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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended May 1, 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)
(314) 342-6300
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 290,844,255 shares of common
stock, $.50 par value, as of May 1, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(millions)
May 1, May 3, Jan. 31,
2004 2003 2004
ASSETS
Current assets:
Cash and cash equivalents $ 438 $ 78 $ 564
Accounts receivable, net 1,528 1,571 1,755
Merchandise inventories 3,005 3,163 2,728
Other current assets 117 102 88
Total current assets 5,088 4,914 5,135
Property and equipment, at cost 9,154 9,390 9,103
Accumulated depreciation (4,054) (3,872) (3,954)
Property and equipment, net 5,100 5,518 5,149
Goodwill 1,504 1,441 1,504
Intangible assets, net 166 174 168
Other assets 126 131 133
Total assets $ 11,984 $ 12,178 $ 12,089
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 390 $ -
Current maturities of
long-term debt 147 170 239
Accounts payable 1,293 1,193 1,191
Accrued expenses 888 889 967
Income taxes payable 140 101 280
Total current liabilities 2,468 2,743 2,677
Long-term debt 3,788 3,936 3,797
Deferred income taxes 778 794 773
Other liabilities 504 501 507
ESOP preference shares 228 257 235
Unearned compensation - (91) (91)
Shareowners' equity 4,218 4,038 4,191
Total liabilities and
shareowners' equity $ 11,984 $ 12,178 $ 12,089
The accompanying notes to condensed consolidated financial
statements are an integral part of these balance sheets.
2
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(millions, except per share) 13 Weeks Ended
May 1, May 3,
2004 2003
Net sales $ 2,963 $ 2,873
Cost of sales:
Recurring 2,120 2,088
Restructuring markdowns 5 -
Selling, general, and
administrative expenses 639 640
Restructuring costs 2 -
Interest expense, net 76 80
Earnings before income taxes 121 65
Provision (credit) for income taxes 45 (7)
Net earnings $ 76 $ 72
Basic earnings per share $ .25 $ .23
Diluted earnings per share $ .24 $ .23
Dividends paid per common share $.24-1/4 $ .24
Weighted average shares outstanding:
Basic 291.4 289.8
Diluted 308.3 307.3
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
3
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(millions) 13 Weeks Ended
May 1, May 3,
2004 2003
Operating Activities:
Net earnings $ 76 $ 72
Adjustment for noncash items included in earnings:
Depreciation and other amortization 138 136
Intangible asset amortization 2 2
Working capital changes:
Accounts receivable, net 227 205
Merchandise inventories (277) (320)
Other current assets (29) 3
Accounts payable 102 92
Accrued expenses (73) (48)
Income taxes payable (140) (63)
Other, net 5 (25)
Cash flows from operations 31 54
Investing Activities:
Net additions to property and equipment (95) (186)
Cash flows used for investing activities (95) (186)
Financing Activities:
Net short-term debt issuances - 240
Net long-term debt repayments (9) (8)
Net issuances (purchases) of common stock 21 (4)
Dividend payments (74) (73)
Cash flows from (used for) financing activities (62) 155
Increase (decrease) in cash and cash equivalents (126) 23
Cash and cash equivalents,
beginning of period 564 55
Cash and cash equivalents,
end of period $ 438 $ 78
Cash paid during the period:
Interest $ 84 $ 104
Income taxes 175 76
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
4
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interim Results. The unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q of the
Securities and Exchange Commission and should be read in conjunction with the
Notes to Consolidated Financial Statements (pages 35-43) in the 2003 Annual
Report. In the opinion of management, this information is fairly presented
and all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the results for the interim periods have
been included; however, certain items are included in these statements based
on estimates for the entire year. Operating results of periods, which exclude
the Christmas season, may not be indicative of the operating results that may
be expected for the fiscal year.
Reclassifications. Certain prior period amounts have been reclassified to
conform with current year presentation.
Restructuring Costs. 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 $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, $335 million has been recognized to date, $7 million
of which was recognized in the first quarter of 2004.
