UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2004
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)
Registrant's telephone number, including area code: (314) 342-6300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.50 per share New York Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
Aggregate market value of the registrant's common stock held by non-affiliates
as of March 1, 2004: $10,487,233,644
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 290,047,907 shares of common
stock, $.50 par value, as of March 1, 2004.
1
Documents incorporated by reference:
1. Registrant's Proxy Statement for the 2004 Annual Meeting of Shareowners (to
be filed with the commission under Rule 14A within 120 days after the end
of registrant's fiscal year-end and, upon such filing, to be incorporated
by reference into Part III).
PART I
Items 1 and 2. Business and Description of Property
The May Department Stores Company ("May"), a corporation organized under the
laws of the State of Delaware in 1976, became the successor to The May
Department Stores Company, a New York corporation ("May NY") in a
reincorporation from New York to Delaware pursuant to a statutory share
exchange accomplished in 1996. As a result of the share exchange, May NY
became a wholly-owned subsidiary of May. May NY was organized under the laws
of the State of New York in 1910, as the successor to a business founded by
David May, who opened his first store in Leadville, Colorado, in 1877.
Information required by this item is also included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
which is incorporated herein by reference.
Department Stores
May operates six quality regional department store divisions nationwide under
11 long-standing and widely recognized trade names. Each department store
division holds a leading market position in its region. At fiscal year-end
2003, May operated 444 department stores in 36 states and the District of
Columbia. The department store divisions and the markets served are shown in
the table below.
Store Company Markets Served
Lord & Taylor 30 markets, including New York/New Jersey Metro;
Chicago; Boston; Philadelphia Metro; Washington,
D.C., Metro; and Detroit
Filene's and 39 markets, including Boston Metro, Pittsburgh,
Kaufmann's Cleveland, Southern Connecticut, Providence Metro,
Hartford, Buffalo, Rochester, and Columbus
Robinsons-May and 15 markets, including Los Angeles/Orange County,
Meier & Frank Riverside/San Bernardino, Phoenix, San Diego, Las
Vegas, Portland/Vancouver Metro, and Salt Lake City
Hecht's and 19 markets, including Washington, D.C., Metro;
Strawbridge's Philadelphia Metro; Baltimore; Norfolk; Nashville;
Richmond; Charlotte; Greensboro; and Raleigh-Durham
Foley's 22 markets, including Houston, Dallas/Fort Worth,
Denver, San Antonio, Austin, and Oklahoma City
Famous-Barr, 24 markets, including St. Louis Metro, Kansas
L.S. Ayres, and City Metro, and Indianapolis
The Jones Store
2
We plan to open eight department stores in 2004 in the following cities:
Filene's Hecht's
Dartmouth, Mass. Wilmington, N.C.
Nashville, Tenn.
Robinsons-May Foley's
Rancho Cucamonga, Calif. El Paso, Texas
Houston, Texas
Meier & Frank The Jones Store
Portland, Ore. Kansas City, Kan.
Bridal Group
David's Bridal, Inc. is the nation's largest retailer of bridal gowns and
bridal-related merchandise and offers a variety of special occasion dresses and
accessories. At fiscal year-end 2003, David's Bridal operated 210 stores in 44
states and Puerto Rico.
After Hours Formalwear, Inc. is the largest tuxedo rental and sales retailer in
the United States. During 2003, After Hours acquired 225 stores, including 125
Gingiss Formalwear and Gary's Tux Shop stores, 64 Desmond's Formalwear stores,
and 25 Modern Tuxedo stores. At fiscal year-end 2003, After Hours operated 460
stores in 30 states.
Priscilla of Boston, Inc. is one of the most highly recognized upscale bridal
retailers in the United States. At fiscal year-end 2003, Priscilla of Boston
operated 10 stores in 9 states.
We plan to open 30 David's Bridal, 20 After Hours, and two Priscilla of Boston
stores in 2004.
A. Associates
May employs approximately 58,000 full-time and 52,000 part-time associates in
46 states, the District of Columbia, Puerto Rico and 10 offices overseas.
B. Property Ownership
The following summarizes the property ownership of department stores and the
Bridal Group at January 31, 2004:
% of Gross
Number of Building
Stores* Sq. Footage
Department Department
Stores Bridal Group Stores Bridal Group
Entirely or mostly owned 262 2 62% 1%
Entirely or mostly leased 112 678 25 99
Owned on leased land 70 - 13 0
444 680 100% 100%
* Includes three department stores subject to financing.
3
C. Credit Sales
Sales at May's stores are made for cash or credit, including May's 30-day
charge accounts and open-end credit plans for department store divisions, which
include revolving charge accounts and revolving installment accounts. During
the fiscal year ended January 31, 2004, 35.3% of net sales were made through
May's department store credit plans.
May National Bank of Ohio ("MBO") is an indirectly wholly-owned and
consolidated subsidiary of May. MBO extends credit to customers of May's six
department store divisions. In 2003, May received approval from the Officer of
the Comptroller of the Currency and completed its merger of May National Bank
of Arizona into MBO.
D. Competition in Retail Merchandising
May conducts its retail merchandising business under highly competitive
conditions. Although May is one of the nation's largest department store
retailers, it has numerous competitors at the national and local level which
compete with May's individual department stores and the Bridal Group.
Competitors include department stores, specialty, off-price, discount,
internet, and mail-order retailers. Competition is characterized by many
factors including location, reputation, assortment, advertising, price,
quality, service, and credit availability. May believes that it is in a strong
competitive position with regard to each of these factors.
E. May Merchandising Company/May Department Stores International, Inc.
May Merchandising Company ("MMC"), an indirectly wholly-owned and consolidated
subsidiary of May, identifies emerging fashion trends in both domestic brands
and our exclusive proprietary brand merchandise. MMC works closely with our
six department store divisions and our merchandise vendors to communicate
emerging fashion trends, to develop meaningful merchandise assortments and
negotiate the best overall terms for delivery of merchandise in a timely manner
to our stores.
May Department Stores International, Inc. ("MDSI"), a wholly-owned and
consolidated subsidiary of May, is primarily a design and sourcing company.
MDSI owns all trade names and marks associated with proprietary brand
merchandise and develops, designs, sources, imports, and distributes the
proprietary brand merchandise bearing those trade names and marks for May.
MDSI has approximately 40-50 private labels in use at the department store
divisions and employs approximately 850 persons worldwide. In addition to its
corporate office in St. Louis, MDSI operates offices in New York City and ten
countries.
4
F. Executive Officers of May
The names and ages (as of March 26, 2004) of all executive officers of May, and
the positions and offices held with May by each such person are as follows:
Name Age Positions and Offices
Eugene S. Kahn 54 Chairman of the Board and Chief Executive
Officer
John L. Dunham 57 President
William P. McNamara 53 Vice Chairman
Thomas D. Fingleton 56 Executive Vice President and Chief Financial
Officer
Jay A. Levitt 46 Chief Executive Officer and President, May
Merchandising Company and May Department
Stores International
R. Dean Wolfe 59 Executive Vice President
Alan E. Charlson 55 Senior Vice President and General Counsel
Martin M. Doerr 49 Senior Vice President
Gregory A. Ott 44 Senior Vice President
Lonny J. Jay 61 Senior Vice President
Jan R. Kniffen 55 Senior Vice President
Richard A. Brickson 56 Secretary and Senior Counsel
J. Per Brodin 42 Vice President
Each of the above named executive officers shall remain in office until the
annual meeting of directors following the next annual meeting of shareowners of
May and until the officer's successor shall have been elected and shall
qualify. Messrs. Kahn, Dunham, and Wolfe are also directors of May. Mr. Ott
assumed the position of senior vice president of strategy and new business
development in October 2003.
Each of the executive officers has been an officer of May for at least the last
five years, with the following exceptions:
- - Mr. McNamara served as senior vice president and general merchandise
manager for May Merchandising Company from 1995 to 1997, president and
chief executive officer of Famous-Barr from 1997 to 1998, and president of
May Merchandising Company from 1998 to February 2000 when he became vice
chairman and an executive officer of May.
- - Mr. Fingleton served as chairman of Hecht's from 1991 to May 2000 when he
became executive vice president and an executive officer of May. He
assumed his current position in April 2001.
- - Mr. Levitt served as vice president and general merchandising manager of
Robinsons-May from 1991 to 1999 when he was named president and chief
executive officer. He became president of May Merchandising Company and
May Department Stores International and an executive officer of May in July
2001. He assumed his current position in July 2002.
- - Mr. Charlson served as senior counsel for May from 1988 to 1998 when he
became senior vice president and chief counsel and an executive officer of
May. He assumed his current position in January 2001.
5
F. Executive Officers of May (continued)
- - Mr. Ott served as a senior engagement manager with McKinsey & Company from
1987 to 1993 when he joined Macy's West as senior vice president of
planning and systems. In 2000, he joined Homewarehouse.com, an online home
improvement site, as vice president of product management and marketing,
until becoming president of See Change Services, a division of APL
Logistics. He assumed his current position in October 2003.
- - Mr. Brodin was associated with a public accounting firm from 1989 to 2002.
He served as director of May's corporate accounting and reporting from
March 2002 to June 2002 when he became vice president and an executive
officer of May.
G. Web Site Access to Reports and Code of Ethics
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports, filed or furnished
pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934
available free of charge on or through the Investor Relations page on our
internet Web site, www.maycompany.com, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.
In addition, the Governance page on our Web site provides our Policy on
Business Conduct, Statement of Corporate Responsibility, and information on
corporate governance, including the board of directors governance guidelines
and the charters for our board committees. We intend to disclose any
amendments to the Policy on Business Conduct and any waivers that are required
to be disclosed by the rules of either the Securities and Exchange Commission
or The New York Stock Exchange on the Governance page on our Web site.
Item 3. 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 consolidated financial statements
taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the 13 weeks
ended January 31, 2004.
PART II
Item 5. Market for May's Common Equity and Related Shareowner Matters
Common Stock Dividends and Market Prices information included in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
6
Item 6. Selected Financial Data
FIVE-YEAR FINANCIAL SUMMARY
(dollars in millions, except per
share and operating statistics) 2003 2002 2001 2000 1999
Operations
Net sales $13,343 $13,491 $13,883 $14,210 $13,562
Total percent increase (decrease) (1.1)% (2.8)% (2.3)% 4.8% 6.0%
Store-for-store percent increase (decrease) (2.8) (5.3) (4.4) 0.0 2.7
Cost of sales 9,378(4) 9,463(5) 9,632 9,798 9,255
Selling, general, and
administrative expenses 3,008(4) 2,863(5) 2,758 2,665 2,497
Interest expense, net 318 345 354 345 287
Earnings before income taxes 639(4) 820(5) 1,139 1,402 1,523
Provision for income taxes 205 278 436 544 596
Net earnings 434(4) 542(5) 703 858 927
Percent of net sales 3.3% 4.0% 5.1% 6.0% 6.8%
LIFO credit $ - $ - $ (30) $ (29) $ (30)
_________________________________________________
Per share
Basic earnings per share $ 1.44(4) $ 1.82(5) $ 2.31 $ 2.74 $ 2.73
Diluted earnings per share 1.41(4) 1.76(5) 2.21 2.62 2.60
Dividends paid (1) 0.96 0.95 0.94 0.93 0.89
Book value 14.51 14.00 13.37 12.93 12.53
Market price - high 34.06 37.75 41.25 39.50 45.38
Market price - low 17.81 20.08 27.00 19.19 29.19
Market price - year-end close 32.90 20.50 36.07 37.30 31.25
_________________________________________________
Financial statistics
Return on equity 10.7%(6) 14.1%(6) 18.2% 21.0% 24.1%
Return on net assets 9.7 (7) 11.8 (7) 15.5 19.5 20.7
_________________________________________________
Operating statistics
Stores open at year-end:
Department stores 444 443 439 427 408
Bridal Group (2) 680 425 400 123 -
Gross retail square footage (in millions):
Department stores 77.5 76.5 75.3 72.0 69.1
Bridal Group (2) 2.9 2.2 1.9 1.3 -
Net sales per square foot (3) $ 167 $ 174 $ 185 $ 198 $ 201
_________________________________________________
Cash flows and financial position
Cash flows from operations $ 1,675 $ 1,460 $ 1,644 $ 1,346 $ 1,530
Depreciation and amortization 564 557 559 511 469
Capital expenditures 600 798 797 598 703
Dividends on common stock 277 273 278 286 295
Working capital 2,458 2,186 2,403 3,056 2,700
Long-term debt and preference stock 4,032 4,300 4,689 4,833 3,875
Shareowners' equity 4,191 4,035 3,841 3,855 4,077
Total assets 12,097 12,001 11,964 11,574 10,935
_________________________________________________
Shares outstanding:
Average basic shares outstanding 289.9 288.2 296.0 306.4 332.2
Average diluted shares
outstanding and equivalents 307.0 307.9 317.6 327.7 355.6
_________________________________________________
All years included 52 weeks, except 2000, which included 53 weeks. Amounts for all years conform to 2003
presentation.
