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UNITED STATES
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 2, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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. 288,596,818 shares of common
stock, $.50 par value, as of August 30, 2003.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(millions)
Aug. 2, Aug. 3, Feb. 1,
ASSETS 2003 2002 2003
Current assets:
Cash and cash equivalents $ 77 $ 96 $ 55
Accounts receivable, net 1,479 1,579 1,741
Merchandise inventories 2,932 2,993 2,857
Other current assets 83 55 69
Total current assets 4,571 4,723 4,722
Property and equipment, at cost 9,210 9,301 9,205
Accumulated depreciation (4,008) (3,952) (3,739)
Property and equipment, net 5,202 5,349 5,466
Goodwill 1,455 1,433 1,441
Intangible assets, net 172 177 176
Other assets 131 118 131
Total assets $ 11,531 $ 11,800 $ 11,936
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 138 $ - $ 150
Current maturities of
long-term debt 164 268 139
Accounts payable 1,046 1,087 1,099
Accrued expenses 1,031 933 1,014
Income taxes payable 17 115 264
Total current liabilities 2,396 2,403 2,666
Long-term debt 3,934 4,327 4,035
Deferred income taxes 816 716 710
Other liabilities 371 374 377
ESOP preference shares 249 279 265
Unearned compensation (91) (152) (152)
Shareowners' equity 3,856 3,853 4,035
Total liabilities and
shareowners' equity $ 11,531 $ 11,800 $ 11,936
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. 2, Aug. 3, Aug. 2, Aug. 3,
2003 2002 2003 2002
Net sales $ 3,000 $ 3,030 $ 5,873 $ 6,126
Cost of sales:
Recurring 2,118 2,119 4,206 4,322
Restructuring markdowns - 20 - 20
Selling, general, and
administrative expenses 657 657 1,297 1,315
Restructuring costs 318 39 318 79
Interest expense, net 80 86 160 169
Earnings (loss) before
income taxes (173) 109 (108) 221
Provision (credit) for
income taxes (63) 40 (70) 82
Net earnings (loss) $ (110) $ 69 $ (38) $ 139
Basic earnings (loss) per share $ (.39) $ .22 $ (.16) $ .45
Diluted earnings (loss) per share $ (.39) $ .22 $ (.16) $ .45
Dividends paid per
common share $ .24 $.23-3/4 $ .48 $.47-1/2
Weighted average shares
outstanding:
Basic 289.8 288.4 289.8 288.0
Diluted 289.8 308.9 289.8 308.9
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) 26 Weeks Ended
Aug. 2, Aug. 3,
2003 2002
Operating Activities:
Net earnings (loss) $ (38) $ 139
Depreciation and other amortization 276 262
Intangible asset amortization 4 5
Asset impairment 315 -
Division combination costs - 99
Working capital changes:
Accounts receivable, net 262 358
Merchandise inventories (75) (137)
Other current assets (9) 3
Accounts payable (53) 65
Accrued expenses 26 (22)
Income taxes payable (147) (158)
Other, net (3) 31
Cash flows from operations 558 645
Investing Activities:
Net additions to property and equipment and
business combination (349) (377)
Cash flows used for investing activities (349) (377)
Financing Activities:
Net short-term debt repayments (12) (78)
Net long-term debt repayments (16) (13)
Net issuances (repurchases) of common stock (13) 12
Dividend payments (146) (145)
Cash flows used for financing activities (187) (224)
Increase in cash and cash equivalents 22 44
Cash and cash equivalents,
beginning of period 55 52
Cash and cash equivalents,
end of period $ 77 $ 96
Cash paid during the period:
Interest $ 173 $ 183
Income taxes 82 212
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 2002 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.
Restructuring Costs. Restructuring costs consisted of the following:
Store Divestitures. In the 2003 second quarter, the company announced its
intention to divest 34 department stores. The store divestitures will result
in asset impairment, severance, and other charges of approximately $380
million, of which $318 million were recognized in the 2003 second quarter.