The company is negotiating agreements with landlords and developers for each
store divestiture. Through the end of the 2004 first quarter, 15 stores have
been closed.
The significant components of the store divestiture costs and status of the
related liability are summarized below:
(millions) Total | Balance at
Charges | 2004 Payments Non-cash May 1,
to Date | Charge (Proceeds) Uses 2004
Asset impairments $ 317 | $ - $ - $ - $ -
Disposal (gains) losses (15)| (6) (18) 12 -
Inventory liquidation losses 11 | 5 5 - -
Severance benefits 9 | 3 3 - -
Other 13 | 5 5 - -
Total $ 335 | $ 7 $ (5) $ 12 $ -
Asset impairment charges were recorded to reduce store assets to their
estimated fair values because of the shorter period over which they will be
used. Estimated fair values were based on estimated market values of similar
assets. Disposal gains or losses are recognized as each store is divested.
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 May 1, 2004, severance benefits have
been paid to approximately 1,400 associates.
5
Income Taxes. The effective income tax rate for the first quarter of 2004 was
37.0% compared with (10.7)% for the first quarter of 2003. The change is due
to a $31 million tax credit recorded in the first quarter of 2003 upon the
resolution of various federal and state income tax issues. Excluding the $31
million tax credit, the company's first quarter 2003 estimated effective tax
rate was 37.0%.
Inventories. Merchandise inventories are principally valued at the lower of
LIFO (last-in, first-out) cost basis or market using the retail method. There
was no LIFO provision or credit in the first quarter of 2004 or 2003.
Pension Benefits. The components of net periodic benefit costs for the
company's pension plans for the first quarter 2004 and 2003 were:
(millions) Qualified Plan Nonqualified Plan
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
Service cost $ 14 $ 12 $ 1 $ 1
Interest cost 12 12 3 3
Expected return on asset (10) (8) - -
Net amortization (1) 3 6 2 1
Net periodic benefit cost $ 19 $ 22 $ 6 $ 5
(1) Prior service cost and actuarial gains and losses are amortized over the
remaining estimated service period.
The company did not make any contributions to its pension plans in the first
quarter of 2004. A contribution of approximately $75 million to the qualified
plan is expected in the fourth quarter of 2004.
Earnings per Share. The following tables reconcile net earnings and weighted
average shares outstanding to amounts used to calculate basic and diluted
earnings per share ("EPS") for the periods shown.
(millions, except per share)
13 Weeks Ended
May 1, 2004 May 3, 2003
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 76 $ 72
ESOP preference share
dividends (4) (5)
Basic EPS 72 291.4 $ .25 67 289.8 $ .23
ESOP preference shares 3 15.4 4 17.5
Assumed exercise of
options (treasury
stock method) - 1.5 - -
Diluted EPS $ 75 308.3 $ .24 $ 71 307.3 $ .23
6
Stock Compensation Plans. Effective February 2, 2003, the company adopted the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The
company adopted SFAS No. 123 using the prospective transition method, under
which all stock-based compensation granted after February 2, 2003 is expensed
using the fair value method.
Stock option expense is recorded over each option grant's vesting period,
usually four years. Accordingly, the cost related to stock-based employee
compensation included in net earnings, 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
the first quarter of 2004 and 2003 if the fair value-based method had been
applied retroactively rather than prospectively to all outstanding unvested
grants.
(millions, except per share) 13 Weeks Ended
May 1, May 3,
2004 2003
Net earnings, as reported $ 76 $ 72
Add: Compensation expense for
employee stock options
included in net earnings,
net of tax 1 -
Deduct: Total compensation expense
for employee stock options
determined under retroactive
fair value-based method,
net of tax (5) (7)
Pro forma net earnings $ 72 $ 65
Earnings per share:
Basic - as reported (prospective) $ 0.25 $ 0.23
Basic - pro forma (retroactive) $ 0.23 $ 0.21
Diluted - as reported (prospective) $ 0.24 $ 0.23
Diluted - pro forma (retroactive) $ 0.23 $ 0.21
Lease Obligations. The company is a guarantor with respect to certain lease
obligations of previously divested businesses. The leases, two of which
include potential extensions to 2087, have future minimum lease payments
aggregating approximately $817 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.
