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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 November 2, 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. 288,247,093 shares of common
stock, $.50 par value, as of November 30, 2002.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions)
Nov. 2, Nov. 3, Feb. 2,
ASSETS 2002 2001 2002
Current assets:
Cash and cash equivalents $ 65 $ 57 $ 52
Accounts receivable, net 1,540 1,752 1,938
Merchandise inventories 3,596 3,721 2,875
Other current assets 67 119 60
Total current assets 5,268 5,649 4,925
Property and equipment, at cost 9,523 8,806 8,996
Accumulated depreciation (4,096) (3,621) (3,732)
Property and equipment, net 5,427 5,185 5,264
Goodwill 1,433 1,308 1,433
Intangible assets, net 174 162 179
Other assets 115 90 119
Total assets $ 12,417 $ 12,394 $ 11,920
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 618 $ 880 $ 78
Current maturities of
long-term debt 315 88 255
Accounts payable 1,349 1,317 1,023
Accrued expenses 978 927 900
Income taxes payable 102 97 272
Total current liabilities 3,362 3,309 2,528
Long-term debt 4,041 4,330 4,403
Deferred income taxes 729 617 696
Other liabilities 375 341 370
ESOP preference shares 272 289 286
Unearned compensation (152) (204) (204)
Shareowners' equity 3,790 3,712 3,841
Total liabilities and
shareowners' equity $ 12,417 $ 12,394 $ 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 39 Weeks Ended
Nov. 2, Nov. 3, Nov. 2, Nov. 3,
2002 2001 2002 2001
Revenues $ 3,052 $ 3,202 $ 9,314 $ 9,528
Cost of sales:
Recurring 2,216 2,319 6,602 6,704
Nonrecurring - division
combination markdowns 3 - 23 -
Selling, general, and
administrative expenses 706 707 2,093 2,113
Division combination costs 6 - 85 -
Interest expense, net 96 92 265 267
Earnings before income taxes 25 84 246 444
Provision for income taxes 9 32 91 172
Net earnings $ 16 $ 52 $ 155 $ 272
Basic earnings per share $ .05 $ .16 $ .50 $ .87
Diluted earnings per share $ .05 $ .16 $ .50 $ .85
Dividends paid per
common share $.23-3/4 $.23-1/2 $.71-1/4 $.70-1/2
Weighted average shares
outstanding:
Basic 288.3 296.6 288.1 298.2
Diluted 307.4 317.6 308.4 319.9
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) 39 Weeks Ended
Nov. 2, Nov. 3,
2002 2001
Operating Activities:
Net earnings $ 155 $ 272
Depreciation and other amortization 406 368
Goodwill and other intangible amortization 8 33
Division combination costs 108 -
Working capital changes:
Accounts receivable, net 398 360
Merchandise inventories (744) (746)
Other current assets (12) (30)
Accounts payable 326 352
Accrued expenses 28 27
Income taxes payable (170) (185)
Other, net 41 43
Cash flows from operations 544 494
Investing Activities:
Net additions to property and equipment (598) (578)
Business combination - (304)
Cash flows used for investing activities (598) (882)
Financing Activities:
Net issuances (repayments):
Short-term debt 540 880
Long-term debt (253) (167)
Net purchases of common stock (2) (200)
Dividend payments, net of tax benefit (218) (224)
Cash flows provided by
financing activities 67 289
Increase(Decrease) in cash and cash equivalents 13 (99)
Cash and cash equivalents,
beginning of period 52 156
Cash and cash equivalents,
end of period $ 65 $ 57
Cash paid during the period:
Interest $ 299 $ 273
Income taxes 223 339
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. In August 2002, The May Department Stores Company
(the company or the parent) combined its Kaufmann's division with its
Filene's division, and its Meier & Frank division with its Robinsons-May
division. Total nonrecurring pretax charges associated with the division
combinations for 2002 were $108 million or $.22 per share, of which $9 million
or $.02 per share were recognized in the third quarter. The third quarter
charges consisted of $3 million as cost of sales and $6 million as other
operating expenses.
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 Nov. 2, 2002
Severance and relocation benefits $ 59 $ 38 $ - $ 21
Inventory alignment 23 - 23 -
Central office closure 15 4 11 -
Other 11 4 - 7
Total $108 $ 46 $ 34 $ 28
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 in the closed
central offices.