The 2003 second quarter costs consisted of $315 million of asset impairment
charges and $3 million of initial severance benefits.
Asset impairment charges were recorded to reduce store assets to their
estimated fair value because of the shorter period over which they will be
used. Estimated fair values were based on estimated market values for similar
assets. Additional severance, inventory liquidation, and other charges will
be incurred as each store is divested.
Division Combination Costs. In 2002, the company recorded $114 million of
division combination charges. Of these charges, $59 million were recognized
in the 2002 second quarter, $20 million of which were included as cost of
sales. Charges of $99 million were recognized in the first six months of
2002, $20 million of which were included as cost of sales. The significant
components of the division combination costs and status of the related
liability are summarized below:
(millions) Total | Balance Non-cash Balance
Charge | Feb. 1, 2003 Payments Uses Aug. 2, 2003
Severance and |
relocation benefits $ 59 | $ 17 $ 12 $ - $ 5
Inventory alignment 23 | - - - -
Central office closure 15 | - - - -
Other 17 | 7 2 4 1
Total $ 114 | $ 24 $ 14 $ 4 $ 6
Severance and relocation benefits include severance for approximately 2,000
associates and the costs to relocate certain employees. Inventory alignment
includes the markdowns 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.
Remaining severance costs will be paid by the end of fiscal 2004.
Business Combination. In June 2003, the company purchased certain assets of
Modern Tuxedo. This business combination consisted of 25 locations in the
Chicago metropolitan area and did not have a material effect on results of
operations or financial position.
5
Income Taxes. The effective income tax rate for the first six months of 2003
was 65.4%, compared with 37.0% in the first six months of 2002. The change is
due to a $31 million tax credit recorded in the 2003 first quarter upon the
resolution of various federal and state income tax issues. Excluding the $31
million tax credit, the company's 2003 estimated effective tax rate is 37.0%.
Inventories. Merchandise inventories are principally valued at the lower of
LIFO (last-in, first-out) cost basis or market using the retail method.
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. 2, 2003 Aug. 3, 2002
Earnings Shares EPS Earnings Shares EPS
Net earnings (loss) $ (110) $ 69
ESOP preference shares'
dividends (4) (5)
Basic EPS (114) 289.8 $ (.39) 64 288.4 $ .22
ESOP preference shares - - 4 18.7
Assumed exercise of
options (treasury
stock method) - - - 1.8
Diluted EPS $ (114) 289.8 $ (.39) $ 68 308.9 $ .22
26 Weeks Ended
Aug. 2, 2003 Aug. 3, 2002
Earnings Shares EPS Earnings Shares EPS
Net earnings (loss) $ (38) $ 139
ESOP preference shares'
dividends (8) (9)
Basic EPS (46) 289.8 $ (.16) 130 288.0 $ .45
ESOP preference shares - - 8 18.9
Assumed exercise of
options (treasury
stock method) - - - 2.0
Diluted EPS $ (46) 289.8 $ (.16) $ 138 308.9 $ .45
Diluted shares and equivalents exclude all stock options and 17 million ESOP
shares from the EPS calculation for the 13 and 26 weeks ended August 2, 2003
because their effect is antidilutive.
6
Stock Compensation Plans. Effective February 2, 2003, the company adopted the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The
company adopted SFAS No. 123 using the prospective transition method, under
which all stock-based compensation granted after February 2, 2003 is expensed
using the fair value method.
Stock option expense is recorded over each option grant's vesting period,
usually four years. Accordingly, the cost related to stock-based employee
compensation included in net earnings (loss) using the prospective method of
transition is less than it would have been had the fair value method been
applied retroactively to all outstanding grants. The following table
illustrates the pro forma effect on net earnings (loss) and earnings (loss) per
share for the second quarter and first six months of 2003 if the fair value
based method had been applied retroactively rather than prospectively to all
outstanding unvested grants.