7
CONDENSED CONSOLIDATING FINANCIAL INFORMATION. The company ("Parent") has
fully and unconditionally guaranteed certain long-term debt obligations of its
wholly-owned subsidiary, The May Department Stores Company, New York
("Subsidiary Issuer"). Other subsidiaries of the Parent include May Department
Stores International, Inc. (MDSI), Leadville Insurance Company, Snowdin
Insurance Company, Priscilla of Boston, and David's Bridal, Inc. and
subsidiaries, including After Hours Formalwear, Inc.
Condensed consolidating balance sheets as of May 1, 2004, May 3, 2003, and
January 31, 2004, and the related condensed consolidating statements of
earnings and cash flows for the thirteen-week periods ended May 1, 2004 and
May 3, 2004 are presented below.
Condensed Consolidating Balance Sheet
As of May 1, 2004
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 420 $ 18 $ - $ 438
Accounts receivable, net - 1,511 48 (31) 1,528
Merchandise inventories - 2,900 105 - 3,005
Other current assets - 106 32 (21) 117
Total current assets - 4,937 203 (52) 5,088
Property and equipment, at cost - 8,886 268 - 9,154
Accumulated depreciation - (3,972) (82) - (4,054)
Property and equipment, net - 4,914 186 - 5,100
Goodwill - 1,129 375 - 1,504
Intangible assets, net - 4 162 - 166
Other assets - 117 9 - 126
Intercompany (payable)
receivable (659) 186 3,698 (3,225) -
Investment in subsidiaries 5,105 - - (5,105) -
Total assets $ 4,446 $11,287 $ 4,633 $ (8,382) $ 11,984
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ - $ - $ - $ -
Current maturities of
long-term debt - 147 - - 147
Accounts payable - 1,221 67 5 1,293
Accrued expenses - 819 126 (57) 888
Income taxes payable - 92 48 - 140
Total current liabilities - 2,279 241 (52) 2,468
Long-term debt - 3,788 - - 3,788
Intercompany note payable - 3,225 - (3,225) -
Deferred income taxes - 711 67 - 778
Other liabilities - 987 9 (492) 504
ESOP preference shares 228 - - - 228
Unearned compensation - - - - -
Shareowners' equity 4,218 297 4,316 (4,613) 4,218
Total liabilities and
shareowners' equity $ 4,446 $11,287 $ 4,633 $ (8,382) $11,984
8
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 1, 2004
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 2,756 $ 415 $ (208) $ 2,963
Cost of sales:
Recurring - 2,035 298 (213) 2,120
Restructuring markdowns - 5 - - 5
Selling, general, and
administrative expenses - 555 84 - 639
Restructuring costs - 2 - - 2
Interest expense (income), net:
External - 76 - - 76
Intercompany - 71 (71) - -
Equity in earnings of subsidiaries (76) - - 76 -
Earnings (loss) before income taxes 76 12 104 (71) 121
Provision for income taxes - 7 38 - 45
Net earnings (loss) $ 76 $ 5 $ 66 $ (71) $ 76
Condensed Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended May 1, 2004
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings (loss) $ 76 $ 5 $ 66 $ (71) $ 76
Equity in earnings of subsidiaries (76) - - 76 -
Depreciation and other amortization - 128 10 - 138
Intangible asset amortization - - 2 - 2
Increase in working capital (4) (180) (6) - (190)
Other, net 19 (15) 6 (5) 5
Cash flows from (used for)
operations 15 (62) 78 - 31
Investing activities:
Net additions to property
and equipment - (69) (26) - (95)
Cash flows used for
investing activities - (69) (26) - (95)
Financing activities:
Net short-term debt issuances - - - - -
Net long-term debt repayments - (9) - - (9)
Net issuances of common stock 12 9 - - 21
Dividend payments (74) - - - (74)
Intercompany activity, net 47 - (47) - -
Cash flow used for
financing activities (15) - (47) - (62)
Increase (decrease) in cash and
cash equivalents - (131) 5 - (126)
Cash and cash equivalents,
beginning of period - 551 13 - 564
Cash and cash equivalents,
end of period $ - $ 420 $ 18 $ - $ 438
9
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Balance Sheet
