selling, general, and
administrative expenses - 1,384 73 (51) 1,406
Interest expense (income), net:
External - 175 - - 175
Intercompany - 142 (142) - -
Equity in earnings of subsidiaries 220 - - (220) -
Earnings before income taxes 220 136 214 (210) 360
Provision for income taxes - 62 78 - 140
Net earnings $ 220 $ 74 $ 136 $ (210) $ 220
12
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended August 4, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 220 $ 74 $ 136 $ (210) $ 220
Equity in earnings of subsidiaries (220) - - 220 -
Depreciation and amortization - 250 10 - 260
Decrease in working capital - 54 42 - 96
Other, net 66 41 (80) (10) 17
66 419 108 - 593
Investing activities:
Net additions to property and
equipment - (379) (13) - (392)
Business combination - (304) - - (304)
- (683) (13) - (696)
Financing activities:
Net issuances of notes payable - 191 - - 191
Net repayments of long-term debt - (41) (1) - (42)
Net (purchases)issuances of
common stock (8) 13 - - 5
Dividend payments, net of
tax benefit (151) 2 - - (149)
Intercompany activity, net 93 - (93) - -
(66) 165 (94) - 5
(Decrease) Increase in cash and
cash equivalents - (99) 1 - (98)
Cash and cash equivalents,
beginning of period - 137 19 - 156
Cash and cash equivalents,
end of period $ - $ 38 $ 20 $ - $ 58
13
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Balance Sheet
February 2, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 36 $ 16 $ - $ 52
Accounts receivable, net - 1,930 45 (37) 1,938
Merchandise inventories - 2,801 74 - 2,875
Other current assets - 43 17 - 60
Total current assets - 4,810 152 (37) 4,925
Property and equipment, at cost - 8,844 152 - 8,996
Accumulated depreciation - (3,709) (23) - (3,732)
Property and equipment, net - 5,135 129 - 5,264
Goodwill - 1,128 305 - 1,433
Intangible assets, net - 6 173 - 179
Other assets - 109 10 - 119
Intercompany (payable)
receivable (841) 523 318 - -
Investment in subsidiaries 4,770 - - (4,770) -
Total assets $3,929 $ 11,711 $ 1,087 $ (4,807) $11,920
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 78 $ - $ - $ 78
Current maturities of long-
term debt - 254 1 - 255
Accounts payable - 947 76 - 1,023
Accrued expenses 6 854 87 (37) 910
Income taxes payable - 263 9 - 272
Total current liabilities 6 2,396 173 (37) 2,538
Long-term debt - 4,402 1 - 4,403
Intercompany note payable
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 629 67 - 696
Other liabilities - 818 - (458) 360
ESOP preference shares 286 - - - 286
Unearned compensation (204) (204) - 204 (204)
Shareowners' equity 3,841 470 4,046 (4,516) 3,841
Total liabilities and
shareowners' equity $3,929 $ 11,711 $ 1,087 $ (4,807) $11,920
14
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net retail sales include lease department sales but exclude sales from closed
and non-replaced stores and finance charge revenues. Store-for-store sales
compare sales of stores open during both years beginning the first day a
store has prior year sales. Lease department sales are integral to our
operations and including them in net retail sales gives us a measure of
our total sales productivity. Through the exclusion of closed and non-replaced
stores, net retail sales provide meaningful comparative data about our current
store base. Net retail sales differ from generally accepted accounting
principles due to the inclusion of lease department sales and the exclusion
of sales from closed and non-replaced stores. Consequently, net retail sales
may not be comparable to sales reported by other retailers and are not an
alternative to revenues. Net retail sales for 2002 and 2001 are as follows:
Percent Store-for-store
2002 2001 Decrease Decrease
Second quarter $3,097 $3,151 (1.7)% (4.9)%
First six months 6,251 6,267 (0.3) (3.6)
The total net retail sales decrease for the second quarter of 2002 was due to
a $154 million decrease in store-for-store sales offset by $100 million of new
store sales. The total net retail sales decrease for the first six months of
2002 was due to a $227 million decrease in store-for-store sales offset by
$211 million of new store sales.
The following table presents the components of costs and expenses, as a
percent of revenues.