(1) The annual dividend was increased to $0.97 per share effective with the March 15, 2004, dividend payment.
(2) After Hours and Priscilla of Boston joined the company in 2001. David's Bridal joined the company in 2000.
(3) Net sales per square foot is calculated from net sales and average gross retail square footage.
(4) Earnings include restructuring charges for divested stores of $328 million (pretax), or $0.71 per basic
share and $0.67 per diluted share, which consist of $6 million as cost of sales and $322 million as
selling, general, and administrative expenses.
(5) Earnings include restructuring charges for division combinations of $114 million (pretax), or $0.26
per basic share and $0.24 per diluted share, which consist of $23 million as cost of sales and
$91 million as selling, general, and administrative expenses.
(6) Restructuring charges reduced return on equity by 5.1% in 2003 and 2.0% in 2002.
(7) Restructuring charges reduced return on net assets by 3.2% in 2003 and 1.1% in 2002.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Fiscal 2003 began with a difficult retailing environment similar to the
conditions in 2002 and 2001. However, an improving economy helped us finish
2003 with a strong fourth quarter. During 2003, we made several key investments
and implemented initiatives that will benefit future results. Among our
significant 2003 achievements are:
- Generated $1.7 billion of operating cash flow. These results led
to our February 2004 announcement of a $500 million share repurchase
program and $200 million planned debt redemption.
- Invested in new stores and expanded or remodeled many existing stores.
- Began the divestiture of 34 underperforming department stores.
- Expanded the nationwide presence of our Bridal Group.
- Reduced operating costs and inventory levels.
Our operating cash flow was $1.7 billion in 2003. Our strong cash flow enables
us to make acquisitions, build new stores, remodel and expand existing stores,
repurchase stock, and reduce debt.
In 2003, we opened 10 new department stores, which added 1.7 million square feet
of retail space.
Filene's
Brockton, MA Westgate Mall
Kaufmann's
Columbus, OH Mall at Tuttle Crossing
Columbus, OH Columbus City Center
Pittsburgh, PA The Waterfront
Meier & Frank
Ogden, UT The Family Center at Riverdale
Hecht's
Richmond, VA Short Pump Town Center
Foley's
Houston, TX The Galleria
Lake Charles, LA Prien Lake Mall
Denton, TX Golden Triangle Mall
Famous-Barr
Columbia, MO The Shoppes at Stadium
Our new stores in Columbus add critical mass to what had been a single-store
market. The other new stores represent strategic expansion in existing or
contiguous markets.
The four new department stores that opened in Brockton, Pittsburgh, Ogden, and
Columbia represent a newer, off-the-mall store format featuring a contemporary
design and flexible merchandise presentations. This format enables us to open
freestanding stores in innovative centers, including mixed-use "lifestyle"
projects.
We also remodeled 3.0 million square feet of retail space in 28 department
stores in 2003, including the expansion of five stores by 200,000 square feet.
At fiscal year-end, we operated 444 department stores in 36 states and the
District of Columbia.
8
In July 2003, we announced our intention to divest 34 underperforming department
stores, consisting of 32 Lord & Taylor stores, one Famous-Barr store, and one
Jones Store location. These divestitures will result in total estimated charges
of $380 million, of which $328 million, or $0.67 per share, was incurred in
2003.
In 2003, our After Hours Formalwear unit acquired 225 stores, including stores
from Gingiss Formalwear, Desmonds Formalwear, and Modern Tuxedo. These
acquisitions expand our reach to key Midwestern and Western markets, giving
After Hours a leading national presence to further complement the market
leadership of David's Bridal. In addition, our Bridal Group opened 30 David's
Bridal stores and 10 After Hours stores.
Our planned capital expenditures for 2004 are approximately $600 million. This
plan includes opening eight new department stores totaling 1.3 million square
feet; remodeling or expanding 12 stores totaling 1.1 million square feet of
retail space; and the Bridal Group's addition of 30 David's Bridal stores, 20
After Hours stores, and two Priscilla of Boston stores totaling 345,000 square
feet of retail space.
During 2003, we implemented initiatives to improve productivity. These
initiatives led to a 0.4% decrease in selling, general, and administrative
expenses as a percent of net sales.
(dollars in millions,
except per share) 2003 2002 2001
$ % $ % $ %
Net sales $13,343 100.0% $13,491 100.0% $13,883 100.0%
Cost of sales:
Recurring 9,372 70.3 9,440 70.0 9,632 69.4
Restructuring markdowns 6 0.0 23 0.2 - 0.0
Selling, general,
and administrative
expenses 2,686 20.1 2,772 20.5 2,758 19.9
Restructuring costs 322 2.4 91 0.7 - 0.0
Interest expense, net 318 2.4 345 2.5 354 2.5
Earnings before
income taxes 639 4.8 820 6.1 1,139 8.2
Provision for
income taxes(1) 205 32.1 278 33.9 436 38.3
Net earnings $ 434 3.3% $ 542 4.0% $ 703 5.1%
Earnings per share $ 1.41 $ 1.76 $ 2.21
(1) Percents represent effective income tax rates.
Results of Operations
Earnings per share were $1.41 in 2003, compared with $1.76 in 2002 and $2.21 in
2001. Net earnings totaled $434 million in 2003, compared with $542 million in
2002 and $703 million in 2001. In 2003, earnings include restructuring costs
for store divestitures of $328 million, or $0.67 per share. In 2002, earnings
include restructuring costs for division combinations of $114 million, or $0.24
per share.
9
Net Sales. 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 exclude sales of stores
closed during both years. Net sales increases (decreases) for 2003 and 2002
were:
2003 2002
Store-for- Store-for-
Quarter Total Store Total Store
First (7.2)% (8.6)% 0.8 % (2.6)%
Second (1.0) (2.9) (2.3) (5.1)
Third (0.5) (2.3) (4.6) (7.3)
Fourth 2.7 0.8 (4.4) (5.9)
Year (1.1)% (2.8)% (2.8)% (5.3)%
The 1.1% decrease in total net sales from $13.5 billion in 2002 to $13.3 billion
in 2003 was due primarily to a $378 million decrease in store-for-store sales,
offset by $284 million of new-store sales. The total net sales decrease for 2002
was due to a $732 million decrease in store-for-store sales, offset by $395
million of new-store sales. The decreases in store-for-store sales coincided
with a general economic decline, decreased consumer confidence, and the
continued war on terrorism. These events resulted in a difficult retailing
environment, which had an adverse impact on our sales volumes.
The 2003 and 2002 decreases in store-for-store sales were characterized by a
decrease in both the number of department store transactions and the average
selling price per item. Overall, 2003 sales of both men's and women's apparel,
home textiles, and tabletop merchandise lagged, partially offset by stronger
sales of fashion accessories and furniture.
Division Net Sales, Net Sales per Square Foot, and Retail Square Footage
Net Sales
in Millions
of Dollars
Store Company: Headquarters 2003 2002
Lord & Taylor: New York City $ 1,823 $ 1,897
Filene's, Kaufmann's: Boston 3,020 3,096
Robinsons-May, Meier & Frank: Los Angeles 2,446 2,466
Hecht's, Strawbridge's: Washington, D.C. 2,363 2,379
Foley's: Houston 1,977 1,995
Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 1,106 1,150
Total Department Stores $12,735 $12,983
Bridal Group: Philadelphia 608 508
The May Department Stores Company $13,343 $13,491
10
Net Sales per
Square Foot
Store Company: Headquarters 2003 2002
Lord & Taylor: New York City $ 163 $ 171
Filene's, Kaufmann's: Boston 178 190
Robinsons-May, Meier & Frank: Los Angeles 176 181
Hecht's, Strawbridge's: Washington, D.C. 166 171
Foley's: Houston 149 157
Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 141 144
Total Department Stores $ 164 $ 172
Bridal Group: Philadelphia 250 244
The May Department Stores Company $ 167 $ 174
Gross Retail
Square Footage
in Thousands
Store Company: Headquarters 2003 2002
Lord & Taylor: New York City 10,475 11,207
Filene's, Kaufmann's: Boston 17,221 16,480
Robinsons-May, Meier & Frank: Los Angeles 14,066 13,767
Hecht's, Strawbridge's: Washington, D.C 14,380 14,134
Foley's: Houston 13,461 12,985
Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 7,882 7,887
Total Department Stores 77,485 76,460
Bridal Group: Philadelphia 2,861 2,235
The May Department Stores Company 80,346 78,695
Number of Stores
Store Company: Headquarters 2003 New Closed 2002
Lord & Taylor: New York City 78 - 7 85
Filene's, Kaufmann's: Boston 101 4 - 97
Robinsons-May, Meier & Frank: Los Angeles 73 1 - 72
Hecht's, Strawbridge's: Washington, D.C. 80 1 1 80
Foley's: Houston 69 3 - 66
Famous-Barr, L.S. Ayres,
The Jones Store: St. Louis 43 1 1 43
Total Department Stores 444 10 9 443
Bridal Group: Philadelphia 680 265 10 425
The May Department Stores Company 1,124 275 19 868
Net sales per square foot is calculated from net sales and average gross retail
square footage.
Gross retail square footage and number of stores represent locations open at the
end of the years presented.
11
Cost of Sales. Recurring cost of sales includes the cost of merchandise,
inbound freight, distribution expenses, buying, and occupancy costs. In 2003,
restructuring markdowns were incurred to liquidate inventory as stores to be
divested were closing. In 2002, restructuring markdowns were incurred to
conform merchandise assortments and synchronize pricing and promotional
strategies during the division combinations. Cost of sales and the related
percent of net sales were:
2003 2002 2001
(dollars in millions) $ % $ % $ %
Recurring cost of sales $9,372 70.3% $9,440 70.0% $9,632 69.4%
Restructuring markdowns 6 0.0 23 0.2 - 0.0
Recurring cost of sales as a percent of net sales increased 0.3% in 2003
compared with 2002 because of a 0.3% increase in occupancy costs.
Recurring cost of sales as a percent of net sales increased 0.6% in 2002
compared with 2001 because of a 0.9% increase in occupancy costs and a 0.2%
increase for the effect of the LIFO(last-in, first-out) cost method, offset by a
0.6% decrease in the cost of merchandise. There was no LIFO provision or credit
in 2003 or 2002, compared with a 2001 LIFO credit of $30 million, or $0.06 per
share.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses and the related percent of net sales were:
2003 2002 2001
(dollars in millions) $ % $ % $ %
Selling, general, and
administrative expenses $2,686 20.1% $2,772 20.5% $2,758 19.9%
The 0.4% decrease in selling, general, and administrative expenses as a percent
of net sales in 2003 was due to a 0.3% decrease in payroll costs, a 0.3%
decrease in net credit expense, and a 0.2% decrease in advertising costs, offset
by a 0.4% increase in pension and other costs.
The 0.6% increase in selling, general, and administrative expenses as a percent
of net sales in 2002 was due to a 0.5% increase in payroll costs and a 0.2%
increase in advertising costs, offset by a 0.2% decrease from the elimination of
goodwill amortization.
Selling, general, and administrative expenses included advertising and sales
promotion costs of $628 million, $669 million, and $652 million in 2003, 2002,
and 2001, respectively. As a percent of net sales, advertising and sales
promotion costs were 4.7% in 2003, 4.9% in 2002, and 4.7% in 2001. We adjusted
our media mix in 2003 to increase the use of electronic media and reduce the use
of print media.