As of May 3, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 50 $ 28 $ - $ 78
Accounts receivable, net - 1,560 47 (36) 1,571
Merchandise inventories - 3,074 89 - 3,163
Other current assets - 76 26 - 102
Total current assets - 4,760 190 (36) 4,914
Property and equipment, at cost - 9,195 195 - 9,390
Accumulated depreciation - (3,817) (55) - (3,872)
Property and equipment, net - 5,378 140 - 5,518
Goodwill - 1,129 312 - 1,441
Intangible assets, net - 6 168 - 174
Other assets - 122 9 - 131
Intercompany (payable)
receivable (710) 299 3,611 (3,200) -
Investment in subsidiaries 4,915 - - (4,915) -
Total assets $ 4,205 $11,694 $ 4,430 $ (8,151) $12,178
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ - $ 390 $ - $ - $ 390
Current maturities of
long-term debt - 170 - - 170
Accounts payable - 1,121 72 - 1,193
Accrued expenses 1 832 92 (36) 889
Income taxes payable - 66 35 - 101
Total current liabilities 1 2,579 199 (36) 2,743
Long-term debt - 3,935 1 - 3,936
Intercompany note payable - 3,200 - (3,200) -
Deferred income taxes - 730 64 - 794
Other liabilities - 969 10 (478) 501
ESOP preference shares 257 - - - 257
Unearned compensation (91) (91) - 91 (91)
Shareowners' equity 4,038 372 4,156 (4,528) 4,038
Total liabilities and
shareowners' equity $ 4,205 $11,694 $ 4,430 $ (8,151) $12,178
10
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 3, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Net sales $ - $ 2,705 $ 420 $ (252) $ 2,873
Cost of sales - 2,028 312 (252) 2,088
Selling, general, and
administrative expenses - 581 65 (6) 640
Interest expense (income), net:
External - 80 - - 80
Intercompany - 71 (71) - -
Equity in earnings of subsidiaries (72) - - 72 -
Earnings (loss) before income taxes 72 (55) 114 (66) 65
Provision (credit) for income taxes - (49) 42 - (7)
Net earnings (loss) $ 72 $ (6) $ 72 $ (66) $ 72
Condensed Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended May 3, 2003
(Unaudited)
(millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 72 $ (6) $ 72 $ (66) $ 72
Equity in earnings of subsidiaries (72) - - 72 -
Depreciation and other amortization - 130 6 - 136
Goodwill and intangible amortization - - 2 - 2
Increase in working capital (5) (115) (10) (1) (131)
Other, net 39 (62) 3 (5) (25)
Cash flows from (used for)
operating activities 34 (53) 73 - 54
Investing activities:
Net additions to property
and equipment - (171) (15) - (186)
Cash flows used for
investing activities - (171) (15) - (186)
Financing activities:
Net short-term debt issuances - 240 - - 240
Net long-term debt repayments - (8) - - (8)
Net issuances (purchases)
of common stock (9) 5 - - (4)
Dividend payments (73) - - - (73)
Intercompany activity, net 48 - (48) - -
Cash flows from (used for)
financing activities (34) 237 (48) - 155
Increase in cash and
cash equivalents - 13 10 - 23
Cash and cash equivalents,
beginning of period - 37 18 - 55
Cash and cash equivalents,
end of period $ - $ 50 $ 28 $ - $ 78
11
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Balance Sheet
As of January 31, 2004
(Unaudited)
(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 - 2,633 95 - 2,728
Other current assets - 76 32 (20) 88
Total current assets - 5,000 186 (51) 5,135
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 $11,397 $ 4,610 $ (8,257) $12,089
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 4 914 105 (56) 967
Income taxes payable - 240 40 - 280
Total current liabilities 4 2,488 236 (51) 2,677
Long-term debt - 3,796 1 - 3,797
Intercompany note payable - 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 $11,397 $ 4,610 $ (8,257) $12,089
12
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
During the first quarter of 2004, net sales, net earnings, and earnings per
share increased over the first quarter 2003, continuing the performance
improvement that began in the fourth quarter of 2004.