Income Taxes. The effective income tax rate for the third quarter and
first nine months of 2002 was 37.0%, compared with 38.8% in the third quarter
and first nine months of 2001. The rate reduction in 2002 is due to the
favorable impact of eliminating goodwill amortization, corporate structure
changes, and changes in tax regulations.
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 fiscal 2002, compared with a fiscal 2001 LIFO
credit of $30 million. No LIFO provision was recorded in the third quarter
or the first nine months of 2002, compared with a $4 million provision in the
third quarter and a $20 million provision in the first nine months of 2001.
5
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's assessment of potential goodwill impairments under
SFAS No. 142 did not identify any impairment. The following table illustrates
the impact of goodwill amortization on the results of the third quarter and
first nine months of 2001.
(Millions, except per share) 13 Weeks Ended 39 Weeks Ended
Nov. 2, Nov. 3, Nov. 2, Nov. 3,
2002 2001 2002 2001
Reported net income $ 16 $ 52 $ 155 $ 272
Add back: Goodwill amortization - 8 - 25
Adjusted net income $ 16 $ 60 $ 155 $ 297
Basic earnings per share:
Reported net income $ .05 $ .16 $ .50 $ .87
Add back: Goodwill amortization - .02 - .08
Adjusted net income $ .05 $ .18 $ .50 $ .95
Diluted earnings per share:
Reported net income $ .05 $ .16 $ .50 $ .85
Add back: Goodwill amortization - .02 - .08
Adjusted net income $ .05 $ .18 $ .50 $ .93
In fiscal 2002, the company adopted 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. The impact of adopting this statement was the
reclassification of the 2001 extraordinary loss of $3 million (net of $2
million in taxes) to interest expense and income taxes, and the classification
of early debt redemption costs of $10 million as interest expense in the
current year related to the early redemption of our $200 million 8-3/8%
debentures.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 changes the timing of when
certain costs associated with restructuring activities may be recognized. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002. Since the company's division combinations were initiated in
May 2002, all related costs were recorded in accordance with prior rules.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor." EITF Issue No. 02-16 provides guidance
on how cash consideration received by a customer or reseller should be
classified in the customer's statement of earnings. The company does not
expect EITF No. 02-16 to have a material impact on its consolidated financial
position or operating results.
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 $.01 to $.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
Nov. 2, 2002 Nov. 3, 2001
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 16 $ 52
ESOP preference shares'
dividends (5) (5)
Basic EPS 11 288.3 $ .05 47 296.6 $ .16
ESOP preference shares 4 18.4 4 19.4
Assumed exercise of
options (treasury
stock method) - 0.7 - 1.6
Diluted EPS $ 15 307.4 $ .05 $ 51 317.6 $ .16
39 Weeks Ended
Nov. 2, 2002 Nov. 3, 2001
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 155 $ 272
ESOP preference shares'
dividends (14) (14)
Basic EPS 141 288.1 $ .50 258 298.2 $ .87
ESOP preference shares 13 18.7 13 19.6
Assumed exercise of
options (treasury
stock method) - 1.6 - 2.1
Diluted EPS $ 154 308.4 $ .50 $ 271 319.9 $ .85
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 November 2, 2002,
November 3, 2001,and February 2, 2002, the related condensed consolidating
statements of earnings for the thirteen week and thirty-nine week periods
ended November 2, 2002 and November 3, 2001, and the related condensed
consolidating statements of cash flows for the thirty-nine week periods
ended November 2, 2002 and November 3, 2001, are presented below.