Finance charge revenues are included as a reduction of selling, general, and
administrative expenses. Finance charge revenues were $244 million in 2003,
$261 million in 2002, and $292 million in 2001.
Restructuring Charges. In July 2003, we announced our intention to divest 34
underperforming department stores. These divestitures will result in total
estimated charges of $380 million, consisting of asset impairments of $317
million, inventory liquidation losses of $25 million, severance benefits of $23
million, and other charges of $15 million. Approximately $50 million of the
$380 million represents the cash cost of the store divestitures, not including
the benefit from future tax credits. Of the $380 million in expected total
charges, $328 million was recognized in 2003, $6 million of which was included
in cost of sales. Most of the remaining costs are expected to be recognized in
2004 and 2005.
12
We are negotiating agreements with landlords and developers for each store
divestiture. Through the end of 2003, we closed nine of the 34 stores we intend
to divest, including one location closed for remodel in 2002 that will not
reopen.
We recorded asset impairment charges 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.
Severance benefits are recognized as each store is closed. As of January 31,
2004, severance benefits of $6 million were paid to approximately 900 store and
central office associates. Inventory liquidation losses and other costs of $5
million were recognized in 2003.
In 2002, we recorded restructuring charges of $102 million for the
Filene's/Kaufmann's and Robinsons-May/Meier & Frank division combinations and
$12 million for the closure of the Arizona Credit Center and realignment of the
company's data centers. Of the $114 million in total charges, $23 million was
included as cost of sales. Severance and relocation benefits were given to
approximately 2,000 associates, with $2 million remaining to be paid by the end
of 2004.
Business Combinations. In 2003, our Bridal Group acquired 225 tuxedo rental and
retail locations, primarily in the Midwestern and Western United States. These
purchases include certain assets of Gingiss Formalwear, Desmonds Formalwear, and
Modern Tuxedo. These transactions did not have a material effect on our results
of operations or financial position.
Interest Expense. Components of net interest expense were:
(dollars in millions) 2003 2002 2001
Interest expense $337 $378 $383
Interest income (3) (10) (7)
Capitalized interest (16) (23) (22)
Net interest expense $318 $345 $354
Percent of net sales 2.4% 2.5% 2.5%
The decrease in interest expense in 2003 was due primarily to lower long-term
borrowings and a $10 million decrease in early debt redemption costs, partially
offset by a $7 million decrease in capitalized interest. The decrease in
interest expense in 2002 was due primarily to lower interest on both long-term
and short-term debt, offset by a $5 million increase in early debt redemption
costs.
Short-term borrowings were:
(dollars in millions) 2003 2002 2001
Average balance outstanding $226 $235 $397
Average interest rate on average balance 1.3% 1.7% 3.0%
Income Taxes. The effective income tax rate for 2003 was 32.1%, compared with
33.9% in 2002 and 38.3% in 2001. The 2003 and 2002 effective tax rates
included the effect of income tax credits recorded on the resolution of various
federal and state income tax issues: $31 million in 2003 and $25 million in
2002. Excluding these tax credits, our 2003 and 2002 effective tax rates were
37.0%. The 1.3% decrease in the effective tax rate in 2002 compared with 2001
was due primarily to the favorable impact of eliminating goodwill amortization.
13
Impact of Inflation. Inflation did not have a material impact on our 2003,
2002, or 2001 net sales or earnings. We value inventory principally on a LIFO
basis, and as a result, the current cost of merchandise is reflected in current
operating results.
Financial Condition
Return on Equity. Return on equity is our principal measure for evaluating our
performance for shareowners and our ability to invest shareowners' funds
profitably. Return on beginning equity was 10.7% in 2003, compared with 14.1% in
2002 and 18.2% in 2001. Restructuring charges reduced return on equity by 5.1%
in 2003 and 2.0% in 2002.
Return on Net Assets. Return on net assets measures performance independent of
capital structure. Return on net assets is pretax earnings before net interest
expense and the interest component of operating leases, divided by beginning-of-
year net assets (including present value of operating leases). Return on net
assets was 9.7% in 2003, compared with 11.8% in 2002 and 15.5% in 2001.
Restructuring charges reduced return on net assets by 3.2% in 2003 and 1.1% in
2002.
Cash Flows. Cash flows from operations were $1.7 billion in 2003, compared with
$1.5 billion in 2002 and $1.6 billion in 2001. The increase in cash flows from
operations in 2003 was due primarily to a decrease in cash paid for income taxes
and the effect of inventory and accounts payable balance changes.
Sources (uses) of cash flows were:
(in millions) 2003 2002 2001
Net earnings $ 434 $ 542 $ 703
Depreciation and amortization 564 557 559
Store divestiture asset impairments 317 - -
Working capital decreases 442 211 318
Other operating activities (82) 150 64
Cash flows from operations 1,675 1,460 1,644
Net capital expenditures (549) (790) (756)
Business combinations (70) - (425)
Cash flows used for investing activities (619) (790) (1,181)
Net long-term debt issuances (repayments) (78) (434) 72
Net short-term debt issuances (repayments) (150) 72 78
Net purchases of common stock (26) (14) (420)
Dividend payments (293) (291) (297)
Cash flows used for financing activities (547) (667) (567)
Increase (decrease) in cash and cash equivalents $ 509 $ 3 $ (104)
See "Consolidated Statements of Cash Flows" on page 23.
Investing Activities. Capital expenditures were made primarily for new stores,
remodels, and expansions. Our strong financial condition enables us to make
capital expenditures to enhance growth and improve operations. The operating
measures we emphasize when we invest in new stores and remodel or expand
existing stores include return on net assets, internal rate of return, and net
sales per square foot.
14
Business combinations in 2003 included the purchase of certain assets of Gingiss
Formalwear, Desmonds Formalwear, and Modern Tuxedo. In 2001, business
combinations included the acquisition of After Hours, Priscilla of Boston, and
nine department stores in the Tennessee and Louisiana markets.
Liquidity and Available Credit. We finance our activities primarily with cash
flows from operations, borrowings under credit facilities, and issuances of
long-term debt. We have $1.0 billion of credit under unsecured revolving
facilities consisting of a $700 million multi-year credit agreement expiring
July 31, 2006, and a $300 million 364-day credit agreement expiring August 2,
2004. These credit agreements support our commercial paper borrowings.
Financial covenants under the credit agreements include a minimum fixed-charge
coverage ratio and a maximum debt-to-capitalization ratio. We also maintain a
$28 million credit facility with a group of minority-owned banks. In addition,
we have filed a shelf registration statement with the Securities and Exchange
Commission that enables us to issue up to $525 million of debt securities.
Annual maturities of long-term debt, including sinking fund requirements and
capital lease obligations, are $239 million, $155 million, $131 million, $260
million, and $177 million for 2004 through 2008. Maturities of long-term debt
are scheduled over the next 33 years, with the largest single-year principal
repayment being $260 million. Interest payments on long-term debt are typically
paid on a semi-annual basis.
In February 2004, our board of directors approved the repurchase of up to $500
million of May common stock, and we announced our plans for early redemption of
$200 million of 8.375% debentures due in 2024. We will incur costs of
approximately $8 million for the early redemption expected in August 2004. Both
the share repurchase and the debt redemption will be accomplished with
internally generated funds.
Off-balance-sheet Financing. We do not sell or securitize customer accounts
receivable. We have not entered into off-balance-sheet financing or other
arrangements with any special-purpose entity. Our existing operating leases do
not contain any significant termination payments if lease options are not
exercised. The present value of operating leases (minimum rents) was $568
million as of January 31, 2004.
Financial Ratios. Our debt-to-capitalization and fixed-charge coverage ratios
are consistent with our capital structure objective. Our capital structure
provides us with substantial financial and operational flexibility.
Our debt-to-capitalization ratios were 46%, 48%, and 51% for 2003, 2002, and
2001, respectively. For purposes of the debt-to-capitalization ratio, we define
total debt as short-term and long-term debt (including the Employee Stock
Ownership Plan [ESOP] debt reduced by unearned compensation) and the capitalized
value of all leases, including operating leases. We define capitalization as
total debt, noncurrent deferred taxes, ESOP preference shares, and shareowners'
equity. See "Profit Sharing" on page 29 for discussion of the ESOP.
Our fixed-charge coverage ratios were 2.6x in 2003, 2.8x in 2002, and 3.5x in
2001. Restructuring charges reduced the fixed-charge coverage ratio by 0.9x in
2003 and 0.3x in 2002.
Employee Stock Options. Effective February 2, 2003, we began expensing the fair
value of all stock-based compensation granted after February 2, 2003. We
adopted the fair value method prospectively. The expense associated with stock
options issued in 2003 was $3 million, or $0.01 per share.
Common Stock Dividends and Market Prices. Our dividend policy is based on
earnings growth and capital investment requirements. We increased the annual
dividend by $0.01 to $0.97 per share effective with the March 2004 dividend.
This is our 29th consecutive annual dividend increase. We have paid consecutive
quarterly dividends since 1911.
15
The quarterly price ranges of the common stock and dividends per share in 2003
and 2002 were:
2003 2002
Market Price Dividends Market Price Dividends
Quarter High Low per Share High Low per Share
First $21.72 $17.81 $0.24 $37.75 $33.04 $0.2375
Second 25.34 20.02 0.24 37.08 25.74 0.2375
Third 28.20 23.70 0.24 30.50 20.10 0.2375
Fourth 34.06 26.37 0.24 26.10 20.08 0.2375
Year $34.06 $17.81 $0.96 $37.75 $20.08 $0.9500
The approximate number of common shareowners as of March 1, 2004, was 38,000.
Contractual Obligations. The following table summarizes our contractual cash
obligations as of January 31, 2004:
(in millions) Less than 2-3 4-5 More than
Total 1 Year Years Years 5 Years
Long-term debt $3,988 $ 238 $ 281 $ 433 $3,036
Capital lease obligations 92 7 14 14 57
Operating lease obligations 858 108 193 158 399
Total $4,938 $ 353 $ 488 $ 605 $3,492
In the ordinary course of business, we enter into arrangements with vendors to
purchase merchandise up to 12 months in advance of expected delivery. These
purchase orders do not contain any significant termination payments or other
penalties if cancelled.
Critical Accounting Policies
Accounts Receivable Allowance. In 2003, approximately 35% of our net sales were
made under our department store credit programs, which resulted in customer
accounts receivable balances of approximately $1.7 billion at January 31, 2004.
We have significant experience in managing our credit programs. Our allowance
for doubtful accounts is based upon a number of factors including account write-
off experience, account aging, and year-end balances. We do not expect actual
experience to vary significantly from our estimate.
Retail Inventory Method. Under the retail inventory method, we record markdowns
to value merchandise inventories at net realizable value. We closely monitor
actual and forecasted sales trends, current inventory levels, and aging
information by merchandise categories. If forecasted sales are not achieved,
additional markdowns may be needed in future periods to clear excess or slow-
moving merchandise, which could result in lower gross margins.
Asset Impairments. When a store experiences unfavorable operating performance,
we evaluate whether an impairment charge should be recorded. A store's assets
are evaluated for impairment by comparing its estimated undiscounted cash flows
with its carrying value. If the cash flows are not sufficient to recover the
carrying value, the assets are written down to fair value. Prior to 2003,
impairment losses associated with these reviews were not significant. In 2003,
we recorded an asset impairment loss of $317 million because of the planned
divestiture of 34 department stores. In the future, if store-for-store sales
decline and general economic conditions are negative, impairment losses could be
significant.
16
Self-insurance Reserves. We self-insure a portion of the exposure for costs
related primarily to workers' compensation and general liability. Expenses are
recorded based on actuarial estimates for reported and incurred but not reported
claims considering a number of factors, including historical claims experience,
severity factors, litigation costs, inflation, and other actuarial assumptions.
Although we do not expect the amount we will ultimately pay to differ
significantly from our estimates, self-insurance reserves could be affected if
future claims experience differs significantly from the historical trends and
our assumptions.
Pension Plans. We use various assumptions and estimates to measure the expense
and funded status of our pension plans. Those assumptions and estimates include
discount rates, rates of return on plan assets, rates of future compensation
increases, employee turnover rates, and anticipated mortality rates. The use of
different assumptions and estimates in our pension plans could result in a
significantly different funded status and plan expense. Based on current
estimates and assumptions, we believe our 2004 pension expense will be
approximately $100 million.