First quarter 2004 net sales of $2.96 billion increased 3.1% over the 2003
first quarter. Store-for-store sales increased 1.7% for the quarter. First
quarter sales showed strong performance in ladies' accessories, footwear, and
sportswear, but lagged in children's, dresses and home furnishings.
Net earnings were $76 million, or $.24 per share for the quarter, a 5.6%
increase compared with net earnings of $72 million, or $.23 per share, for
the first quarter of 2003. As a percent of net sales, pretax earnings improved
from 2.3% in 2003 to 4.1% in 2004. This improvement is attributed to strong
margin performance and the continued positive effects of productivity
improvements implemented in 2003.
During the first quarter, we opened one new department store: a Hecht's store
in Wilmington, N.C. Seven additional department stores are planned for 2004.
During the quarter, we also closed 6 department stores we previously announced
would be divested. Our Bridal Group opened three David's Bridal stores and
three After Hours stores. The Bridal Group plans to open an additional 27
David's Bridal stores, 17 After Hours stores, and two Priscilla of Boston
stores by year end. At the end of the first quarter, we operated 439 department
stores, 213 David's Bridal stores, 457 After Hours Formalwear stores, and 10
Priscilla of Boston stores in 46 states, the District of Columbia, and Puerto
Rico.
Results of Operations
Net Sales. Net sales include merchandise sales and lease department income.
Store-for-store sales compare sales of stores open during both periods
beginning the first day a new store has prior-year sales and exclude sales of
stores closed during both periods. Net sales and related increases were as
follows:
(dollars in millions) Percent Store-for-Store
2004 2003 Increase Increase
First quarter $2,963 $2,873 3.1% 1.7%
The total net sales increase of $90 million for the 2004 first quarter was due
to a $48 million increase in store-for-store sales and $71 million of new store
sales, offset by decreases from divested stores.
13
The following table presents the statements of earnings as a percent of net
sales.
First Quarter
2004 2003
Net sales 100.0% 100.0%
Cost of sales:
Recurring 71.6 72.7
Restructuring markdowns 0.1 0.0
Selling, general, and
administrative expenses 21.5 22.3
Restructuring costs 0.1 0.0
Interest expense, net 2.6 2.7
Earnings before income taxes 4.1 2.3
Provision (credit) for income taxes 37.0* (10.7)*
Net earnings 2.6% 2.5%
* - Percent represents effective income tax rate.
Cost of Sales. Recurring cost of sales includes the cost of merchandise,
inbound freight, distribution expenses, buying, and occupancy costs.
Restructuring markdowns were incurred to liquidate inventory as stores to be
divested were closing.
For the 13 weeks ended May 1, 2004, recurring cost of sales as a percent of
net sales decreased 1.1% principally because of a 0.9% decrease in the cost of
merchandise and a 0.4% decrease in buying and occupancy costs.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses as a percent of net sales decreased from 22.3% in the
first quarter of 2003 to 21.5% in the first quarter of 2004 principally
because of a 0.7% decrease in payroll costs and a 0.2% decrease in advertising
costs.
Restructuring Costs. 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 $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, $335 million was recognized to date, $7
million of which was recognized in the first quarter of 2004.
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. The company is negotiating agreements with landlords and
developers for each store divestiture. Through the end of the 2004 first
quarter, 15 stores have been closed. Severance benefits are recognized as
each store is closed. Severance benefits of $9 million for approximately
1,400 associates and inventory liquidation and other net costs of $9 million
have been incurred to date. Remaining amounts will be recognized as each
store is divested.
14
Interest Expense. Components of net interest expense for the first quarter
were (millions):
2004 2003
Interest expense $ 82 $ 85
Interest income (5) -
Capitalized interest (1) (5)
Net interest expense $ 76 $ 80
Interest expense principally relates to long-term debt. The decrease in
interest expense for the first quarter of 2004 is due to lower overall
borrowings.