(millions) 13 Weeks Ended 26 Weeks Ended
Aug. 2, Aug. 3, Aug. 2, Aug. 3,
2003 2002 2003 2002
Net earnings (loss), as reported $ (110) $ 69 $ (38) $ 139
Add: Compensation expense for
employee stock options
included in net earnings,
net of tax 1 - 1 -
Deduct: Total compensation expense
for employee stock options
determined under retroactive
fair value based method,
net of tax (6) (6) (13) (10)
Pro forma net earnings (loss) $ (115) $ 63 $ (50) 129
Earnings (loss) per share:
Basic - as reported (prospective) $ (.39) $ 0.22 $ (.16) $ 0.45
Basic - pro forma (retroactive) $ (.41) $ 0.20 $ (.21) $ 0.41
Diluted - as reported (prospective) $ (.39) $ 0.22 $ (.16) $ 0.45
Diluted - pro forma (retroactive) $ (.41) $ 0.20 $ (.21) $ 0.41
Lease Obligations. The company is a guarantor with respect to certain lease
obligations of previously divested businesses. The leases, two of which include
potential extensions to 2087, have future minimum lease payments aggregating
approximately $844 million, and are offset by payments from existing tenants
and subtenants. In addition, the company is liable for other expenses related
to the above leases, such as property taxes and common area maintenance, which
are also payable by the current tenants and subtenants. Potential liabilities
related to these guarantees are subject to certain defenses by the company.
The company believes that the risk of significant loss from these lease
obligations is remote.
Impact of New Accounting Pronouncements. In May 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards that require companies to classify certain financial
instruments as liabilities that were previously classified as equity. The
company does not expect SFAS No. 150 to have a material impact on its
consolidated financial position or operating results.
7
Condensed Consolidating Financial Information. The company ("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 2, 2003, August 3, 2002,
and February 1, 2003, the related condensed consolidating statements of
earnings for the thirteen week and twenty-six week periods ended August 2,
2003 and August 3, 2002, and the related condensed consolidating statements of
cash flows for the twenty-six week periods ended August 2, 2003 and August 3,
2002, are presented below.
Condensed Consolidating Balance Sheet
August 2, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 45 $ 32 $ - $ 77
Accounts receivable, net - 1,472 43 (36) 1,479
Merchandise inventories - 2,833 99 - 2,932
Other current assets - 59 24 - 83
Total current assets - 4,409 198 (36) 4,571
Property and equipment, at cost - 9,000 210 - 9,210
Accumulated depreciation - (3,945) (63) - (4,008)
Property and equipment, net - 5,055 147 - 5,202
Goodwill - 1,129 326 - 1,455
Intangible assets, net - 5 167 - 172
Other assets - 120 11 - 131
Intercompany (payable)
receivable (759) 297 3,662 (3,200) -
Investment in subsidiaries 4,777 - - (4,777) -
Total assets $ 4,018 $11,015 $ 4,511 $ (8,013) $11,531
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 138 $ - $ - $ 138
Current maturities of
long-term debt - 164 - - 164
Accounts payable - 953 93 - 1,046
Accrued expenses 4 968 95 (36) 1,031
Income taxes payable - (26) 43 - 17
Total current liabilities 4 2,197 231 (36) 2,396
Long-term debt - 3,933 1 - 3,934
Intercompany note payable
(receivable) - 3,200 - (3,200) -
Deferred income taxes - 751 65 - 816
Other liabilities - 844 10 (483) 371
ESOP preference shares 249 - - - 249
Unearned compensation (91) (91) - 91 (91)
Shareowners' equity 3,856 181 4,204 (4,385) 3,856
Total liabilities and
shareowners' equity $ 4,018 $11,015 $ 4,511 $ (8,013) $11,531
8
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended August 2, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 2,833 $ 479 $ (312) $ 3,000
Cost of sales - 2,066 351 (299) 2,118
Selling, general, and