Impact of New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 did
not reclassify any financial instruments as a result of adopting SFAS No. 150.
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 transitional
assessment of potential goodwill impairments under SFAS No. 142 did not identify
any impairment. Goodwill amortization incurred in 2001 was $42 million, or
$0.11 per share. Net earnings in 2001, excluding goodwill amortization, were
$740 million, or $2.32 per share.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk arises primarily 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 fiscal 2003, 2002, and 2001, we
were not party to any derivative financial instruments.
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 restructuring activities. Because of these factors, actual
performance could differ materially from that described in the forward-looking
statements.
17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in Quantitative and Qualitative
Disclosures About Market Risk in Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners of
The May Department Stores Company
We have audited the accompanying consolidated balance sheets of The May
Department Stores Company and subsidiaries (the "Company") as of January 31,
2004 and February 1, 2003, and the related consolidated statements of earnings,
shareowners' equity, and cash flows for the years then ended. Our audits also
included the financial statement schedules, as of and for the years ended
January 31, 2004 and February 1, 2003, listed at Item 15. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
The consolidated financial statements and financial statement schedule of the
Company for the year ended February 2, 2002 (fiscal 2001), before the inclusion
of the transitional disclosures and reclassifications discussed in the notes to
the consolidated financial statements, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements and state that such fiscal 2001 financial statement
schedule, when considered in relation to the fiscal 2001 basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein, in their report dated February 13,
2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the fiscal 2003 and 2002 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of January 31, 2004 and February 1, 2003, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the fiscal 2003 and 2002 financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as whole,
presents fairly in all material respects, the information set forth therein.
As discussed in notes to the consolidated financial statements, in fiscal 2002
the Company changed its method of accounting for goodwill to conform to
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets."
18
As discussed above, the Company's fiscal 2001 consolidated financial statements
were audited by other auditors who have ceased operations. As described in the
notes, these financial statements have been revised to include the transitional
disclosures required by SFAS No. 142 and to reflect the adoption of SFAS No.
145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections." Our audit procedures with respect to the
disclosures in the notes with respect to 2001 included (1) comparing the
previously reported net earnings to the previously issued consolidated
financial statements and the adjustments to reported net earnings representing
amortization expense (including any related tax effects) recognized in the
period related to goodwill that is no longer being amortized as a result of
initially applying SFAS No. 142 (including any related tax effects) to the
Company's underlying analysis obtained from management, and (2) testing the
mathematical accuracy of the reconciliation of adjusted net earnings to
reported net earnings, and the related earnings-per-share amounts. Our audit
procedures with respect to the 2001 reclassifications described in the notes,
that were applied to conform the 2001 consolidated financial statements to the
presentation required by SFAS No. 145, included (1) comparing the amount shown
as extraordinary loss, net of tax in the Company's consolidated statement of
earnings to the Company's underlying accounting analysis obtained from
management, (2) comparing the amounts comprising the loss on extinguishment of
debt and the related tax benefit to the Company's underlying accounting records
obtained from management, and (3) testing the mathematical accuracy of the
underlying analysis. In our opinion, the disclosures for 2001 related to SFAS
No. 142 in the notes are appropriate and the reclassifications for 2001 have
been properly applied. However, we were not engaged to audit, review, or apply
any procedures to the 2001 consolidated financial statements of the Company
other than with respect to such disclosures and reclassifications and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 consolidated financial statements taken as a whole.
/s/Deloitte & Touche LLP
St. Louis, Missouri
March 19, 2004
The following report is a copy of a report previously issued by Arthur Andersen
LLP in connection with the company's annual report on Form 10-K for the year
ended February 2, 2002. This opinion has not been reissued by Arthur Andersen
LLP. In fiscal 2002, the company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections." As discussed
in the notes to the consolidated financial statements, the company has presented
the transitional disclosures for fiscal 2001 required by SFAS No. 142 and
adjusted the 2001 consolidated financial statements as a result of adoption of
SFAS No. 145. The Arthur Andersen LLP report does not extend to these
transitional disclosures or adjustments. These disclosures and adjustments are
reported on by Deloitte & Touche LLP as stated in their report appearing herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of
The May Department Stores Company
We have audited the accompanying consolidated balance sheets of The May
Department Stores Company (a Delaware corporation) and subsidiaries as of
February 2, 2002, and February 3, 2001, and the related consolidated statement
of earnings, shareowners' equity and cash flows for each of the three fiscal
years in the period ended February 2, 2002. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
19
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The May Department Stores
Company and subsidiaries as of February 2, 2002, and February 3, 2001, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended February 2, 2002, in conformity with accounting
principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II included in this Form 10-K is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
1010 Market Street
St. Louis, Missouri 63101-2089
February 13, 2002
20
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share) 2003 2002 2001
Net sales $13,343 $13,491 $13,883
Cost of sales:
Recurring 9,372 9,440 9,632
Restructuring markdowns 6 23 -
Selling, general, and administrative expenses 2,686 2,772 2,758
Restructuring costs 322 91 -
Interest expense, net 318 345 354
Earnings before income taxes 639 820 1,139
Provision for income taxes 205 278 436
Net earnings $ 434 $ 542 $ 703
Basic earnings per share $ 1.44 $ 1.82 $ 2.31
Diluted earnings per share $ 1.41 $ 1.76 $ 2.21
See Notes to Consolidated Financial Statements.
21
CONSOLIDATED BALANCE SHEETS
January 31, February 1,
(dollars in millions, except per share) 2004 2003
Assets
Current assets:
Cash $ 20 $ 21
Cash equivalents 544 34
Accounts receivable, net of allowance for
doubtful accounts of $105 and $112 1,755 1,776
Merchandise inventories 2,737 2,857
Other current assets 87 99
Total current assets 5,143 4,787
Property and equipment:
Land 351 361
Buildings and improvements 4,648 4,753
Furniture, fixtures, equipment, and other 4,047 4,034
Property under capital leases 57 57
Total property and equipment 9,103 9,205
Accumulated depreciation (3,954) (3,739)
Property and equipment, net 5,149 5,466
Goodwill 1,504 1,441
Intangible assets, net of accumulated
amortization of $27 and $19 168 176
Other assets 133 131
Total assets $ 12,097 $ 12,001
Liabilities and shareowners' equity
Current liabilities:
Short-term debt $ - $ 150
Current maturities of long-term debt 239 139
Accounts payable 1,191 1,101
Accrued expenses 975 947
Income taxes payable 280 264
Total current liabilities 2,685 2,601
Long-term debt 3,797 4,035
Deferred income taxes 773 710
Other liabilities 507 507
ESOP preference shares 235 265
Unearned compensation (91) (152)
Shareowners' equity:
Common stock 144 144
Additional paid-in capital 16 9
Retained earnings 4,098 3,957
Accumulated other comprehensive loss (67) (75)
Total shareowners' equity 4,191 4,035
Total liabilities and shareowners' equity $ 12,097 $ 12,001
Common stock has a par value of $0.50 per share; 1 billion shares are authorized. At January
31, 2004, 320.5 million shares were issued, with 288.8 million shares outstanding and 31.7
million shares held in treasury. At February 1, 2003, 320.5 million shares were issued, with
288.3 million shares outstanding and 32.2 million shares held in treasury.
ESOP preference shares have a par value of $0.50 per share and a stated value of $507 per
share; 800,000 shares are authorized. At January 31, 2004, 462,846 shares (convertible into
15.6 million shares of common stock) were issued and outstanding. At February 1, 2003,
522,587 shares (convertible into 17.7 million shares of common stock) were issued and
outstanding.
See Notes to Consolidated Financial Statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions) 2003 2002 2001
Operating activities
Net earnings $ 434 $ 542 $ 703
Adjustments for noncash items included in earnings:
Depreciation and other amortization 556 546 511
Goodwill and other intangible amortization 8 11 48
Store divestiture asset impairments 317 - -
Deferred income taxes (64) 34 63
Working capital changes:
Accounts receivable, net 21 202 183
Merchandise inventories 122 17 103
Other current assets - 24 30
Accounts payable 90 79 51
Accrued expenses 24 (103) (30)
Income taxes payable 185 (8) (19)
Other assets and liabilities, net (18) 116 1
Cash flows from operations 1,675 1,460 1,644
Investing activities
Capital expenditures (600) (798) (797)
Proceeds from dispositions of property and equipment 51 8 41
Business combinations (70) - (425)
Cash flows used for investing activities (619) (790) (1,181)
Financing activities
Issuances of long-term debt - - 250
Repayments of long-term debt (78) (434) (178)
Net issuances (repayments) of short-term debt (150) 72 78
Purchases of common stock (52) (45) (474)
Issuances of common stock 26 31 54
Dividend payments (293) (291) (297)
Cash flows used for financing activities (547) (667) (567)
Increase (decrease) in cash and cash equivalents 509 3 (104)
Cash and cash equivalents, beginning of year 55 52 156
Cash and cash equivalents, end of year $ 564 $ 55 $ 52
Cash paid during the year:
Interest expense $ 329 $ 369 $ 344
Income taxes 87 225 369
See Notes to Consolidated Financial Statements.
23
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Accumulated
Additional Other Total
(dollars in millions, except Outstanding Common Stock Paid-in Retained Comprehensive Shareowners'
per share, shares in thousands) Shares $ Capital Earnings Income (Loss) Equity
Balance at February 3, 2001 298,170 $149 $ - $3,706 $ - $3,855
Net earnings - - - 703 - 703
Minimum pension liability, net - - - - (12) (12)
Comprehensive earnings 691
Dividends paid:
Common stock ($0.94 per share) - - - (278) - (278)
ESOP preference shares,
net of tax benefit - - - (19) - (19)
Common stock issued 3,038 2 64 - - 66
Common stock purchased (14,035) (7) (64) (403) - (474)
Balance at February 2, 2002 287,173 144 - 3,709 (12) 3,841
Net earnings - - - 542 - 542
Minimum pension liability, net - - - - (63) (63)
Comprehensive earnings 479
Dividends paid:
Common stock ($0.95 per share) - - - (273) - (273)
ESOP preference shares,
net of tax benefit - - - (18) - (18)
Common stock issued 2,723 1 51 - - 52
Common stock purchased (1,645) (1) (42) (3) - (46)
Balance at February 1, 2003 288,251 144 9 3,957 (75) 4,035
Net earnings - - - 434 - 434
Minimum pension liability, net - - - - (3) (3)
Unrealized gains on marketable
securities, net of tax of $7 - - - - 11 11
Comprehensive earnings 442
Dividends paid:
Common stock ($0.96 per share) - - - (277) - (277)
ESOP preference shares,
net of tax benefit - - - (16) - (16)
Common stock issued 2,631 1 58 - - 59
Common stock purchased (2,091) (1) (51) - - (52)
Balance at January 31, 2004 288,791 $144 $ 16 $4,098 $ (67) $4,191
Treasury Shares
(in thousands) 2003 2002 2001
Balance, beginning of year 32,204 183,282 172,285
Common stock issued:
Exercise of stock options (484) (935) (1,588)
Deferred compensation plan (281) (151) (231)
Restricted stock grants, net of forfeitures 153 (236) (337)
Conversion of ESOP preference shares (2,019) (1,401) (876)
Contribution to profit sharing plan - - (6)
(2,631) (2,723) (3,038)
Common stock purchased 2,091 1,645 14,035
Common stock retired - (150,000) -
Balance, end of year 31,664 32,204 183,282
Outstanding common stock excludes shares held in treasury.
See Notes to Consolidated Financial Statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. The company's fiscal year ends on the Saturday closest to January
31. Fiscal years 2003, 2002, and 2001 ended on January 31, 2004, February 1,
2003, and February 2, 2002, respectively. References to years in this annual
report relate to fiscal years or year-ends rather than calendar years.
Basis of Reporting. The consolidated financial statements include the accounts
of The May Department Stores Company (May or the company), a Delaware
corporation, and all subsidiaries. All intercompany transactions are eliminated.