Short-term borrowings for the first quarter were (dollars in millions):
2004 2003
Average balance outstanding $ - $249
Average interest rate on
average balance - 1.3%
Income Taxes. The effective tax rate for the first quarter of 2004 was 37.0%,
compared with (10.7)% for the first quarter of 2003. The change is due to a
$31 million tax credit recorded in the first quarter of 2003 upon the
resolution of various federal and state income tax issues. Excluding the $31
million tax credit, the company's first quarter 2003 estimated effective tax
rate was 37.0%.
Trailing Years' Results. Operating results for the trailing years were as
follows (millions, except per share):
May 1, May 3,
2004 2003
Net sales $ 13,433 $ 13,268
Net earnings $ 438 $ 544
Diluted earnings per share $ 1.42 $ 1.76
Financial Condition
Cash Flows. Cash flows from operations were $31 million and $54 million in
the first quarter of 2004 and 2003, respectively. The 2004 decrease in
operating cash flows is primarily due to an increase in cash paid for income
taxes.
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 can borrow up to $1.0 billion under our credit agreements,
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. In
addition, we have filed with the Securities and Exchange Commission shelf
registration statements that enable us to issue up to $525 million of debt
securities.
Financial Ratios. Key financial ratios as of and for the thirteen weeks ended
May 1, 2004 and May 3, 2003 and as of and for the fifty-two weeks ended
January 31, 2004 are as follows:
May 1, May 3, Jan. 31,
2004 2003 2004
Current Ratio 2.1 1.8 1.9
Debt-Capitalization Ratio 46% 49% 46%
Fixed Charge Coverage 2.2x 1.6x 2.6x
15
Forward-looking Statements
Management's Discussion and Analysis contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. While such
statements reflect all available information and management's judgment and
estimates of current and anticipated conditions and circumstances and are
prepared with the assistance of specialists within and outside the company,
there are many factors outside of our control that have an impact on our
operations. Such factors include but are not limited to competitive changes,
general and regional economic conditions, consumer preferences and spending
patterns, availability of adequate locations for building or acquiring new
stores, our ability to hire and retain qualified associates, and our ability
to manage the business to minimize the disruption of sales and customer
service as a result of the restructuring activities. Because of these
factors, actual performance could differ materially from that described in the
forward-looking statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk primarily arises from changes in interest rates on
short-term debt. Short-term debt has generally been used to finance seasonal
working capital needs resulting in minimal exposure to interest rate
fluctuations. Long-term debt is at fixed interest rates. Our merchandise
purchases are denominated in United States dollars. Operating expenses of our
international offices located outside the United States are generally paid in
local currency and are not material. During the first three months of fiscal
2004 and fiscal 2003, we were not a party to any derivative financial
instruments.
Item 4 - Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation, under the supervision and with the participation of
the company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of
the Securities Exchange Act of 1934, as amended). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures are effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date the controls were
evaluated.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The company is involved in claims, proceedings, and litigation arising from
the operation of its business. The company does not believe any such claim,
proceeding, or litigation, either alone or in the aggregate, will have a
material adverse effect on the company's consolidated financial statements
taken as a whole.
16
Item 2 - Changes in Securities and Use of Proceeds
The following table provides information about common stock repurchases by the
company during the quarter ended May 1, 2004 (dollars in millions, except per
share, shares in thousands):
4 Weeks 5 Weeks 4 Weeks
Ended Ended Ended First
Feb. 28, Apr. 3, May 1, Quarter
Fiscal Period: 2004 2004 2004 Total
Total number of
shares purchased 0.0 600.0 0.0 600.0
Average price
paid per share $ - $35.28 $ - $35.28
Total number of
shares purchased
as part of publicly
announced plans or
programs 0.0 520.0 0.0 0.0
Approximate dollar
value of shares that
may yet be purchased
under the plan or
programs $500.0 $481.7 $481.7 $481.7
In February 2004, the company's board of directors authorized a common stock
repurchase program of $500 million. In the first quarter of 2004, the company
repurchased 520,000 shares of common stock under the board authorized
repurchase program and 80,000 shares of common stock in open-market
transactions outside of the program to be held in treasury to fund profit
sharing and incentive compensation plans and stock option exercises.