administrative expenses - 599 76 (18) 657
Restructuring costs - 318 - - 318
Interest expense (income), net:
External - 80 - - 80
Intercompany - 71 (71) - -
Equity in loss of subsidiaries 110 - - (110) -
Earnings (loss) before income taxes (110) (301) 123 115 (173)
Provision (credit) for income taxes - (108) 45 - (63)
Net earnings (loss) $ (110) $ (193) $ 78 $ 115 $ (110)
Condensed Consolidating Statement of Earnings
For the Twenty-six Weeks Ended August 2, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 5,538 $ 899 $ (564) $ 5,873
Cost of sales - 4,094 663 (551) 4,206
Selling, general, and
administrative expenses - 1,180 141 (24) 1,297
Restructuring costs - 318 - - 318
Interest expense (income), net:
External - 160 - - 160
Intercompany - 142 (142) - -
Equity in loss of subsidiaries 38 - - (38) -
Earnings (loss) before income taxes (38) (356) 237 49 (108)
Provision (credit) for income taxes - (157) 87 - (70)
Net earnings (loss) $ (38) $ (199) $ 150 $ 49 $ (38)
9
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended August 2, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating Activities:
Net earnings (loss) $ (38) $ (199) $ 150 $ 49 $ (38)
Equity in loss of subsidiaries 38 - - (38) -
Depreciation and other
amortization - 262 14 - 276
Intangible asset amortization - 1 3 - 4
Asset impairment - 315 - - 315
Increase (decrease) in
working capital - (10) 14 - 4
Other, net 89 (36) (45) (11) (3)
Cash flows from operations 89 333 136 - 558
Investing Activities:
Net additions to property and
equipment and business
combination - (305) (44) - (349)
Cash flows used for
investing activities - (305) (44) - (349)
Financing Activities:
Net short-term debt repayments - (12) - - (12)
Net long-term debt repayments - (16) - - (16)
Net issuances (repurchases)
of common stock (20) 7 - - (13)
Dividend payments (147) 1 - - (146)
Intercompany activity, net 78 - (78) - -
Cash flows used for
financing activities (89) (20) (78) - (187)
Increase in cash and
cash equivalents - 8 14 - 22
Cash and cash equivalents,
beginning of period - 37 18 - 55
Cash and cash equivalents,
end of period $ - $ 45 $ 32 $ - $ 77
10
Condensed Consolidating Financial Information (continued) -
Condensed Consolidating Balance Sheet
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 3,564 (3,200) -
Investment in subsidiaries 4,878 - - (4,878) -
Total assets $ 3,986 $11,566 $ 4,362 $ (8,114) $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 $ 4,362 $ (8,114) $11,800
11
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
Net sales $ - $ 2,890 $ 451 $ (311) $ 3,030
Cost of sales - 2,093 350 (304) 2,139
Selling, general, and
administrative expenses - 609 59 (11) 657
Restructuring costs - 39 - - 39
Interest expense (income), net:
External - 86 - - 86
Intercompany - 72 (71) (1) -
Equity in loss of subsidiaries (69) - - 69 -
Earnings (loss) before income taxes 69 (9) 113 (64) 109
Provision for income taxes - 1 39 - 40
Net earnings (loss) $ 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
Net sales $ - $ 5,836 $ 806 $ (516) $ 6,126
Cost of sales - 4,240 608 (506) 4,342
Selling, general, and
administrative expenses - 1,214 121 (20) 1,315
Restructuring costs - 79 - - 79
Interest expense (income), net:
External - 169 - - 169
Intercompany - 142 (141) (1) -
Equity in loss of subsidiaries (139) - - 139 -
Earnings (loss) before income taxes 139 (8) 218 (128) 221
Provision for income taxes - 2 80 - 82
Net earnings (loss) $ 139 $ (10) $ 138 $ (128) $ 139
12
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 (loss) $ 139 $ (10) $ 138 $ (128) $ 139
Equity in earnings of
subsidiaries (139) - - 139 -
Depreciation and other
amortization - 248 14 - 262
Intangible asset amortization - 1 4 - 5
Division combination costs - 99 - - 99
Increase in working capital - 109 - - 109
Other, net 50 29 (37) (11) 31