The company operates as one reportable segment. The company's 444 quality
department stores are operated by six regional department store divisions across
the United States under 11 long-standing and widely recognized trade names. The
company aggregates its six department store divisions into a single reportable
segment because they have similar economic and operating characteristics. In
addition, the Bridal Group operates 210 David's Bridal stores, 460 After Hours
Formalwear stores, and 10 Priscilla of Boston stores.
Use of Estimates. Management makes estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Actual results could
differ from these estimates.
Net Sales. Net sales include merchandise sales and lease department income.
Merchandise sales are recognized at the time the sale is made to the customer,
are net of estimated returns and promotional coupons, and exclude sales tax.
Lease department income is recognized based on a percentage of lease department
sales, net of estimated returns.
Cost of Sales. Recurring cost of sales includes the cost of merchandise,
inbound freight, distribution expenses, buying, and occupancy costs. In 2003,
restructuring markdowns were incurred to liquidate inventory as stores to be
divested were closing. In 2002, restructuring markdowns were incurred to conform
merchandise assortments and synchronize pricing and promotional strategies
during the division combinations.
Vendor Allowances. The company has arrangements with some vendors under which
it receives cash or allowances when merchandise does not achieve anticipated
rates of sale. The amounts recorded for these arrangements are recognized as
reductions of cost of sales.
Preopening Expenses. Preopening expenses of new stores are expensed as
incurred.
Advertising Costs. Advertising and sales promotion costs are expensed at the
time the advertising occurs. These costs are net of cooperative advertising
reimbursements and are included in selling, general, and administrative
expenses. Advertising and sales promotion costs were $628 million, $669 million,
and $652 million in 2003, 2002, and 2001, respectively.
Finance Charge Revenues. Finance charge revenues are recognized in accordance
with the contractual provisions of customer agreements and are included as a
reduction of selling, general, and administrative expenses. Finance charge
revenues were $244 million, $261 million, and $292 million in 2003, 2002, and
2001, respectively.
Income Taxes. Income taxes are accounted for using the liability method. The
liability method applies statutory tax rates in effect at the date of the
balance sheet to differences between the book basis and the tax basis of assets
and liabilities.
25
Earnings per Share. References to earnings per share relate to diluted earnings
per share.
Stock-based Compensation. 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. The expense associated with stock options issued in 2003 was $3
million.
The company accounts for stock-based compensation on stock options granted prior
to February 2, 2003 by applying Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123.
Accordingly, no compensation expense was recognized for these stock options
because the option exercise price was fixed at the market price on the date of
grant.
Cash Equivalents. Cash equivalents consist primarily of commercial paper with
maturities of less than three months. Cash equivalents are stated at cost, which
approximates fair value.
Merchandise Inventories. Merchandise inventories are valued principally at the
lower of LIFO (last-in, first-out) cost basis or market using the retail method.
Merchandise inventories on a FIFO (first-in, first-out) cost basis approximate
LIFO. There was no LIFO provision or credit in 2003 or 2002.
Property and Equipment. Property and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives.
Properties under capital leases and leasehold improvements are amortized over
the shorter of their useful lives or related lease terms. Software development
costs are capitalized and amortized over their expected useful life. Capitalized
interest was $16 million, $23 million, and $22 million in 2003, 2002, and 2001,
respectively. The estimated useful life for each major class of long-lived
assets is as follows:
Buildings and improvements:
Buildings and improvements 10-50 years
Leasehold interests 5-30 years
Furniture, fixtures, equipment, and other:
Furniture, fixtures, and equipment 3-15 years
Software development costs 2-7 years
Rental formalwear 2-4 years
Property under capital leases 16-50 years
Goodwill and Other Intangibles. Goodwill represents the excess of cost over the
fair value of net tangible and separately recognized intangible assets acquired
at the dates of acquisition. Business combinations in 2003 added $63 million of
goodwill. The company completes its annual goodwill impairment test in the
fourth quarter. No impairment was identified in 2003 or 2002. Other intangibles
include trade names and customer lists, and are amortized using the straight-
line method over a period of three to 40 years.
Impairment of Long-lived Assets. Long-lived assets and certain identifiable
intangibles are reviewed when events or circumstances indicate that their net
book values may not be recoverable. The estimated future undiscounted cash flows
associated with the asset are compared with the asset's carrying amount to
determine if a writedown to fair value is required. Prior to 2003, impairment
losses resulting from these reviews were not significant. In 2003, the company
recorded $317 million of asset impairments for the planned divestiture of 34
department stores. In the future, if store-for-store sales decline and general
economic conditions are negative, impairment losses could be significant.
26
Financial Derivatives. The company was not a party to any derivative financial
instruments in 2003, 2002, or 2001.
Impact of New Accounting Pronouncements. In May 2003, the Financial Accounting
Standards Board 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 did not reclassify any financial instruments as a result of adopting
SFAS No. 150.
In 2002, the company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which eliminated goodwill amortization and prescribes a new approach
for assessing potential goodwill impairments. The following table illustrates
the impact of goodwill amortization on the results of 2001:
(in millions, except per share) 2003 2002 2001
Reported net earnings $ 434 $ 542 $ 703
Add back: Goodwill amortization, net of tax - - 37
Adjusted net earnings $ 434 $ 542 $ 740
Basic earnings per share:
Reported net earnings $ 1.44 $ 1.82 $ 2.31
Add back: Goodwill amortization, net of tax - - 0.12
Adjusted basic earnings per share $ 1.44 $ 1.82 $ 2.43
Diluted earnings per share:
Reported net earnings $ 1.41 $ 1.76 $ 2.21
Add back: Goodwill amortization, net of tax - - 0.11
Adjusted diluted earnings per share $ 1.41 $ 1.76 $ 2.32
Reclassifications. Certain prior-year amounts have been reclassified to conform
with the current-year presentation.
RESTRUCTURING COSTS
Store Divestitures. In July 2003, the company announced its intention to divest
34 underperforming department stores. These divestitures will result in total
estimated charges of $380 million, consisting of asset impairments of $317
million, inventory liquidation losses of $25 million, severance benefits of $23
million, and other charges of approximately $15 million. Approximately $50
million of the $380 million represents the cash cost of the store divestitures,
not including the benefit from future tax credits. Of the $380 million of
expected total charges, $328 million was recognized in 2003, $6 million of which
was included in cost of sales. Most of the remaining costs are expected to be
recognized in 2004 and 2005.
The company is negotiating agreements with landlords and developers for each
store divestiture. Through the end of 2003, the company has closed nine of the
34 stores it intends to divest.
27
The significant components of the store divestiture costs and status of the
related liability are summarized below:
(in millions) Balance
2003 Payments Non-cash Jan. 31,
Charge (Proceeds) Uses 2004
Asset impairment $ 317 $ - $ 317 $ -
Disposal (gains) losses (9) (30) 21 -
Inventory liquidation losses 6 6 - -
Severance benefits 6 6 - -
Other 8 8 - -
Total $ 328 $ (10) $ 338 $ -
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. Inventory
liquidation losses are incurred to mark down inventory during liquidation sales
as stores to be divested are closing. Severance benefits are recognized as each
store is closed. As of January 31, 2004, severance benefits were paid to
approximately 900 store and central office associates.
Division Combinations. In 2002, the company recorded restructuring charges of
$102 million for the Filene's/Kaufmann's and Robinsons-May/Meier & Frank
division combinations and $12 million for the closure of the Arizona Credit
Center and realignment of the company's data centers. Of the $114 million in
total charges, $23 million was included as cost of sales.
The significant components of the division combination costs and status of the
related liability are summarized below:
(in millions) Balance Balance
Total | Feb. 1, Non-cash Jan. 31,
Charge | 2003 Payments Uses 2004
Severance and |
relocation benefits $ 59 | $ 17 $ 15 $ - $ 2
Inventory alignment 23 | - - - -
Central office closure 15 | - - - -
Other 17 | 7 2 5 -
Total $114 | $ 24 $ 17 $ 5 $ 2
Severance and relocation benefits include severance for approximately 2,000
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 includes
primarily accelerated depreciation of fixed assets in the closed central
offices. Remaining severance costs will be paid by the end of fiscal 2004.
BUSINESS COMBINATIONS
In 2003, the company acquired 225 tuxedo rental and retail locations, primarily
in the Midwestern and Western United States. These purchases include certain
assets of Gingiss Formalwear, Desmonds Formalwear, and Modern Tuxedo. The
aggregate purchase price for these acquisitions was $70 million. The purchase
price allocations for these business combinations are preliminary and subject to
final valuations. These transactions did not have a material effect on results
of operations or financial position.
28
PROFIT SHARING
The company has a qualified profit sharing plan that covers most associates who
work 1,000 hours or more in a year and have attained age 21. The plan is a
defined-contribution program that provides discretionary matching allocations at
a variable matching rate generally based upon changes in the company's annual
earnings per share, as defined in the plan. The plan's matching allocation value
totaled $53 million for 2003, an effective match rate of 91%. The matching
allocation values were $28 million in 2002 and $33 million in 2001.
The plan includes an Employee Stock Ownership Plan (ESOP), under which the plan
borrowed $400 million in 1989, guaranteed by the company, at an average rate of
8.5%. The proceeds were used to purchase $400 million (788,955 shares) of
convertible preference stock of the company (ESOP preference shares). Each share
is convertible into 33.787 shares of common stock and has a stated value of
$15.01 per common share equivalent. The annual dividend rate on the ESOP
preference shares is 7.5%.
The $91 million outstanding portion of the guaranteed ESOP debt is reflected on
the consolidated balance sheet as current maturities of long-term debt because
the company will fund the remaining debt service in 2004. The company's
contributions to the ESOP and the dividends on the ESOP preference shares are
used to repay the loan principal and interest. Interest expense associated with
the ESOP debt was $9 million in 2003, $14 million in 2002, and $18 million in
2001. Dividends on ESOP preference shares were $18 million in 2003, $20 million
in 2002, and $22 million in 2001.
The release of ESOP preference shares is based upon debt-service payments. Upon
release, the shares are allocated to participating associates' accounts.
Unearned compensation, initially an equal offsetting amount to the $400 million
guaranteed ESOP debt, has been adjusted for the difference between the expense
related to the ESOP and cash payments to the ESOP. It is reduced as principal is
repaid.
The company's profit sharing expense was $46 million in 2003, $40 million in
2002, and $47 million in 2001.
At January 31, 2004, the plan beneficially owned 12.3 million shares of the
company's common stock and 100% of the company's ESOP preference shares,
representing 9.2% of the company's common stock.
PENSION AND OTHER POSTRETIREMENT BENEFITS
The company has a qualified defined-benefit plan that covers most associates who
work 1,000 hours or more in a year and have attained age 21. The company also
maintains two nonqualified, supplementary defined-benefit plans for certain
associates. All plans are noncontributory and provide benefits based upon years
of service and pay during employment.
Pension expense is based on information provided by an outside actuarial firm
that uses assumptions to estimate the total benefits ultimately payable to
associates and allocates this cost to service periods. The actuarial assumptions
used to calculate pension costs are reviewed annually.
29
The components of net periodic benefit costs and actuarial assumptions for the
benefit plans were:
(in millions) 2003 2002 2001
Components of pension expense (all plans)
Service cost $ 51 $43 $39
Interest cost 59 55 53
Expected return on assets (31) (38) (42)
Net amortization(1) 29 12 12
Total $108 $72 $62
(1) Prior service cost and actuarial (gain) loss are amortized over the
remaining service period.
(as of January 1) 2004 2003 2002
Actuarial assumptions
Discount rate 6.00% 6.75% 7.25%
Expected return on plan assets 7.00 7.00 7.50
Salary increase 3.50 4.00 4.00
The expected return on plan assets represents the weighted expected return for
each asset category using the target allocation and actual returns in prior
periods.