Second Quarter First Six Months
2002 2001 2002 2001
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales
Recurring 69.6 68.8 70.0 69.3
Nonrecurring - division
combination markdowns 0.6 0.0 0.3 0.0
Selling, general, and
administrative expenses 22.2 22.6 22.2 22.2
Division combination costs 1.3 0.0 1.3 0.0
Interest expense, net 2.8 2.8 2.7 2.8
Earnings before income taxes 3.5 5.8 3.5 5.7
Provision for income taxes 36.6* 38.8* 37.0* 38.8*
Net earnings 2.2% 3.5% 2.2% 3.5%
* - Percent represents effective income tax rate.
Revenues include sales from all stores operating during the periods, finance
charge revenues, and lease department income. The decrease in revenues is due
primarily to the decrease in net retail sales discussed above.
15
Cost of sales includes the cost of merchandise, inbound freight, distribution
expenses, and buying and occupancy costs. Cash or allowances received from
vendors when merchandise does not achieve anticipated rates of sale are
recognized as reductions of cost of sales. Recurring cost of sales was $2,151
million in the 2002 second quarter, down 1.5% from $2,183 million in the 2001
second quarter. For the first six months of 2002, recurring cost of sales was
$4,386 million, compared to $4,385 million in the same 2001 period. In addition,
$20 million of nonrecurring division combination markdowns were incurred to
conform merchandise assortments and to synchronize pricing and promotional
strategies.
As a percent of revenues, recurring cost of sales for the second quarter of
2002 increased 0.8%, principally due to a 1.2% increase in occupancy costs,
partially offset by the effect of the LIFO (last-in, first-out) cost method.
For the first six months of 2002, recurring cost of sales as a percent of
revenues increased 0.7%, principally due to a 1.0% increase in occupancy
costs, partially offset by the effect of the LIFO cost method. Based upon
current estimates, we do not expect a LIFO provision or credit in fiscal 2002,
compared with a fiscal 2001 LIFO credit of $30 million. No LIFO provision was
recorded in the second quarter or the first six months of 2002, compared with
an $8 million provision and a $16 million provision in the second quarter and
first six months of 2001, respectively.
Selling, general, and administrative expenses were $688 million in the 2002
second quarter, compared with $718 million in the 2001 second quarter, a 4.2%
decrease. For the first six months of 2002, selling, general, and
administrative expenses were $1,387 million compared with $1,406 million in
the 2001 period, a 1.3% decrease.
Selling, general, and administrative expenses as a percent of revenues
decreased 0.4% for the second quarter of 2002 as compared with 2001. The
decrease was principally due to an 0.8% decrease in credit expense and a 0.3%
decrease due to the elimination of goodwill amortization, offset by a 0.6%
increase in payroll and a 0.2% increase in insurance costs. Selling, general,
and administrative expenses as a percent of revenues in the first six months
of 2002 were unchanged from the first six months of 2001, as credit expense
decreased 0.8% and goodwill amortization decreased 0.3%, partially offset by a
0.4% increase in payroll and a 0.2% increase in insurance costs.
On August 3, 2002, we completed our previously announced plan to combine our
Kaufmann's division with our Filene's division, and our Meier & Frank division
with our Robinsons-May division. Total non-recurring pre-tax charges
associated with the division combinations are expected to be approximately
$110 million or $.22 per share, of which $59 million or $.12 per share were
recognized in the second quarter consisting of $20 million as cost of sales
and $39 million as other operating expenses. We incurred approximately $40
million or $.08 per share of division combination costs in the first quarter
and expect to incur the remaining division combination costs of approximately
$11 million or $.02 per share over the third and fourth quarters.
Components of net interest expense were (millions):
Second Quarter First Six Months
2002 2001 2002 2001
Interest expense $ 94 $ 96 $188 $190
Interest income (1) (1) (7) (5)
Capitalized interest (7) (6) (12) (10)
Net interest expense $ 86 $ 89 $169 $175
Interest expense principally relates to long-term debt.
16
Short-term borrowings were (dollars in millions):
Second Quarter First Six Months
2002 2001 2002 2001
Average balance outstanding $112 $371 $ 80 $242
Average interest rate on
average balance 1.8% 4.0% 1.8% 4.2%
The effective income tax rate for the first six months of 2002 was 37.0%
compared with 38.8% in the first six months of 2001. The effective income tax
rate for the second quarter of 2002 was 36.6%, compared with 38.8% in the
second quarter of 2001, reflecting the adjustment to record the year-to-date
provision at the expected annual effective tax rate of 37.0%. The rate
reduction for the first six months of 2002 is due to the favorable impact of
eliminating goodwill amortization, corporate structure changes, and changes in
tax regulations.