7
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Balance Sheet
As of November 2, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 47 $ 18 $ - $ 65
Accounts receivable, net - 1,533 43 (36) 1,540
Merchandise inventories - 3,513 83 - 3,596
Other current assets - 50 17 - 67
Total current assets - 5,143 161 (36) 5,268
Property and equipment, at cost - 9,343 180 - 9,523
Accumulated depreciation - (4,049) (47) - (4,096)
Property and equipment, net - 5,294 133 - 5,427
Goodwill - 1,129 304 - 1,433
Intangible assets, net - 7 167 - 174
Other assets - 105 10 - 115
Intercompany (payable)
receivable (937) 487 450 - -
Investment in subsidiaries 4,848 - - (4,848) -
Total assets $ 3,911 $12,165 $ 1,225 $ (4,884) $12,417
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 618 $ - $ - $ 618
Current maturities of long-
term debt - 315 - - 315
Accounts payable - 1,243 106 - 1,349
Accrued expenses 1 925 89 (37) 978
Income taxes payable - 77 25 - 102
Total current liabilities 1 3,178 220 (37) 3,362
Long-term debt - 4,039 2 - 4,041
Intercompany note payable
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 660 69 - 729
Other liabilities - 366 9 - 375
Minority interest in subsidiary - 475 - (475) -
ESOP preference shares 272 - - - 272
Unearned compensation (152) (152) - 152 (152)
Shareowners' equity 3,790 399 4,125 (4,524) 3,790
Total liabilities and
shareowners' equity $ 3,911 $12,165 $ 1,225 $ (4,884) $12,417
8
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended November 2, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 2,935 $ 627 $ (510) $ 3,052
Cost of sales - 2,178 516 (475) 2,219
Selling, general, and
administrative expenses - 691 57 (42) 706
Division combination costs - 6 - - 6
Interest expense (income), net:
External - 97 (1) - 96
Intercompany - 71 (72) 1 -
Equity in earnings of subsidiaries (16) - - 16 -
Earnings before income taxes 16 (108) 127 (10) 25
Provision for income taxes - (37) 46 - 9
Net earnings $ 16 $ (71) $ 81 $ (10) $ 16
Condensed Consolidating Statement of Earnings
For the Thirty-nine Weeks Ended November 2, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 8,907 $ 1,433 $ (1,026) $ 9,314
Cost of sales - 6,446 1,124 (945) 6,625
Selling, general, and
administrative expenses - 2,013 178 (98) 2,093
Division combination costs - 85 - - 85
Interest expense (income), net:
External - 266 (1) - 265
Intercompany - 213 (213) - -
Equity in earnings of subsidiaries (155) - - 155 -
Earnings before income taxes 155 (116) 345 (138) 246
Provision for income taxes - (35) 126 - 91
Net earnings $ 155 $ (81) $ 219 $ (138) $ 155
9
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Cash Flows
For the Thirty-nine Weeks Ended November 2, 2002
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 155 $ (81) $ 219 $ (138) $ 155
Equity in earnings of subsidiaries (155) - - 155 -
Depreciation and other amortization - 382 24 - 406
Goodwill and intangible amortization - 2 6 - 8
Division combination costs - 108 - - 108
Decrease in working capital (5) (219) 50 - (174)
Other, net 95 91 (128) (17) 41
90 283 171 - 544
Investing activities:
Net additions to property and
equipment - (569) (29) - (598)
- (569) (29) - (598)
Financing activities:
Net issuances of short-term debt - 540 - - 540
Net repayments of long-term debt - (253) - - (253)
Net(purchases)issuances of
common stock (10) 8 - - (2)
Dividend payments, net of
tax benefit (220) 2 - - (218)
Intercompany activity, net 140 - (140) - -
(90) 297 (140) - 67
Increase in cash and
cash equivalents - 11 2 - 13
Cash and cash equivalents,
beginning of period - 36 16 - 52
Cash and cash equivalents,
end of period $ - $ 47 $ 18 $ - $ 65
10
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Balance Sheet
As of November 3, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 39 $ 18 $ - $ 57
Accounts receivable, net - 1,747 42 (37) 1,752
Merchandise inventories - 3,650 71 - 3,721
Other current assets - 106 13 - 119
Total current assets - 5,542 144 (37) 5,649
Property and equipment, at cost - 8,713 93 - 8,806
Accumulated depreciation - (3,601) (20) - (3,621)
Property and equipment, net - 5,112 73 - 5,185
Goodwill - 1,130 178 - 1,308
Intangible assets, net - 6 156 - 162
Other assets - 87 3 - 90
Intercompany (payable)
receivable (940) 632 308 - -
Investment in subsidiaries 4,751 - - (4,751) -
Total assets $ 3,811 $12,509 $ 862 $ (4,788) $12,394
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ - $ 880 $ - $ - $ 880
Current maturities of long-
term debt - 88 - - 88
Accounts payable - 1,248 69 - 1,317
Accrued expenses 14 890 60 (37) 927