Target asset allocations and actual asset allocations by asset category were:
Target Percentage of
Allocation Actual Plan Assets
Asset Category 2003 2003 2002
Equity securities 55-65% 61% 60%
Debt securities 35-45 39 40
100% 100%
The accumulated benefit obligations (ABO), change in projected benefit
obligations (PBO), change in net plan assets, and funded status of the benefit
plans were:
Qualified Plan Nonqualified Plans
(in millions) 2003 2002 2003 2002
Change in PBO(1)
PBO at beginning of year $727 $638 $ 175 $ 170
Service cost 46 39 5 4
Interest cost 46 44 13 11
Actuarial loss(2) 72 53 43 -
Plan amendments (1) 15 2 (1)
Benefits paid (69) (62) (10) (9)
PBO at end of year $821 $727 $ 228 $ 175
ABO at end of year(3) $715 $641 $ 187 $ 152
30
Qualified Plan Nonqualified Plans
(in millions) 2003 2002 2003 2002
Change in net plan assets
Fair value of net plan assets
at beginning of year $ 494 $ 549 $ - $ -
Actual return on plan assets 88 (47) - -
Employer contribution 84 54 - -
Benefits paid (69) (62) - -
Fair value of net plan assets
at end of year $ 597 $ 494 $ - $ -
Funded status (PBO less plan assets) $(224) $(233) $(228) $(175)
Unrecognized net actuarial loss 194 192 78 40
Unrecognized prior service cost 49 60 11 11
Net prepaid (accrued) benefit cost $ 19 $ 19 $(139) $(124)
Plan assets (less than) ABO $(118) $(147) $(187) $(152)
Amounts recognized in the balance sheets(4)
Accrued benefit liability $(118) $(147) $(187) $(152)
Intangible asset 49 60 10 11
Accumulated other comprehensive loss 88 106 38 17
Net amount recognized $ 19 $ 19 $(139) $(124)
(1) PBO is the actuarial present value of benefits attributed by the benefit
formula to prior associate service; it takes into consideration future
salary increases.
(2) Actuarial loss is the change in benefit obligations or plan assets resulting
from changes in actuarial assumptions or from experience different than
assumed.
(3) ABO is the actuarial present value of benefits attributed by the pension
benefit formula to prior associate service based on current and
past compensation levels.
(4) Accrued benefit liability is included in accrued expenses and other
liabilities. Intangible pension assets are included in other assets.
Accumulated other comprehensive loss, net of tax benefit, is included in
equity.
Estimated future benefit payments to plan participants at January 31, 2004 are:
(in millions) Qualified Nonqualified
Plan Plan
2004 $ 79 $ 9
2005 82 9
2006 85 9
2007 87 9
2008 90 9
2009-2013 463 41
The company's practice is to make annual plan contributions equal to qualified
plan expense. The company expects 2004 qualified plan expense to be
approximately $75 million.
The company also provides postretirement life and/or health benefits for certain
associates. As of January 31, 2004, the company's estimated PBO (at a discount
rate of 6.00%) for postretirement benefits was $67 million, of which $50 million
was accrued in other liabilities. As of February 1, 2003, the company's
estimated PBO (at a discount rate of 6.75%) for postretirement benefits was $62
million, of which $49 million was accrued in other liabilities. The
postretirement plan is unfunded. The postretirement benefit expense was $6
million in 2003 and $4 million in both 2002 and 2001.
31
The estimated future obligations for postretirement medical benefits are based
upon assumed annual healthcare cost increases of 9% for 2004, decreasing by 1%
annually to 5% for 2008 and future years. A 1% increase or decrease in the
assumed annual healthcare cost increases would increase or decrease the present
value of estimated future obligations for postretirement benefits by
approximately $4 million.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 is not
expected to have a material impact on the company's postretirement health
benefits.
TAXES
The provision for income taxes and the related percent of pretax earnings for
the last three years were:
(dollars in millions) 2003 2002 2001
$ % $ % $ %
Federal $231 $211 $315
State and local 38 33 58
Current taxes 269 42.1% 244 29.7% 373 32.7%
Federal (59) 62 54
State and local (5) (28) 9
Deferred taxes (64) (10.0) 34 4.2 63 5.6
Total $205 32.1% $278 33.9% $436 38.3%
The reconciliation between the statutory federal income tax rate and the
effective income tax rate for the last three years follows:
(percent of pretax earnings) 2003 2002 2001
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 5.2 0.6 5.9
Federal tax benefit of state
and local income taxes (1.8) (0.2) (2.1)
Resolution of federal tax matters (4.9) 0.0 0.0
Other, net (1.4) (1.5) (0.5)
Effective income tax rate 32.1% 33.9% 38.3%
Major components of deferred tax assets (liabilities) were:
(in millions) 2003 2002
Accrued expenses and reserves $ 108 $ 127
Deferred and other compensation 194 209
Merchandise inventories (224) (188)
Depreciation and amortization and basis differences (879) (792)
Other deferred income tax liabilities, net (5) (53)
Net deferred income taxes (806) (697)
Less: Net current deferred income tax assets(liabilities) (33) 13
Noncurrent deferred income taxes $(773) $(710)
32
EARNINGS PER SHARE
All ESOP preference shares were issued in 1989, and earnings per share is
computed in accordance with the provisions of Statement of Position 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans," and Emerging
Issues Task Force 89-12, "Earnings Per Share Issues Related to Convertible
Preferred Stock Held by an Employee Stock Ownership Plan." For basic earnings
per share purposes, the ESOP preference shares dividend, net of income tax
benefit, is deducted from net earnings to arrive at net earnings available for
common shareowners. Diluted earnings per share is computed by use of the "if
converted" method, which assumes all ESOP preference shares were converted as of
the beginning of the year. Net earnings are adjusted to add back the ESOP
preference dividend deducted in computing basic earnings per share, less the
amount of additional ESOP contribution required to fund ESOP debt service in
excess of the current common stock dividend attributable to the ESOP preference
shares.
Diluted earnings per share also include the effect of outstanding options.
Options excluded from the diluted earnings per share calculation because of
their antidilutive effect totaled 23.4 million in 2003, 18.5 million in 2002,
and 9.3 million in 2001. The following tables reconcile net earnings and
weighted average shares outstanding to amounts used to calculate basic and
diluted earnings per share for 2003, 2002, and 2001:
(in millions, except per share) 2003
Net Earnings
Earnings Shares per Share
Net earnings $434
ESOP preference shares' dividends (16)
Basic earnings per share $418 289.9 $1.44
ESOP preference shares 14 16.6
Assumed exercise of options
(treasury stock method) - 0.5
Diluted earnings per share $432 307.0 $1.41
(in millions, except per share) 2002
Net Earnings
Earnings Shares per Share
Net earnings $542
ESOP preference shares' dividends (18)
Basic earnings per share $524 288.2 $1.82
ESOP preference shares 17 18.5
Assumed exercise of options
(treasury stock method) - 1.2
Diluted earnings per share $541 307.9 $1.76
33
(in millions, except per share) 2001
Net Earnings
Earnings Shares per Share
Net earnings $703
ESOP preference shares' dividends (19)
Basic earnings per share $684 296.0 $2.31
ESOP preference shares 17 19.5
Assumed exercise of options
(treasury stock method) - 2.1
Diluted earnings per share $701 317.6 $2.21
ACCOUNTS RECEIVABLE
Credit sales under department store credit programs as a percent of net sales
were 35.3% in 2003. This compares with 36.9% in 2002 and 39.0% in 2001. Net
accounts receivable consisted of:
(in millions) 2003 2002
Customer accounts receivable $1,703 $1,750
Other receivables 157 138
Total accounts receivable 1,860 1,888
Allowance for doubtful accounts (105) (112)
Accounts receivable, net $1,755 $1,776
The fair value of customer accounts receivable approximates their carrying
values at January 31, 2004, and February 1, 2003, because of the short-term
nature of these accounts. We do not sell or securitize customer accounts
receivables. The allowance for doubtful accounts is based upon a number of
factors including account write-off experience, account aging, and month-end
balances.
Net sales made through third-party debit and credit cards as a percent of net
sales were 43.6% in 2003, 41.1% in 2002, and 38.2% in 2001.
OTHER CURRENT ASSETS
Other current assets consisted of:
(in millions) 2003 2002
Prepaid expenses and supply inventories $87 $86
Current deferred income taxes - 13
Total $87 $99
34
OTHER ASSETS
Other assets consisted of:
(in millions) 2003 2002
Intangible pension asset $ 59 $ 71
Deferred debt expense 35 39
Other 39 21
Total $133 $131
ACCRUED EXPENSES
Accrued expenses consisted of:
(in millions) 2003 2002
Insurance costs $ 262 $ 257
Salaries, wages, and employee benefits 190 172
Advertising and other operating expenses 157 146
Interest and rent expense 135 134
Sales, use, and other taxes 116 104
Construction costs 55 68
Current deferred income taxes 33 -
Other 27 66
Total $ 975 $ 947
SHORT-TERM DEBT AND LINES OF CREDIT
Short-term debt for the last three years was:
(dollars in millions) 2003 2002 2001
Balance outstanding at year-end $ - $ 150 $ 78
Average balance outstanding 226 235 397
Average interest rate:
At year-end - 1.3% 1.8%
On average balance 1.3% 1.7% 3.0%
Maximum balance outstanding $ 473 $ 825 $1,090
The average balance of short-term debt outstanding, primarily commercial paper,
and the respective weighted average interest rates are based on the number of
days such short-term debt was outstanding during the year. The maximum balance
outstanding in 2003 consisted of $445 million of commercial paper and $28
million of short-term bank financing.
The company has $1.0 billion of credit under unsecured revolving facilities
consisting of a $700 million multi-year credit agreement expiring July 31, 2006,
and a $300 million 364-day credit agreement expiring August 2, 2004. These
credit agreements support the company's commercial paper borrowings. Financial
covenants under the credit agreements include a minimum fixed-charge coverage
ratio and a maximum debt-to-capitalization ratio. The company also maintains a
$28 million credit facility with a group of minority-owned banks.
35
LONG-TERM DEBT
Long-term debt and capital lease obligations were:
(in millions) 2003 2002
Unsecured notes and sinking-fund
debentures due 2004-2036 $3,970 $4,104
Mortgage notes and bonds due 2004-2020 18 21
Capital lease obligations 48 49
Total debt 4,036 4,174
Less: Current maturities of long-term debt 239 139
Long-term debt $3,797 $4,035
The weighted average interest rate of long-term debt was 8.0% at January 31,
2004, and 8.0% at February 1, 2003.
The annual maturities of long-term debt, including sinking fund requirements and
capital lease obligations, are $239 million, $155 million, $131 million, $260
million, and $177 million for 2004 through 2008. Maturities of long-term debt
are scheduled over the next 33 years, with the largest principal repayment in
any single year being $260 million. Interest payments on long-term debt are
typically paid on a semi-annual basis.
The net book value of property encumbered under long-term debt agreements was
$73 million at January 31, 2004.
The fair value of long-term debt (excluding capital lease obligations) was
approximately $4.7 billion and $4.8 billion at January 31, 2004, and February 1,
2003, respectively. The fair value was determined using borrowing rates for debt
instruments with similar terms and maturities.
During the third quarter of 2002, the company recorded $10 million of interest
expense related to the call of $200 million of 8.375% debentures due in 2022.
The debentures were called effective October 1, 2002.
During the third quarter of 2001, the company recorded interest expense of $5
million related to the call of $100 million of 9.875% debentures due in 2021.
These debentures were called effective October 9, 2001.
In February 2004, the company announced its intention to redeem $200 million of
8.375% debentures due in 2024. The debentures are expected to be called
effective August 1, 2004.
LEASE OBLIGATIONS
The company leases approximately 27% of its gross retail square footage. Rental
expense for the company's operating leases consisted of:
(in millions) 2003 2002 2001
Minimum rentals $107 $ 97 $80
Contingent rentals based on sales 12 13 15
Real property rentals 119 110 95
Equipment rentals 2 3 4
Total $121 $113 $99
36
Future minimum lease payments at January 31, 2004, were:
Capital Operating
(in millions) Leases Leases Total
2004 $ 7 $108 $115
2005 7 101 108
2006 7 92 99
2007 7 84 91
2008 7 74 81
After 2008 57 399 456
Minimum lease payments $ 92 $858 $950
The present value of minimum lease payments under capital leases was $48 million
at January 31, 2004, of which $2 million was included in current liabilities.
The present value of operating leases (minimum rents) was $568 million at
January 31, 2004. Property under capital leases was:
(in millions) 2003 2002
Cost $57 $57
Accumulated amortization (33) (31)
Total $24 $26
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
$825 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.