Operating results excluding division combination costs for the trailing years
were (millions, except per share):
Aug. 3, Aug. 4,
2002 2001 (a)
Revenues $ 14,111 $ 14,656
Net earnings 687 823
Diluted earnings per share 2.18 2.55
(a)- Includes 53 weeks.
Financial Condition
Cash Flows. Cash flows from operations were $645 million and $593 million in
the first six months of 2002 and 2001, respectively. The increase in current
year cash flows is primarily due to changes in working capital accounts.
Liquidity, Available Credit, and Debt Ratings. We finance our activities
primarily with cash flows from operations, borrowings under credit facilities
and issuances of long-term debt. We can borrow up to $1.0 billion under our
credit agreements. In addition, we have filed with the Securities and
Exchange Commission shelf registration statements that enable us to issue up
to $525 million of debt securities.
Our bonds are rated A2 by Moody's Investors Service, Inc. and A by Standard &
Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by
Standard & Poor's. Our senior unsecured bank credit agreement is rated A1 by
Moody's.
Effective October 1, 2002, we intend to redeem all of our 8-3/8% debentures
due in 2022. The redemption price for the $200 million debentures will be
$1,040.44 for each $1,000 in principal plus accrued interest. This debt
redemption will result in a $.02 per share charge in the third quarter of
2002.
17
Financial Ratios. Key financial ratios for the periods indicated are as
follows:
Aug. 3, Aug. 4, Feb. 2,
2002 2001 2002
Current Ratio 2.0 2.1 1.9
Debt-Capitalization Ratio 50% 51% 51%
Fixed Charge Coverage* 3.2x 3.7x 3.4x
* Fixed charge coverage, which is presented for the 52 weeks ended August 3,
2002, August 4, 2001, and February 2, 2002, is defined as earnings before
division combination costs and gross interest expense, the expense portion
of interest on the ESOP debt, rent expense and income taxes divided by
gross interest expense, interest expense on the ESOP debt, and total rent
expense.
Recent Sales Results and Other Recent Developments
Sales for the four-week period ending August 31, 2002 were $983.1 million, a
5.8% decrease from $1.04 billion in the similar period last year. Store-for-
store sales decreased 8.6%. Sales for the first seven months of fiscal 2002
were $7.23 billion, a 1.0% decrease, compared with $7.31 billion during the
first seven months of fiscal 2001. Store-for-store sales decreased 4.3%.
Effective February 2, 2003, we will begin expensing the fair value of employee
stock options. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," we will adopt the fair value method prospectively. The expense
associated with stock options is expected to be approximately $.02 per share
in 2003, growing to approximately $.08 per share by 2006.
Impact of New Accounting Pronouncements
In the first quarter of fiscal 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which eliminates goodwill amortization and prescribes a new approach for
assessing potential goodwill impairments. We completed the transitional
goodwill impairment test required by SFAS No. 142 and identified no potential
impairment. In the second quarter of fiscal 2001, selling, general, and
administrative expenses included $10 million of goodwill amortization expense,
which decreased net earnings by $9 million. In the first six months of fiscal
2001, selling, general, and administrative expenses included $19 million of
goodwill amortization expense, which decreased net earnings by $17 million.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the
requirement to classify gains and losses from the extinguishment of
indebtedness as extraordinary, requires certain lease modifications to be
treated the same as a sale-leaseback transaction, and makes other non-
substantive technical corrections to existing pronouncements. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002 with earlier adoption
encouraged. We expect the only impact of adopting SFAS No. 145 to be the
reclassification of prior year extraordinary losses to interest expense and
income taxes.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 changes the timing of when
certain costs associated with exit or disposal activities are recognized. SFAS
No. 146 is effective for exit or disposal activities, initiated after December
31, 2002, with early application encouraged. We do not expect SFAS No. 146 to
have a material impact on our consolidated operating results or financial
position.