Cash flows from operations 50 476 119 - 645
Investing Activities:
Net additions to property and
equipment - (355) (22) - (377)
Cash flows used in
investing activities - (355) (22) - (377)
Financing Activities:
Net short-term debt repayments - (78) - - (78)
Net long-term debt repayments - (13) - - (13)
Net issuances of common stock 3 9 - - 12
Dividend payments (147) 2 - - (145)
Intercompany activity, net 94 - (94) - -
Cash flows used in
financing activities (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
13
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Balance Sheet
As of February 1, 2003
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 37 $ 18 $ - $ 55
Accounts receivable, net - 1,733 44 (36) 1,741
Merchandise inventories - 2,787 70 - 2,857
Other current assets - 49 23 (3) 69
Total current assets - 4,606 155 (39) 4,722
Property and equipment, at cost - 9,024 181 - 9,205
Accumulated depreciation - (3,690) (49) - (3,739)
Property and equipment, net - 5,334 132 - 5,466
Goodwill - 1,129 312 - 1,441
Intangible assets, net - 6 170 - 176
Other assets - 122 9 - 131
Intercompany (payable)
receivable (671) 254 417 - -
Investment in subsidiaries 4,824 - - (4,824) -
Total assets $ 4,153 $11,451 $ 1,195 $ (4,863) $11,936
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 150 $ - $ - $ 150
Current maturities of
long-term debt - 139 - - 139
Accounts payable - 1,021 78 - 1,099
Accrued expenses 5 957 88 (36) 1,014
Income taxes payable - 244 23 (3) 264
Total current liabilities 5 2,511 189 (39) 2,666
Long-term debt - 4,034 1 - 4,035
Intercompany note payable
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 646 64 - 710
Other liabilities - 840 10 (473) 377
ESOP preference shares 265 - - - 265
Unearned compensation (152) (152) - 152 (152)
Shareowners' equity 4,035 372 4,131 (4,503) 4,035
Total liabilities and
shareowners' equity $ 4,153 $11,451 $ 1,195 $ (4,863) $11,936
14
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales include merchandise sales and lease department income. Store-for-
store sales compare sales of stores open during both years beginning the
first day a new store has prior-year sales and excludes sales of stores
closed during both periods. Net sales and related decreases are as follows:
Percent Store-for-Store
2003 2002 Decrease Decrease
Second quarter $3,000 $3,030 (1.0)% (3.1)%
First six months 5,873 6,126 (4.1) (6.0)
The total net sales decrease of $30 million for the 2003 second quarter was
principally due to a $95 million decrease in store-for-store sales offset by
$71 million of new store sales. The total net sales decrease of $253 million
for the first six months of 2003 was principally due to a $364 million
decrease in store-for-store sales offset by $134 million of new store sales.
The following table presents the components of costs and expenses, as a
percent of net sales.
Second Quarter First Six Months
2003 2002 2003 2002
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales:
Recurring 70.6 69.9 71.6 70.6
Restructuring markdowns 0.0 0.7 0.0 0.3
Selling, general, and
administrative expenses 21.9 21.7 22.1 21.5
Restructuring costs 10.6 1.3 5.4 1.3
Interest expense, net 2.7 2.8 2.7 2.7
Earnings (loss) before income taxes (5.8) 3.6 (1.8) 3.6
Income taxes 37.0* 36.6* 65.4* 37.0*
Net earnings (loss) (3.6)% 2.3% (0.6)% 2.3%
* - Percent represents effective income tax rate.
Recurring cost of sales was $2,118 million in the 2003 second quarter,
compared to $2,119 million in the 2002 second quarter. For the first six
months of 2003, recurring cost of sales was $4,206 million, compared to $4,322
million in the same 2002 period. In addition, $20 million of restructuring
markdowns related to the division combinations were incurred in the 2002
second quarter to conform merchandise assortments and to synchronize pricing
and promotional strategies.
