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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 000-26207

BELK, INC.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

      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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No o

      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 Exchange Act Rule 12b-2).     Yes x     No o

      The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are “affiliates” of the Registrant) as of August 2, 2003 (based on the price at which the common equity was last sold as of the last business day of the Company’s most recently completed second fiscal quarter) was $180,440,017. 51,999,326 shares of common stock were outstanding as of April 1, 2004, comprised of 50,942,382 shares of the registrant’s Class A Common Stock, par value $0.01, and 1,056,944 shares of the registrant’s Class B Common Stock, par value $0.01.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 2004 are incorporated herein by reference in Part III.

BELK, INC.

TABLE OF CONTENTS

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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS

      Certain statements made in this report, and other written or oral statements made by or on behalf of the Company, may constitute “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and the Company’s future performance, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. You can identify these forward-looking statements through our use of words such as “may,” “will,” “intend,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or other similar words. Forward-looking statements include information concerning possible or assumed future results from merchandising, marketing and advertising in our stores and through the internet, our ability to be competitive in the retail industry, our ability to execute profitability and efficiency strategies, our ability to execute our growth strategies, anticipated benefits from the consolidation of our operating divisions and distribution facilities, the expected benefit of our new systems and technology, the expected increase in our sales and revenues generated through our proprietary charge card program and the anticipated benefits from the Merchandising Restructuring (as described herein). These forward-looking statements are subject to certain risks and uncertainties that may cause our actual results to differ significantly from the results we discuss in such forward-looking statements. We believe that these forward-looking statements are reasonable. However, you should not place undue reliance on such statements.

      Risks and uncertainties that might cause our results to differ from those we project in our forward-looking statements include, but are not limited to:

	•	general economic and business conditions, both nationally and in our market areas;
	•	levels of consumer debt and bankruptcies;
	•	changes in interest rates;
	•	changes in buying, charging and payment behavior among our customers;
	•	the effects of weather conditions on seasonal sales in our market areas;
	•	seasonal fluctuations in net income due to increased consumer spending during the holiday season, timing of new store openings, merchandise mix, the timing and level of markdowns and historically low first quarter results;
	•	competition among department and specialty stores and other retailers, including luxury goods retailers, general merchandise stores, internet retailers, mail order retailers and off-price and discount stores;
	•	the competitive pricing environment within the department and specialty store industries;
	•	our ability to compete on merchandise mix, quality, style, service, convenience and credit availability;
	•	the effectiveness of our advertising, marketing and promotional campaigns;
	•	our ability to determine and implement appropriate merchandising strategies, merchandise flow and inventory turnover levels;
	•	our realization of planned synergies and cost savings through the consolidation of our distribution facilities and functions;
	•	the effectiveness of our e-commerce and gift registry strategies;
	•	our ability to contain costs;
	•	our ability to accomplish our logistics and distribution strategies;
	•	the effectiveness of our merchandising and sales promotion consolidation and the implementation of our planning and allocation functions;
	•	changes in our business strategy or development plans;

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	•	our ability to hire and retain key personnel;
	•	changes in laws and regulations, including changes in accounting standards, tax statutes or regulations, environmental and land use regulations, and uncertainties of litigation; and
	•	our ability to obtain capital to fund any growth or expansion plans.

      Our other filings with the Securities and Exchange Commission (“SEC”) may contain additional information concerning the risks and uncertainties listed above, and other factors you may wish to consider. Upon request, we will provide copies of these filings to you free of charge.

      Our forward-looking statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, even if future events or new information may impact the validity of such statements.

PART I

General

      Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the largest privately owned department store business in the United States, with total revenues of approximately $2.26 billion for the fiscal year ended January 31, 2004. The Company and its predecessors have been successfully operating department stores since 1888 by seeking to provide superior service and merchandise that meets customers’ needs for fashion, value and quality.

      The Company’s fiscal year ends on the Saturday closest to each January 31. All references to “fiscal year 2004” refer to the fiscal year ending January 31, 2004; references to “fiscal year 2003” refer to the period ending February 1, 2003; references to “fiscal year 2002” refer to the period ending February 2, 2002; and references to “fiscal year 2001” refer to the period ending February 3, 2001.

      As of the end of its fiscal year 2004, the Company operated 221 retail department stores in 13 states primarily in the southeastern United States. Belk stores seek to provide customers the convenience of one-stop shopping, with an appealing merchandise mix and extensive offerings of brands, styles, assortments and sizes. Belk stores sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections at better values. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.

      Although the Company operates 50 Belk stores that exceed 100,000 square feet in size, most Belk stores range in size from 50,000 to 80,000 square feet. Most of the Belk stores are anchor tenants in major regional malls and shopping centers, primarily in medium and smaller markets. In addition to department stores, the Company operates two stores that sell limited selections of cosmetics, hosiery and accessories for women under the “Belk Express” store name. In the aggregate, the Belk stores occupy approximately 14.7 million square feet of selling space.

      Management of the Belk stores is organized into four regional operating divisions, with each unit headed by a division chairman and a director of stores. Each division supervises a number of stores and maintains an administrative office in the markets served by the division. Division offices provide overall management and support for the Belk stores in their regions. These divisions are not considered segments for reporting purposes.

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      The Company was incorporated in Delaware in 1997. The Company’s principal executive offices are located at 2801 West Tyvola Road, Charlotte, North Carolina 28217-4500, and its telephone number is (704) 357-1000.