Income taxes payable - 88 9 - 97
Total current liabilities 14 3,194 138 (37) 3,309
Long-term debt - 4,329 1 - 4,330
Intercompany note payable
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 614 3 - 617
Other liabilities - 799 - (458) 341
ESOP preference shares 289 - - - 289
Unearned compensation (204) (204) - 204 (204)
Shareowners' equity 3,712 577 3,920 (4,497) 3,712
Total liabilities and
shareowners' equity $ 3,811 $12,509 $ 862 $ (4,788) $12,394
11
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended November 3, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 3,132 $ 559 $ (489) $ 3,202
Cost of sales - 2,305 467 (453) 2,319
Selling, general, and
administrative expenses - 710 39 (42) 707
Interest expense (income), net:
External - 93 (1) - 92
Intercompany - 71 (71) - -
Equity in earnings of subsidiaries (52) - - 52 -
Earnings before income taxes 52 (47) 125 (46) 84
Provision for income taxes - (15) 47 - 32
Net earnings $ 52 $ (32) $ 78 $ (46) $ 52
Condensed Consolidating Statement of Earnings
For the Thirty-nine Weeks Ended November 3, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 9,286 $ 1,309 $ (1,067) $ 9,528
Cost of sales - 6,622 1,072 (990) 6,704
Selling, general, and
administrative expenses - 2,094 112 (93) 2,113
Interest expense (income), net:
External - 268 (1) - 267
Intercompany - 213 (213) - -
Equity in earnings of subsidiaries (272) - - 272 -
Earnings before income taxes 272 89 339 (256) 444
Provision for income taxes - 47 125 - 172
Net earnings $ 272 $ 42 $ 214 $ (256) $ 272
12
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Cash Flows
For the Thirty-nine Weeks Ended November 3, 2001
(Unaudited)
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 272 $ 42 $ 214 $ (256) $ 272
Equity in earnings of subsidiaries (275) - - 275 -
Depreciation and other amortization - 360 8 - 368
Goodwill and other intangible
amortization - 26 7 - 33
Increase (Decrease) in
working capital 7 (271) 42 - (222)
Other, net 295 (121) (112) (19) 43
299 36 159 - 494
Investing activities:
Net additions to property and
equipment - (559) (19) - (578)
Business combination - (304) - - (304)
- (863) (19) - (882)
Financing activities:
Net issuances of notes payable - 880 - - 880
Net repayments of long-term debt - (165) (2) - (167)
Net (purchases)issuances of
common stock (211) 11 - - (200)
Dividend payments, net of
tax benefit (227) 3 - - (224)
Intercompany activity, net 139 - (139) - -
(299) 729 (141) - 289
Decrease in cash and
cash equivalents - (98) (1) - (99)
Cash and cash equivalents,
beginning of period - 137 19 - 156
Cash and cash equivalents,
end of period $ - $ 39 $ 18 $ - $ 57
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 77 (37) 900
Income taxes payable - 263 9 - 272
Total current liabilities 6 2,396 163 (37) 2,528
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 10 (458) 370
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 are as follows:
Percent Store-for store
2002 2001 Decrease Decrease
Third quarter $3,053 $3,182 (4.1)% (7.3)%
First nine months 9,303 9,449 (1.5) (4.8)
The total net retail sales decrease for the third quarter of 2002 was due to a
$231 million decrease in store-for-store sales, offset by $102 million of new
store sales. The total net retail sales decrease for the first nine months of
2002 was due to a $458 million decrease in store-for-store sales, offset by
$312 million of new store sales.
The following table presents the components of costs and expenses, as a
percent of revenues.
Third Quarter First Nine Months
2002 2001 2002 2001
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales
Recurring 72.6 72.4 70.9 70.4
Nonrecurring - division
combination markdowns 0.1 0.0 0.2 0.0
Selling, general, and
administrative expenses 23.1 22.1 22.5 22.2
Division combination costs 0.2 0.0 0.9 0.0
Interest expense, net 3.2 2.9 2.9 2.8
Earnings before income taxes 0.8 2.6 2.6 4.6
Provision for income taxes 37.0* 38.8* 37.0* 38.8*
Net earnings 0.5% 1.6% 1.7% 2.9%
* - 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
Recurring cost of sales was $2,216 million in the 2002 third quarter, down
4.4% from $2,319 million in the 2001 third quarter. For the first nine months
of 2002, recurring cost of sales was $6,602 million, down 1.5% from $6,704
million in the same period last year. In addition, $3 million and $23 million
of nonrecurring division combination markdowns were incurred in the third
quarter and first nine months of 2002, respectively, to conform merchandise
assortments and to synchronize pricing and promotional strategies.