18
Forward-looking Statements
Management's Discussion and Analysis contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. While such
statements reflect all available information and management's judgment and
estimates of current and anticipated conditions and circumstances and are
prepared with the assistance of specialists within and outside the company,
there are many factors outside of our control that have an impact on our
operations. Such factors include, but are not limited to: competitive changes,
general and regional economic conditions, consumer preferences and spending
patterns, availability of adequate locations for building or acquiring new
stores, our ability to hire and retain qualified associates and our ability to
manage the business to minimize the disruption of sales and customer service
as a result of the division combinations. Because of these factors, actual
performance could differ materially from that described in the forward-looking
statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk primarily arises from changes in interest rates on
short-term debt. Short-term debt has generally been used to finance seasonal
working capital needs resulting in minimal exposure to interest rate
fluctuations. Long-term debt is at fixed interest rates. Our merchandise
purchases are denominated in United States dollars. Operating expenses of our
international offices located outside the United States are generally paid in
local currency and are not material. During the first six months of fiscal
2002 and fiscal 2001, we did not enter into any derivative financial
instruments.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The company is involved in claims, proceedings, and litigation arising
from the operation of its business. The company does not believe any
such claim, proceeding, or litigation, either alone or in the aggregate,
will have a material adverse effect on the company's financial position
or results of operations.
Item 2 - Changes in Securities - None.
Item 3 - Defaults Upon Senior Securities - None.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareowners of registrant was held on May 24,
2002.
(b) At the annual meeting of shareowners of registrant held on May 24, 2002,
the registrant's voting securities carried 306,707,844 votes, of which
270,371,546 were voted at the meeting. Action was taken with respect
to:
(i) the election of three directors of registrant;
Authority
For Withheld
Marsha J. Evans 209,757,933 60,613,613
Edward E. Whitacre, Jr. 210,142,019 60,229,527
R. Dean Wolfe 210,339,380 60,032,166
19
(ii) a ratification of the appointment of Deloitte & Touche LLP as
independent auditors (263,372,854 votes in favor, 5,744,501 votes
against and 1,254,191 votes abstained);
(iii) a proposal relating to a classified board of directors (150,760,787
votes in favor, 90,642,233 votes against, 3,185,158 votes abstained
and 25,783,368 not voted).
All such proposals were set forth and described in detail in the Notice
of Annual Meeting and Proxy Statement of registrant dated April 25,
2002, filed with the Commission pursuant to Rule 12b-23 (b).
Item 5 - Other Information - None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(12) - Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
A report was filed dated July 9, 2002, which contained information
concerning debt ratings.
A report was filed dated August 16, 2002, in which the Principal
Executive Officer, Eugene S. Kahn, and the Principal Financial
Officer, Thomas D. Fingleton, of the company, submitted to the SEC
sworn statements pursuant to Securities and Exchange Commission Order
No. 4-460.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MAY DEPARTMENT STORES COMPANY
(Registrant)
Date: September 13, 2002
/s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
20
Certifications Pursuant to Exchange Act 13a-14 and 15d-14
I, Eugene S. Kahn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The May Department
Stores Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002 /s/ Eugene S. Kahn
Eugene S. Kahn
Chairman of the Board and
Chief Executive Officer
I, Thomas D. Fingleton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The May Department
Stores Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002 /s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
21
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of The May Department Stores
Company (the "Company") on Form 10-Q for the period ending August 3, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), we, Eugene S. Kahn, Chairman of the Board and Chief Executive Officer
and Thomas D. Fingleton, Executive Vice President and Chief Financial Officer
of the Company, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. section 1350, as adopted), that:
1. The Report fully complies with the requirements of section 13(a) or
section 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Dated: September 13, 2002
/s/ Eugene S. Kahn /s/ Thomas D. Fingleton
Eugene S. Kahn Thomas D. Fingleton
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
22
Exhibit 12
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 2, 2002 AND FOR THE
TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
(Millions)
26 Weeks Ended Fiscal Year Ended
Aug. 3, Aug. 4, Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002 2001 2002 2001 2000 1999 1998
Earnings Available for Fixed Charges:
Pretax earnings from continuing
operations $ 221 $ 360 $1,144 $1,402 $ 1,523 $ 1,395 $ 1,279
Fixed charges (excluding interest
capitalized and pretax preferred
stock dividend requirements) 201 205 406 406 346 344 363
Dividends on ESOP preference shares (10) (10) (22) (23) (24) (25) (26)
Capitalized interest amortization 4 4 8 8 7 7 6
416 559 1,536 1,793 1,852 1,721 1,622
Fixed Charges:
Gross interest expense (a) $ 195 $ 200 $ 396 $ 395 $ 340 $ 339 $ 353
Interest factor attributable to
rent expense 18 16 32 28 22 21 23
213 216 428 423 362 360 376
Ratio of Earnings to Fixed Charges 2.0 2.6 3.6 4.2 5.1 4.8 4.3
(a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt
discount and debt issue expense.