OTHER LIABILITIES
In addition to accrued pension and postretirement costs, other liabilities
consisted principally of deferred compensation liabilities of $144 million at
January 31, 2004, and $148 million at February 1, 2003. Under the company's
deferred compensation plan, eligible associates may elect to defer part of their
compensation each year into cash and/or stock unit alternatives. The company
issues shares to settle obligations with participants who defer in stock units,
and it maintains shares in treasury sufficient to settle all outstanding stock
unit obligations.
LITIGATION
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 consolidated financial statements taken
as a whole.
37
STOCK OPTION AND STOCK-RELATED PLANS
Under the company's common stock option plans, options are granted at market
price on the date of grant. Options to purchase may extend for up to 10 years,
may be exercised after stated intervals of time, and are conditional upon
continued active employment with the company. At the end of 2003, 17.1 million
shares were available for grant under the plans, of which 5.7 million could be
issued as restricted stock.
Effective February 2, 2003, the company adopted the fair value recognition
provisions of 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 options granted prior to February 2, 2003, are accounted for as provided
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no compensation cost has been recognized related to these stock options because
the option exercise price is fixed at the market price on the date of grant.
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, 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 and earnings per share for
2003, 2002, and 2001 if the fair value-based method had been applied
retroactively rather than prospectively to all outstanding unvested grants.
(millions, except per share)
2003 2002 2001
Net earnings, as reported $ 434 $ 542 $ 703
Add: Compensation expense for
employee stock options
included in net earnings,
net of tax 2 - -
Deduct: Total compensation expense
for employee stock options
determined under retroactive
fair value-based method,
net of tax 22 23 26
Pro forma net earnings $ 414 $ 519 $ 677
Earnings per share:
Basic - as reported (prospective) $ 1.44 $ 1.82 $ 2.31
Basic - pro forma (retroactive) $ 1.37 $ 1.74 $ 2.23
Diluted - as reported (prospective) $ 1.41 $ 1.76 $ 2.21
Diluted - pro forma (retroactive) $ 1.34 $ 1.69 $ 2.14
38
The company uses the Black-Scholes option pricing model to estimate the grant
date fair value of its 1996 and later option grants. The Black-Scholes
assumptions used were:
2003 2002 2001
Risk-free interest rate 3.1% 5.1% 4.6%
Expected dividend $0.96 $0.95 $0.94
Expected option life (years) 7 7 7
Expected volatility 32% 32% 32%
A combined summary of the stock option plans at the end of 2003, 2002, and
2001, and of the changes in outstanding shares within years, is presented below:
(shares in thousands) 2003 2002 2001
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Beginning of year 25,275 $34 22,474 $34 20,057 $33
Granted 4,237 22 5,131 35 4,688 36
Exercised (485) 25 (947) 26 (1,588) 26
Forfeited or expired (2,904) 33 (1,383) 36 (683) 35
End of year 26,123 $33 25,275 $34 22,474 $34
Exercisable at
end of year 16,082 $35 14,431 $35 11,049 $34
Fair value per share
of options granted $ 5 $11 $11
The following table summarizes information about stock options outstanding at
January 31, 2004:
Options Outstanding Options Exercisable
Average
Exercise Number Remaining Average Number Average
Price Outstanding Contractual Exercise Exercisable Exercise
Range (in thousands) Life Price (in thousands) Price
$21-30 10,459 7 $25 5,358 $26
31-35 6,024 7 34 2,826 33
36-45 9,640 6 41 7,898 42
26,123 6 $33 16,082 $35
The company is authorized to grant restricted stock to management associates
with or without performance restrictions. No monetary consideration is paid by
associates who receive restricted stock. Restricted stock vests over periods of
up to 10 years. In 2003 and 2002, the company granted 125,000 and 439,208
shares of restricted stock, respectively. The aggregate outstanding shares of
restricted stock as of January 31, 2004, and February 1, 2003, were 904,000 and
1,140,750, respectively. For restricted stock grants, compensation expense is
based upon the grant date market price and is recorded over the vesting period.
For performance-based restricted stock, compensation expense is recorded over
the performance period and is based on estimates of performance levels.
39
COMMON STOCK REPURCHASE PROGRAMS
In 2001, the company's board of directors authorized a common stock repurchase
program of $400 million. During 2001, the company completed this repurchase
program totaling 11.9 million shares of May common stock at an average price of
$34 per share.
In February 2004, the company's board of directors authorized a common stock
repurchase program of $500 million.
PREFERENCE STOCK
The company is authorized to issue up to 25 million shares of $0.50 par value
preference stock. As of January 31, 2004, there were 800,000 ESOP preference
shares authorized and 462,846 shares outstanding. Each ESOP preference share is
convertible into shares of May common stock, at a conversion rate of 33.787
shares of May common stock for each ESOP preference share. Each ESOP preference
share carries the number of votes equal to the number of shares of May common
stock into which the ESOP preference share could be converted. Dividends are
cumulative and paid semiannually at a rate of $38.025 per share per year. ESOP
preference shares have a liquidation preference of $507 per share plus
accumulated and unpaid dividends. ESOP preference shares may be redeemed, in
whole or in part, at the option of May or an ESOP preference shareowner, at a
redemption price of $507 per share, plus accumulated and unpaid dividends. The
redemption price may be satisfied in cash or May common stock or a combination
of both.
The ESOP preference shares are shown outside of shareowners' equity in the
consolidated balance sheet because the shares are redeemable by the holder or by
the company in certain situations.
SHAREOWNER RIGHTS PLAN
The company has a shareowner rights plan under which a right is attached to each
share of the company's common stock. The rights become exercisable only under
certain circumstances involving actual or potential acquisitions of May's common
stock by a person or by affiliated persons. Depending upon the circumstances,
the holder may be entitled to purchase units of the company's preference stock,
shares of the company's common stock, or shares of common stock of the acquiring
person. The rights will remain in existence until August 31, 2004, unless they
are terminated, extended, exercised, or redeemed.
40
QUARTERLY RESULTS (UNAUDITED)
Quarterly results are determined in accordance with annual accounting policies.
They include certain items based upon estimates for the entire year. The
quarterly information below is presented using the same classifications as the
annual financial statements. Summarized quarterly results for the last two years
were:
(in millions,
except per share) 2003
First Second Third Fourth Year
Net sales $2,873 $3,000 $2,976 $4,494 $13,343
Cost of sales:
Recurring 2,088 2,118 2,160 3,006 9,372
Restructuring markdowns - - 1 5 6
Selling, general, and
administrative expenses 640 657 658 731 2,686
Restructuring costs - 318 5 (1) 322
Pretax earnings 65 (173) 74 673 639
Net earnings 72 (110) 47 425 434
Earnings per share:
Basic $ 0.23 $(0.39) $ 0.15 $ 1.45 $ 1.44
Diluted 0.23 (0.39) 0.15 1.38 1.41
(in millions,
except per share) 2002
First Second Third Fourth Year
Net sales $3,096 $3,030 $2,992 $4,373 $13,491
Cost of sales:
Recurring 2,203 2,119 2,171 2,947 9,440
Restructuring markdowns - 20 3 - 23
Selling, general, and
administrative expenses 658 657 691 766 2,772
Restructuring costs 40 39 6 6 91
Pretax earnings 112 109 25 574 820
Net earnings 70 69 16 387 542
Earnings per share:
Basic $ 0.23 $ 0.22 $ 0.05 $ 1.32 $ 1.82
Diluted 0.23 0.22 0.05 1.26 1.76
41
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 January 31, 2004, and
February 1, 2003, and the related condensed consolidating statements of
earnings and cash flows for each of the three fiscal years in the
period ended January 31, 2004, are presented below.
Condensed Consolidating Balance Sheet
As of January 31, 2004
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 551 $ 13 $ - $ 564
Accounts receivable, net - 1,740 46 (31) 1,755
Merchandise inventories - 2,637 100 - 2,737
Other current assets - 75 32 (20) 87
Total current assets - 5,003 191 (51) 5,143
Property and equipment, at cost - 8,860 243 - 9,103
Accumulated depreciation - (3,882) (72) - (3,954)
Property and equipment, net - 4,978 171 - 5,149
Goodwill - 1,129 375 - 1,504
Intangible assets, net - 4 164 - 168
Other assets - 125 8 - 133
Intercompany (payable)
receivable (642) 161 3,706 (3,225) -
Investment in subsidiaries 4,981 - - (4,981) -
Total assets $ 4,339 $11,400 $ 4,615 $ (8,257) $12,097
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ - $ - $ - $ -
Current maturities of
long-term debt - 239 - - 239
Accounts payable - 1,095 91 5 1,191
Accrued expenses 4 917 110 (56) 975
Income taxes payable - 240 40 - 280
Total current liabilities 4 2,491 241 (51) 2,685
Long-term debt - 3,796 1 - 3,797
Intercompany note payable
(receivable) - 3,225 - (3,225) -
Deferred income taxes - 706 67 - 773
Other liabilities - 985 9 (487) 507
ESOP preference shares 235 - - - 235
Unearned compensation (91) (91) - 91 (91)
Shareowners' equity 4,191 288 4,297 (4,585) 4,191
Total liabilities and
shareowners' equity $ 4,339 $11,400 $ 4,615 $ (8,257) $12,097
42
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Fiscal Year Ended January 31, 2004
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 12,735 $ 1,918 $ (1,310) $ 13,343
Cost of sales:
Recurring - 9,185 1,477 (1,290) 9,372
Restructuring markdowns - 6 - - 6
Selling, general, and
administrative expenses - 2,434 286 (34) 2,686
Restructuring costs - 322 - - 322
Interest expense (income), net:
External - 318 - - 318
Intercompany - 285 (285) - -
Equity in earnings of subsidiaries (434) - - 434 -
Earnings (loss) before income taxes 434 185 440 (420) 639
Provision for income taxes - 48 157 - 205
Net earnings (loss) $ 434 $ 137 $ 283 $ (420) $ 434
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended January 31, 2004
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings (loss) $ 434 $ 137 $ 283 $ (420) $ 434
Equity in earnings of subsidiaries (434) - - 434 -
Depreciation and amortization - 525 39 - 564
Asset impairments - 317 - - 317
(Increase) decrease in
working capital (1) 425 15 3 442
Other, net (27) 27 (65) (17) (82)
Cash flows from
(used for) operations (28) 1,431 272 - 1,675
Investing activities:
Net additions to property and
equipment, and business
combinations - (484) (135) - (619)
Cash flows used for
investing activities - (484) (135) - (619)
Financing activities:
Net short-term debt repayments - (150) - - (150)
Net long-term debt repayments - (53) (25) - (78)
Net issuances (repurchases) of
common stock (39) 13 - - (26)
Dividend payments (295) 2 - - (293)
Intercompany activity, net 362 (245) (117) - -
Cash flows from (used for)
financing activities 28 (433) (142) - (547)
Increase (decrease) in cash and
cash equivalents - 514 (5) - 509
Cash and cash equivalents,
beginning of year - 37 18 - 55
Cash and cash equivalents,
end of year $ - $ 551 $ 13 $ - $ 564
43
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 - 1,766 46 (36) 1,776
Merchandise inventories - 2,787 70 - 2,857
Other current assets - 79 23 (3) 99
Total current assets - 4,669 157 (39) 4,787
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 3,617 (3,200) -
Investment in subsidiaries 4,824 - - (4,824) -
Total assets $ 4,153 $11,514 $ 4,397 $ (8,063) $12,001
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 150 $ - $ - $ 150
Current maturities of
long-term debt - 139 - - 139
Accounts payable - 1,021 80 - 1,101
Accrued expenses 5 890 88 (36) 947
Income taxes payable - 244 23 (3) 264
Total current liabilities 5 2,444 191 (39) 2,601
Long-term debt - 4,034 1 - 4,035
Intercompany note payable
(receivable) - 3,200 - (3,200) -
Deferred income taxes - 646 64 - 710
Other liabilities - 970 10 (473) 507
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 $11,514 $ 4,397 $ (8,063) $12,001
44
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Fiscal Year Ended February 1, 2003
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 12,978 $ 1,865 $ (1,352) $13,491