As a percent of revenues, recurring cost of sales for the third quarter of
2002 increased 0.2%, principally due to a 1.3% increase in occupancy costs,
offset by a 1.1% decrease in the cost of merchandise, plus the effect of the
LIFO (last-in, first-out) cost method. For the first nine months of 2002,
recurring cost of sales as a percent of revenues increased 0.5%, principally
due to a 1.1% increase in occupancy costs, offset by a 0.6% decrease in the
cost of merchandise, plus 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 third quarter or the first nine months of 2002, compared with
a $4 million provision in the third quarter and a $20 million provision in the
first nine months of 2001. A LIFO credit of $50 million ($.11 per share) was
recorded in the fourth quarter of 2001; no LIFO charge or credit is
anticipated in the fourth quarter of 2002.
Selling, general, and administrative expenses were $706 million in the 2002
third quarter, compared with $707 million in the 2001 third quarter, a 0.1%
decrease. For the first nine months of 2002, selling, general, and
administrative expenses were $2,093 million compared with $2,113 million in
the same period last year, a 0.9% decrease.
Selling, general, and administrative expenses as a percent of revenues
increased 1.0% for the third quarter of 2002 as compared with 2001. The
increase was principally due to a 0.9% increase in payroll, a 0.5% increase in
advertising and a 0.2% increase in insurance costs, offset by a 0.2% decrease
in credit expense and a 0.3% decrease due to the elimination of goodwill
amortization. Selling, general, and administrative expenses as a percent of
revenues increased 0.3% for the first nine months of 2002 as compared with
2001. The increase was principally due to a 0.6% increase in payroll, a 0.2%
increase in advertising and a 0.2% increase in insurance costs, offset by a
0.5% decrease in credit expense and a 0.3% decrease due to the elimination of
goodwill amortization.
In August 2002, we combined our Kaufmann's division with our Filene's
division, and our Meier & Frank division with our Robinsons-May division.
Total nonrecurring pretax charges associated with the division combinations
for 2002 were $108 million or $.22 per share, of which $9 million or $.02 per
share were recognized in the third quarter. The third quarter charges
consisted of $3 million as cost of sales and $6 million as other operating
expenses.
We anticipate that the division combinations will save approximately $60
million pretax or $.13 per share annually. Net earnings excluding division
combination costs for the third quarter of 2002 were $22 million or $.07 per
share. Net earnings excluding division combination costs for the first nine
months of 2002 were $223 million or $.72 per share.
16
Components of net interest expense were (millions):
Third Quarter First Nine Months
2002 2001 2002 2001
Interest expense $102 $ 100 $290 $ 290
Interest income - (1) (7) (6)
Capitalized interest (6) (7) (18) (17)
Net interest expense $ 96 $ 92 $265 $ 267
Interest expense principally relates to long-term debt. The increase in
interest expense for the third quarter in 2002 is primarily due to early debt
redemption costs of $10 million in 2002, compared to $5 million in 2001.
Short-term borrowings were (dollars in millions):
Third Quarter First Nine Months
2002 2001 2002 2001
Average balance outstanding $287 $408 $149 $297
Average interest rate on
average balance 1.8% 3.0% 1.8% 3.6%
The effective income tax rate for the third quarter and first nine months of
2002 was 37.0%, compared with 38.8% in the third quarter and first nine months
of 2001. The rate reduction in 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
twelve months were (millions, except per share):
Nov. 2, Nov. 3,
2002 2001 (a)
Revenues $ 13,961 $ 14,532
Net earnings 654 790
Diluted earnings per share 2.08 2.44
(a)- Includes 53 weeks.
Financial Condition
Cash Flows. Cash flows from operations were $544 million and $494 million in
the first nine months of 2002 and 2001, respectively. The increase in current
year cash flows is primarily due to changes in working capital accounts offset
by lower earnings.
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 a shelf registration statement that enables 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.