For the 13 weeks ended August 2, 2003, recurring cost of sales as a percent of
net sales increased 0.7%, principally due to a 0.4% increase in occupancy
costs and a 0.5% increase in the cost of merchandise. For the 26 weeks ended
August 2, 2003, recurring cost of sales as a percent of net sales increased
1.0%, principally due to a 0.7% increase in occupancy costs and a 0.4%
increase in the cost of merchandise.
15
Selling, general, and administrative expenses were $657 million in the second
quarter for both 2003 and 2002. For the first six months of 2003, selling,
general, and administrative expenses were $1,297 million, compared with $1,315
million in the 2002 period, a 1.4% decrease.
Selling, general, and administrative expenses as a percent of net sales
increased from 21.7% in the 2002 second quarter to 21.9% in the 2003 second
quarter, principally due to a 0.3% increase in pension costs and a 0.4% increase
in severance costs, offset by a 0.2% decrease in credit expense and a 0.5%
decrease in payroll costs. Selling, general, and administrative expenses as a
percent of net sales increased from 21.5% in the first six months of 2002 to
22.1% in the first six months of 2003. For the first six months of 2003,
pension costs increased 0.3%, payroll costs increased 0.3%, and other expenses
increased 0.3%, offset by a 0.3% decrease in credit expense.
In the 2003 second quarter, we announced our intentions to divest 34
department stores. The store divestitures will result in asset impairment,
severance and other charges of approximately $380 million, of which $318
million, or $0.69 per share, were recognized in the 2003 second quarter. The
2003 second quarter costs consisted of $315 million of non-cash asset
impairment charges and $3 million of initial severance benefits.
Approximately $50 million of the $380 million represents the cash cost of the
store divestitures, not including the benefit from future tax credits. The
remaining cash costs for severance, inventory liquidation, and other charges
will be incurred as each store is divested.
In 2002, charges of $114 million, or $0.24 per share, were recognized related
to division combinations. Of these charges, $59 million, or $0.12 per share,
were recognized in the 2002 second quarter, $20 million of which were included
as cost of sales. Charges of $99 million, or $0.20 per share, were recognized
in the first six months of 2002, $20 million of which were included as cost of
sales.
In June 2003, our After Hours Formalwear division purchased certain assets of
Modern Tuxedo. This business combination consisted of 25 tuxedo rental and
retail sales locations in the Chicago metropolitan area and did not have a
material effect on results of operations or financial position.
Components of net interest expense were (millions):
Second Quarter First Six Months
2003 2002 2003 2002
Interest expense $ 85 $ 94 $170 $ 188
Interest income - (1) (1) (7)
Capitalized interest (5) (7) (9) (12)
Net interest expense $ 80 $ 86 $160 $ 169
Interest expense principally relates to long-term debt.
Short-term borrowings were (dollars in millions):
Second Quarter First Six Months
2003 2002 2003 2002
Average balance outstanding $321 $112 $285 $ 80
Average interest rate on
average balance 1.3% 1.8% 1.3% 1.8%
16
The effective income tax rate for the first six months of 2003 was 65.4%,
compared with 37.0% in the first six months of 2002. The change is due to a
$31 million tax credit recorded in the 2003 first quarter upon the resolution
of various federal and state income tax issues. Excluding the $31 million tax
credit, our 2003 estimated effective tax rate is 37.0%.
Operating results for the trailing years were (millions, except per share):
Aug. 2, Aug. 3,
2003 2002
Net sales $ 13,238 $ 13,837
Net earnings $ 365 $ 622
Diluted earnings per share $ 1.15 $ 1.97
Financial Condition
Cash Flows. Cash flows from operations were $558 million and $645 million in
the first six months of 2003 and 2002, respectively. The 2003 decrease in
operating cash flows is primarily due to decreases from accounts receivable and
accounts payable, partially offset by the effect of inventory balance changes.
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, consisting of a $700 million multi-year credit agreement and
a $300 million 364-day credit agreement, which was renewed August 4, 2003. 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.