Cost of sales:
Recurring - 9,294 1,477 (1,331) 9,440
Restructuring markdowns - 23 - - 23
Selling, general, and
administrative expenses - 2,563 245 (36) 2,772
Restructuring costs - 91 - - 91
Interest expense (income), net:
External - 345 - - 345
Intercompany - 284 (284) - -
Equity in earnings of subsidiaries (542) - - 542 -
Earnings (loss) before income taxes 542 378 427 (527) 820
Provision for income taxes - 123 155 - 278
Net earnings (loss) $ 542 $ 255 $ 272 $ (527) $ 542
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended February 1, 2003
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings (loss) $ 542 $ 255 $ 272 $ (527) $ 542
Equity in earnings of subsidiaries (542) - - 542 -
Depreciation and amortization - 522 35 - 557
(Increase) decrease in
working capital (1) 191 22 (1) 211
Other, net (170) 428 (94) (14) 150
Cash flows from
(used for) operations (171) 1,396 235 - 1,460
Investing activities:
Net additions to property and
equipment, and business
combinations - (745) (45) - (790)
Cash flows used for
investing activities - (745) (45) - (790)
Financing activities:
Net short-term debt issuances - 72 - - 72
Net long-term debt repayments - (433) (1) - (434)
Net issuances (repurchases) of
common stock (22) 8 - - (14)
Dividend payments (294) 3 - - (291)
Intercompany activity, net 487 (300) (187) - -
Cash flows from (used for)
financing activities 171 (650) (188) - (667)
Increase in cash and
cash equivalents - 1 2 - 3
Cash and cash equivalents,
beginning of year - 36 16 - 52
Cash and cash equivalents,
end of year $ - $ 37 $ 18 $ - $ 55
45
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Fiscal Year Ended February 2, 2002
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 13,562 $ 1,647 $ (1,326) $13,883
Cost of sales - 9,586 1,358 (1,312) 9,632
Selling, general, and
administrative expenses - 2,637 151 (30) 2,758
Interest expense (income), net:
External - 355 (1) - 354
Intercompany - 284 (284) - -
Equity in earnings of subsidiaries (703) - - 703 -
Earnings (loss) before income taxes 703 700 423 (687) 1,139
Provision for income taxes - 280 156 - 436
Net earnings (loss) $ 703 $ 420 $ 267 $ (687) $ 703
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended February 2, 2002
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings (loss) $ 703 $ 420 $ 267 $ (687) $ 703
Equity in earnings of subsidiaries (703) - - 703 -
Depreciation and amortization - 536 23 - 559
(Increase) decrease in
working capital (1) 272 47 - 318
Other, net 193 8 (121) (16) 64
Cash flows from operations 192 1,236 216 - 1,644
Investing activities:
Net additions to property
and equipment, and business
combinations - (1,029) (152) - (1,181)
Cash flows used for
investing activities - (1,029) (152) - (1,181)
Financing activities:
Net short-term debt issuances - 78 - - 78
Net long-term debt issuances - 74 (2) - 72
Net issuances (repurchases) of
common stock (432) 12 - - (420)
Dividend payments (300) 3 - - (297)
Intercompany activity, net 540 (475) (65) - -
Cash flows used for
financing activities (192) (308) (67) - (567)
Decrease in cash and
cash equivalents - (101) (3) - (104)
Cash and cash equivalents,
beginning of year - 137 19 - 156
Cash and cash equivalents,
end of year $ - $ 36 $ 16 $ - $ 52
46
SCHEDULE II
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE FISCAL YEARS ENDED JANUARY 31, 2004
(millions)
Charges
to costs
and
Balance expenses Balance
beginning and other Deductions end of
of period adjustments (a) period
FISCAL YEAR ENDED
January 31, 2004
Allowance for
uncollectible
accounts $ 112 $115 $(122) $105
FISCAL YEAR ENDED
February 1, 2003
Allowance for
uncollectible
accounts $ 90 $124 $(102) $112
FISCAL YEAR ENDED
February 2, 2002
Allowance for
uncollectible
accounts $ 76 $117 $(103) $ 90
(a) Write-off of accounts determined to be uncollectible, net of recoveries of
$24 million in 2003, $25 million in 2002, and $24 million in 2001.
47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The company had no disagreements with its accountants during the last two
fiscal years. On April 10, 2002, the company engaged Deloitte & Touche LLP to
act as its independent auditors as successor to Arthur Andersen LLP. All
information relating to such change in accountants is incorporated by reference
from the company's Current Report on Form 8-K, dated April 12, 2002.
Item 9A - Disclosure Controls and Procedures.
As of the period covered by this annual report on Form 10-K, 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 III
Items 10, 11, 12, 13, 14. Directors and Executive Officers of May, Executive
Compensation, Security Ownership of Certain
Beneficial Owners and Management, Certain
Relationships and Related Transactions, Principal
Accounting Fees and Services
Pursuant to paragraph G (Information to be Incorporated by Reference) of the
General Instructions to Form 10-K, the information required by Items 10, 11,
12, 13, and 14 (other than information about executive officers of May and its
Code of Ethics) is incorporated by reference from the definitive proxy
statement for the registrant's 2004 Annual Meeting of Shareowners to be filed
with the commission pursuant to Regulation 14A. Information about executive
officers of May and May's Code of Ethics is set forth in Part I of this Form
10-K, under the heading "Items 1. and 2. Business and Description of
Property."
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements. Page in
this Report
Report of Deloitte & Touche LLP,
Independent Auditors 18-19
Report of Arthur Andersen LLP,
Independent Auditors 19-20
Consolidated Statements of Earnings for
the three fiscal years ended
January 31, 2004 21
Consolidated Balance Sheets as of
January 31, 2004, and February 1, 2003 22
Consolidated Statements of Cash Flows
for the three fiscal years ended
January 31, 2004 23
Consolidated Statements of Shareowners'
Equity for the three fiscal years
ended January 31, 2004 24
Notes to Consolidated Financial Statements 25-46
48
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K (continued) Page in
this report
(2) Supplemental Financial Statement Schedule(for the
three fiscal years ended January 31, 2004):
Schedule II Valuation and Qualifying Accounts 47
(3) Exhibits: Location
3.1 Amended and Restated Certificate Incorporated
of Incorporation of May, by Reference
dated May 22, 1996 to Exhibit
4(a) of Post
Effective
Amendment No. 1
to Form S-8,
filed May 29,
1996.
3.2 Certificate of Amendment of the Incorporated by
Amended and Restated Certificate of Reference to
Incorporation, dated May 21, 1999 Exhibit 3(b) of
Form 10-Q filed
June 8, 1999.
3.3 By-Laws of May Incorporated by
Reference to
Exhibit 4.3 of
Form S-8 filed
February 20,
2003.
4.1 Rights Agreement, dated August Incorporated by
19, 1994 Reference to
Exhibit 1 to
Current Report
on Form 8-K,
dated September,
2, 1994.
4.2 Assignment and Assumption of the Incorporated by
Rights Agreement, dated May 24, 1996 Reference to
Exhibit 4(d) of
Post-Effective
Amendment No. 1
to Form S-8,
dated May 29,
1996.
10.1 1994 Stock Incentive Plan Incorporated by
Reference to
the Definitive
Exhibit 10.1 of
Form 10-K,filed
April 19, 2000.
10.2 Deferred Compensation Plan Incorporated by
Reference to
the Definitive
Exhibit 10.1 of
Form 10-K,filed
April 19, 2000.
49
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K (continued)
10.3 Executive Incentive Compensation Incorporated by
Plan for Corporate Executives Reference to
the Definitive
Proxy Statement
for the 2004
Annual Meeting
of Shareowners.
10.4 Form of Employment Agreement Incorporated by
Reference to
Exhibit 10.4 of
Form 10-K filed
April 19, 2000.
12 Computation of Ratio of Filed
Earnings to Fixed Charges herewith.
21 Subsidiaries of May Filed
herewith.
23 Independent Auditors' Consent Filed
herewith.
31.1 Certification Pursuant to Exchange Act Filed
13a-15 and 15d-15(e) herewith.
31.2 Certification Pursuant to Exchange Act Filed
13a-15 and 15d-15(e) herewith.
32 Certification Pursuant to Section 906 Filed
of the Sarbanes-Oxley Act of 2002 (18 herewith.
U.S.C. Section 1350, as adopted)
(b) Reports on Form 8-K
A report dated February 12, 2004, which furnished a company press
release announcing its financial results for the 13 and 52 weeks ended
January 31, 2004.
All other schedules and exhibits of May for which provision is made in the
applicable regulations of the Securities and Exchange Commission have been
omitted, as they are not required or are inapplicable or the information
required thereby has been given otherwise.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, May has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MAY DEPARTMENT STORES COMPANY
Date: March 26, 2004 By: /s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of May and in the
capacities and on the dates indicated.
Date Signature Title
Principal Executive Officer:
March 26, 2004 /s/ Eugene S. Kahn Director,
Eugene S. Kahn Chairman of the Board
and Chief Executive
Officer
Principal Financial and
Accounting Officer:
March 26, 2004 /s/ Thomas D. Fingleton Executive Vice
Thomas D. Fingleton President and Chief
Financial Officer
Directors:
March 26, 2004 /s/ John L. Dunham Director and
John L. Dunham President
March 26, 2004 /s/ R. Dean Wolfe Director and
R. Dean Wolfe Executive Vice
President
March 26, 2004 /s/ Marsha J. Evans Director
Marsha J. Evans
March 26, 2004 /s/ James M. Kilts Director
James M. Kilts
March 26, 2004 /s/ Russell E. Palmer Director
Russell E. Palmer
March 26, 2004 /s/ Michael R. Quinlan Director
Michael R. Quinlan
March 26, 2004 /s/ Joyce M. Roche' Director
Joyce M. Roche'
51
Exhibit 12
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE FISCAL YEARS ENDED JANUARY 31, 2004
(Dollars in Millions) Fiscal Year Ended
Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan 29,
2004 2003 2002 2001 2000
Earnings Available for Fixed Charges:
Pretax earnings $ 639 $ 820 $1,139 $1,402 $1,523
Fixed charges (excluding interest
capitalized and pretax preferred stock
dividend requirements) 367 405 411 406 346
Dividends on ESOP preference shares (18) (20) (22) (23) (24)
Capitalized interest amortization 10 9 8 8 7
998 1,214 1,536 1,793 1,852
Fixed Charges:
Gross interest expense (a) $ 345 $ 392 $ 401 $ 395 $ 340
Interest factor attributable to
rent expense 38 36 32 28 22
383 428 433 423 362
Ratio of Earnings to Fixed Charges 2.6 2.8 3.5 4.2 5.1
(a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt
discount and debt issue expense.
Exhibit 21
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF MAY
The corporations listed below are subsidiaries of May, and all are included in
the consolidated financial statements of May as subsidiaries (unnamed
subsidiaries, considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary):
Jurisdiction
in which
Name organized
The May Department Stores Company New York
May Merchandising Company Delaware
May Department Stores International, Inc. Delaware
May Capital, Inc. Delaware
Grande Levee, Inc. Nevada
Leadville Insurance Company Vermont
Snowdin Insurance Company Vermont
David's Bridal, Inc. Florida
After Hours Formalwear, Inc. Georgia
Priscilla of Boston, Inc. Delaware
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-42940 and 333-42940-01 of The May Department Stores Company on Form S-3 and
Registration Statements Nos. 333-59792, 333-76227, 333-00957, 333-103352 and
333-111987 of The May Department Stores Company on Form S-8 of our report dated
March 19, 2004, relating to the consolidated financial statements of The May
Department Stores Company and subsidiaries as of and for the years ended
January 31, 2004 and February 1, 2003 (which expresses an unqualified opinion
and 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 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), appearing in this Annual Report on Form 10-K of The May
Department Stores Company for the year ended January 31, 2004.
/s/Deloitte & Touche LLP
St. Louis, Missouri
March 25, 2004
Exhibit 31.1
CERTIFICATION
I, Eugene S. Kahn, certify that:
1. I have reviewed this annual report on Form 10-K 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: March 26, 2004 /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 annual report on Form 10-K 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: March 26, 2004 /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 Annual Report of The May Department Stores
Company (the "Company") on Form 10-K for the period ending
January 31, 2004, 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: March 26, 2004
/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