17
Effective October 1, 2002, we redeemed all of our 8-3/8% debentures due in
2022. The redemption price for the $200 million debentures was $1,040.44 for
each $1,000 in principal plus accrued interest. This debt redemption resulted
in a $10 million charge or $.02 per share in the third quarter of 2002.
Financial Ratios. Key financial ratios for the periods indicated are as
follows:
Nov. 2, Nov. 3, Feb. 2,
2002 2001 2002
Current Ratio 1.6 1.7 1.9
Debt-Capitalization Ratio 53% 55% 51%
Fixed Charge Coverage* 3.1x 3.5x 3.5x
* Fixed charge coverage, which is presented for the 52 weeks ended November
2, 2002, November 3, 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 Developments
Sales for the four-week period ending November 30, 2002 were $1.30 billion, a
5.8% decrease from $1.37 billion in the similar period last year. Store-for-
store sales decreased 7.9%. Sales for the first ten months of fiscal 2002 were
$10.60 billion, a 2.1% decrease, compared with $10.82 billion during the first
ten months of fiscal 2001. Store-for-store sales decreased 5.2%.
Effective February 2, 2003, we will begin expensing the fair value of employee
stock options. In accordance with Statement of Financial Accounting Standards
(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 $.01 to $.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 SFAS No. 142, "Goodwill and
Other Intangible Assets," which eliminates goodwill amortization and
prescribes a new approach for assessing potential goodwill impairments. Our
assessment of potential goodwill impairments under SFAS No. 142 did not
identify any impairment. In the third quarter of fiscal 2001, selling,
general, and administrative expenses included $10 million of goodwill
amortization expense, which decreased net earnings by $8 million. In the
first nine months of fiscal 2001, selling, general, and administrative
expenses included $29 million of goodwill amortization expense, which
decreased net earnings by $25 million.
In fiscal 2002, we adopted 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.
The impact of adopting this statement was the reclassification of the 2001
extraordinary loss of $3 million (net of $2 million in taxes) to interest
expense and income taxes, and the classification of early debt redemption
costs of $10 million as interest expense in the current year related to the
early redemption of our $200 million 8-3/8% debentures.
18
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 changes the timing of when
certain costs associated with restructuring activities may be recognized. SFAS
No. 146 is effective for exit or disposal activities, initiated after December
31, 2002. Since our division combinations were initiated in May 2002, all
related costs were recorded in accordance with prior rules.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor." EITF Issue No. 02-16 provides guidance
on how cash consideration received by a customer or reseller should be
classified in the customer's statement of earnings. We do not expect
EITF Issue No. 02-16 to have a material impact on our consolidated financial
position or operating results.
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 nine months of fiscal
2002 and fiscal 2001, we did not enter into any derivative financial
instruments.
Item 4 - Disclosure Controls and Procedures.
Within the 90-day period prior to the filing of this report, we carried out an
evaluation, under the supervision and with the participation of the company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934, as amended). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date the controls were
evaluated.
19
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 - None.
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 - None.
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: December 6, 2002
/s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
20
CERTIFICATIONS
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 6, 2002 /s/ Eugene S. Kahn
Eugene S. Kahn
Chairman of the Board and
Chief Executive Officer
21
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 6, 2002 /s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
22
In connection with the Quarterly Report of The May
Department Stores Company (the "Company") on Form 10-Q for the
period ending November 2, 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: December 6, 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
23
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
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 2002 AND NOVEMBER 3, 2001
(Dollars in millions)
39 Weeks Ended Fiscal Year Ended
Nov. 2, Nov. 3, 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 $ 246 $ 444 $ 1,139 $ 1,402 $ 1,523 $1,395 $1,273
Fixed charges (excluding interest
capitalized and pretax preferred
stock dividend requirements) 310 311 411 406 346 344 368
Dividends on ESOP preference shares (16) (16) (22) (23) (24) (25) (25)
Capitalized interest amortization 7 6 8 8 7 7 6
547 745 1,536 1,793 1,852 1,721 1,622
Fixed Charges:
Gross interest expense (a) $ 301 $ 304 $ 401 $ 395 $ 340 $ 339 $ 359
Interest factor attributable to
rent expense 27 24 32 28 22 21 23
328 328 433 423 362 360 382
atio of Earnings to Fixed Charges 1.7 2.3 3.5 4.2 5.1 4.8 4.2
(a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt
discount and debt issue expense.