As of August 15, 2003, our bonds are rated Baa1 by Moody's Investors Service,
Inc. and BBB+ by Standard & Poor's Corporation. Our commercial paper is rated
Prime-2 by Moody's and A-2 by Standard & Poor's. Our senior unsecured bank
credit agreements are rated Baa1 by Moody's.
Financial Ratios. Key financial ratios as of and for the twenty-six weeks
ended August 2, 2003 and August 3, 2002, and as of and for the fifty-two weeks
ended February 1, 2003 are as follows:
Aug. 2, Aug. 3, Feb. 1,
2003 2002 2003
Current Ratio 1.9 2.0 1.8
Debt-Capitalization Ratio 49% 50% 48%
Fixed Charge Coverage 0.4x 2.0x 2.8x
The decline in the fixed charge coverage ratio for the first six months of
2003 is due to the second quarter restructuring charge reducing earnings.
Impact of New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards that require companies to classify certain financial
instruments as liabilities that were previously classified as equity. We do
not expect SFAS No. 150 to have a material impact on our consolidated
financial position or operating results.
17
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 restructuring activities. 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
2003 and fiscal 2002, we did not enter into any derivative financial
instruments.
Item 4 - Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, 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.
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 and Use of Proceeds - None.
Item 3 - Defaults Upon Senior Securities - None.
18
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareowners of registrant was held on May 23,
2003.
(b) At the annual meeting of shareowners of registrant held on May 23,
2003, the registrant's voting securities carried 305,774,098 votes,
of which 274,677,046 were voted at the meeting. Action was taken
with respect to:
(i) the election of five directors of registrant;
Authority
For Withheld
John L. Dunham 200,706,866 73,970,180
Russell E. Palmer 191,371,207 83,305,839
Michael R. Quinlan 191,564,337 83,112,709
Joyce M. Roche' 227,546,036 47,131,010
William P. Stiritz 200,418,186 74,258,860
(ii) a ratification of the appointment of Deloitte & Touche LLP as
independent auditors (263,974,089 votes in favor, 8,709,144
votes against and 1,993,813 votes abstained);
(iii) a resolution to approve an amendment to the company's 1994 Stock
Incentive Plan (205,248,259 votes in favor, 41,895,874 votes
against, 2,720,143 votes abstained and 24,812,770 not voted);
(iv) a proposal relating to a classified board of directors
(176,447,898 votes in favor, 69,074,923 votes against,
4,341,455 votes abstained and 24,812,770 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 4, 2003, 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
10.1 - 364-day Credit Agreement dated as of August 4, 2003 among The
May Department Stores Company, a New York corporation, as
Borrower, The May Department Stores Company, a Delaware
corporation, as Guarantor, and The Initial Lenders Named
Herein, as Initial Lenders, and Citibank, N.A., as
Administrative Agent, and JPMorgan Chase Bank, The Bank of New
York, Bank One NA, and BNP Paribas, Chicago Branch, as
Syndication Agents, and J.P. Morgan Securities Inc. and
Citigroup Global Markets Inc., as Joint Lead Arrangers and
Bookrunners.
10.2 - Amendment No. 1 to the Five Year Credit Agreement, dated as of
August 4, 2003, among The May Department Stores Company, a New
York corporation, as Borrower, The May Department Stores
Company, a Delaware corporation, as Guarantor, the banks,
financial institutions and other institutional lenders parties
to the Credit Agreement, and Citibank, N.A., as Agent for the
Lenders.
19
Item 6 - Exhibits and Reports on Form 8-K (continued)
(a) Exhibits (continued)
12 - Computation of Ratio of Earnings to Fixed Charges
15 - Letter Regarding Unaudited Interim Financial Information
31.1 - Certification Pursuant to Exchange Act 13a-15 and 15d-15(e)
31.2 - Certification Pursuant to Exchange Act 13a-15 and 15d-15(e)
32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002(18 U.S.C. Section 1350, as adopted)
(b) Reports on Form 8-K
A report dated May 8, 2003, which furnished a company press release
providing information on its earnings for the 13 weeks ended May 3,
2003.