Item 3 - Defaults Upon Senior Securities - None.
Item 4 - Submission of Matters to a Vote of Security Holders - None.
Item 5 - Other Information - None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.3 - By-Laws of May
10.1 - 1994 Stock Incentive Plan
10.2 - Deferred Compensation Plan
12 - Computation of Ratio of Earnings to Fixed Charges
15 - Letter Regarding Unaudited Interim Financial Information
31.1 - Certification Pursuant to Exchange Act 13a-15 and 15d-15(e)
31.2 - Certification Pursuant to Exchange Act 13a-15 and 15d-15(e)
32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002(18 U.S.C. Section 1350, as adopted)
(b) Reports on Form 8-K
A report dated May 11, 2004, which furnished a company press release
announcing its financial results for the 13 weeks ended May 1, 2004.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MAY DEPARTMENT STORES COMPANY
(Registrant)
Date: June 2, 2004
/s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareowners of
The May Department Stores Company
We have reviewed the accompanying condensed consolidated balance sheets of
The May Department Stores Company and subsidiaries (the "Company") as of May
1, 2004 and May 3, 2003, and the related condensed consolidated statements of
earnings and cash flows for the thirteen-week periods then ended. These
interim financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and of
making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We have previously audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of January 31, 2004, and the related consolidated
statements of earnings, shareowners' equity, and cash flows for the year then
ended (not presented herein); and in our report dated March 19, 2004, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 31, 2004 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
St. Louis, Missouri
June 1, 2004
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 AND FOR THE
THIRTEEN WEEKS ENDED MAY 1, 2004 AND MAY 3, 2003
(dollars in millions)
13 Weeks Ended Fiscal Year Ended
May 1, May 3, Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
2004 2003 2004 2003 2002 2001 2000
Earnings Available for Fixed Charges:
Pretax earnings $ 121 $ 65 $ 639 $ 820 $1,139 $1,402 $1,523
Fixed charges (excluding interest
capitalized and pretax preferred
stock dividend requirements) 92 93 367 405 411 406 346
Dividends on ESOP preference shares (4) (5) (18) (20) (22) (23) (24)
Capitalized interest amortization 2 2 10 9 8 8 7
$ 211 $ 155 $ 998 $1,214 $1,536 $1,793 $1,852
Fixed Charges:
Gross interest expense (a) $ 84 $ 88 $ 345 $ 392 $ 401 $ 395 $ 340
Interest factor attributable to
rent expense 10 10 38 36 32 28 22
$ 94 $ 98 $ 383 $ 428 $ 433 $ 423 $ 362
Ratio of Earnings to Fixed Charges 2.2 1.6 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 15
June 1, 2004
The May Department Stores Company
St. Louis, Missouri
We have made a review, in accordance with standards of the Public Company
Accounting Oversight Board (United States), of the unaudited interim
condensed consolidated financial information of The May Department Stores
Company and subsidiaries (the "Company") for the thirteen week periods ended
May 1, 2004 and May 3, 2003, as indicated in our reports dated June 1, 2004
and May 29, 2003; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our reports referred to above, which are included in your
Quarterly Reports on Form 10-Q for the quarters ended May 1, 2004 and May 3,
2003, are incorporated by reference in Registration Statements Nos. 333-
59792, 333-76227, 333-00957, 333-103352 and 333-111987 on Form S-8 and
Registration Statements Nos. 333-42940 and 333-42940-01 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
St. Louis, Missouri
Exhibit 31.1
CERTIFICATION
I, Eugene S. Kahn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The May
Department Stores Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 2, 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 quarterly report on Form 10-Q of The May
Department Stores Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 2, 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 Quarterly Report of The May Department
Stores Company (the "Company") on Form 10-Q for the period ending
May 1, 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: June 2, 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