A report dated May 13, 2003, which furnished a company press release
announcing its financial results for the 13 weeks ended May 3, 2003.
A report dated June 20, 2003, which filed information concerning debt
ratings.
A report dated June 27, 2003, which filed information concerning debt
ratings.
A report dated July 30, 2003, which filed a company press release
announcing its intention to divest 32 Lord & Taylor stores.
A report dated August 12, 2003, which furnished a company press
release announcing its financial results for the 13 and 26 weeks ended
August 2, 2003.
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 11, 2003
/s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
20
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareowners
The May Department Stores Company
We have reviewed the accompanying condensed consolidated balance sheets of
The May Department Stores Company and subsidiaries (the "Company") as of
August 2, 2003 and August 3, 2002, and the related condensed consolidated
statements of earnings for the thirteen and twenty-six week periods ended
August 2, 2003 and August 3, 2002, and of cash flows for the twenty-six week
periods ended August 2, 2003 and August 3, 2002. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with auditing standards generally accepted in
the United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
the Company as of February 1, 2003, and the related consolidated statements
of earnings, shareowners' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 2003, we expressed an
unqualified opinion (which includes explanatory paragraphs relating to (1)
the adoption of a new accounting principle and (2) the application of
procedures relating to certain other disclosures and reclassifications of
financial statement amounts related to the 2001 and 2000 consolidated
financial statements that were audited by other auditors who have ceased
operations and for which we have expressed no opinion or other form of
assurance other than with respect to such disclosures and reclassifications)
on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of
February 1, 2003 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
St. Louis, Missouri
September 9, 2003
21
Exhibit 12
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 1, 2003 AND FOR THE
TWENTY-SIX WEEKS ENDED AUGUST 2, 2003 AND AUGUST 3, 2002
(dollars in millions)
26 Weeks Ended Fiscal Year Ended
Aug. 2, Aug. 3, Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2003 2002 2003 2002 2001 2000 1999
Earnings Available for Fixed Charges:
Pretax earnings (loss) from continuing
operations $ (108) $ 221 $ 820 $1,139 $1,402 $1,523 $1,395
Fixed charges (excluding interest
capitalized and pretax preferred
stock dividend requirements) 185 201 405 411 406 346 344
Dividends on ESOP preference shares (9) (10) (20) (22) (23) (24) (25)
Capitalized interest amortization 5 4 9 8 8 7 7
73 416 1,214 1,536 1,793 1,852 1,721
Fixed Charges:
Gross interest expense (a) $ 175 $ 195 $ 392 $ 401 $ 395 $ 340 $ 339
Interest factor attributable to
rent expense 20 18 36 32 28 22 21
195 213 428 433 423 362 360
Ratio of Earnings to Fixed Charges 0.4 2.0 2.8 3.5 4.2 5.1 4.8
(a) Represents interest expense on long-term and short-term debt, ESOP debt
and amortization of debt discount and debt issue expense.
Exhibit 15
September 9, 2003
The May Department Stores Company
St. Louis, Missouri
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim condensed
consolidated financial information of The May Department Stores Company and
subsidiaries (the "Company") for the thirteen and twenty-six week periods ended
August 2, 2003 and August 3, 2002, as indicated in our report dated August 28,
2003; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended August 2, 2003, is
incorporated by reference in Registration Statements Nos. 333-59792, 333-76227,
333-00957, and 333-103352 on Form S-8 and Registration Statements Nos. 333-
42940 and 333-42940-01 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
St. Louis, Missouri
Exhibit 31.1
CERTIFICATION
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 11, 2003 /s/ Eugene S. Kahn
Eugene S. Kahn
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 11, 2003 /s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350, as adopted)
In connection with the Quarterly Report of The May Department Stores Company
(the "Company") on Form 10-Q for the period ending August 2, 2003, 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 11, 2003
/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
A signed original of this written statement required by Section 906 has been
provided to The May Department Stores Company and will be retained by The May
Department Stores Company and furnished to the Securities and Exchange
Commission or its staff upon request.