Business Strategy

      Belk’s mission is to be the dominant department store in its markets by selling merchandise to customers that meets their needs for fashion, selection, value, quality and service. To achieve this mission, Belk’s business strategy includes five key elements: (1) a target customer focus; (2) focused merchandise assortments; (3) compelling sales promotions; (4) distinctive customer service; and (5) a winning store and market strategy.

      Target Customer Focus. Belk’s primary target customer is a 35-to-54-year-old female with middle to upper level family income who works outside of the home; who buys for herself and her family; and who is style-conscious and seeks updated fashions and quality merchandise. The Company maintains its target customer focus by conducting ongoing research to ascertain and update target customer characteristics and needs, such as annual customer satisfaction surveys and customer focus group studies. The Company seeks to maximize customer convenience and satisfaction through effective inventory management that ensures consistently high inventory levels of desired merchandise, effective store layout, merchandise signing and visual display, and quick and efficient transactions at the point of sale. Additionally, the Company strives to attract and retain well-qualified associates who provide a high level of friendly, personal service to enhance the customer’s shopping experience.

      Focused Merchandise Assortments. The Company has positioned itself through its target customer focus to take advantage of significant sales growth opportunities in its women’s apparel (including special sizes), accessories and shoe businesses as well as its home business. The Company has launched merchandise initiatives focused on providing its target customer with in-depth assortments of updated, branded fashions that meet customers’ lifestyle needs for casual, career and social occasions.

      Compelling Sales Promotions. Belk’s sales promotion strategy focuses on promoting merchandise that the target customer desires, offering her compelling price values, and providing adequate inventory to support all sales promotion events.

      Distinctive Customer Service. The Company’s customer research has revealed that Belk generally differentiates itself from competitors through the high level of service and amenities that its stores provide. Belk intends to continue its tradition of employing sales associates who are knowledgeable about the merchandise they sell, approach customers promptly, help when needed and provide quick checkout.

      Winning Store and Market Strategy. The Company has a store and market strategy focused on maximizing return on investment and improving its competitive position. The approach to investment in new markets and the expansion and renovation of existing facilities includes a disciplined real estate evaluation process using rigorous financial and strategic measures and investment guidelines.

Productivity and Efficiency Strategy

      The Company seeks to improve profitability through developing and implementing initiatives designed to improve productivity and efficiency throughout the organization. Such initiatives include a “store-ready” merchandise program that speeds delivery of merchandise to the sales floor, the expanded implementation of a “smart store” concept that enhances efficiencies on the sales floor through the use of centralized cash register and gift wrap stands, and the use of computer-based training programs.

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      During fiscal year 2004, a Company-wide profit improvement initiative begun in fiscal year 2002 continued to produce substantial expense savings and gross margin improvement along with gains in efficiency and productivity. Associates from throughout the Company contributed numerous ideas, many of which were implemented to help reduce costs and boost profits across all areas of the business. The profit improvement efforts had a significant positive impact on the Company’s overall financial results for the year. Integrating expense management and profit improvement strategies, processes and programs into operations throughout the Company will continue to be a top priority.

Growth Strategy

      The Company intends to continue to open new stores selectively in new and existing markets in order to increase sales, market share and customer loyalty. As the consolidation of the department store industry continues, the Company also will consider store acquisitions that offer opportunities for growth in existing and contiguous markets.

      Management believes that significant opportunities for growth exist in Belk markets where the Belk name and reputation are well known and in contiguous markets where Belk can distinguish its stores from the competition. Although the Company will continue to take advantage of prudent opportunities to expand into large markets, the Company will focus its expansion in medium-sized markets with store units in the 50,000 to 80,000 square-foot size range.

      In determining where to open new stores in the future, the Company’s management will evaluate demographic information such as income, education levels, age and occupation, as well as the availability of prime real estate locations, existing and potential competitors and the number of Belk stores in the same or contiguous market areas. Management will also analyze store and market sales and income data and seek to identify economies of scale available in advertising, distribution and other expenses as part of its process for determining new store sites and markets for expansion.

      In fiscal year 2004, the Company opened eight new stores that have a combined selling space of approximately 465,000 square feet and completed major renovations of four existing stores.

      In fiscal year 2005, Belk plans to open fourteen new stores that will have a combined selling space of approximately 964,000 square feet. The Company also will complete expansions of three existing stores and major renovations of five existing stores.

      New stores and major renovations completed in fiscal year 2004 include:

New Stores

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Renovations

      New stores, store expansions and major store renovations scheduled for completion in fiscal year 2005 include:

New Stores

Store Expansions

Store Renovations

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Merchandising

      Belk stores feature quality name brand and private label merchandise in moderate to better price ranges, providing fashion, selection and value to customers. The merchandise mix is targeted to middle and upper income customers shopping for their families and homes, and includes a wide selection of fashion apparel, accessories and shoes for women, men and children, as well as cosmetics, home furnishings, housewares, gift and guild, jewelry, and other types of department store merchandise. The goal is to position Belk stores as the leaders in their markets in providing updated, fashionable assortments with depth in style, selection and value.

      Belk stores offer complete assortments of many national brands. The Company has enjoyed excellent long-term relationships with many top apparel and cosmetics suppliers and is often the exclusive distributor of apparel, accessories and cosmetic lines in its markets. These exclusive distribution arrangements enhance the Belk stores’ image as fashion leaders and enable Belk to offer customers exclusive and original merchandise that is not generally available in other stores in their markets.

      Belk stores also offer exclusive private brands in selected merchandise categories that provide customers with merchandise that is comparable in quality and style with national brands at substantial savings. Belk private brands, which include Kim Rogers, Madison Studio, J. Khaki, Meeting Street, Saddlebred and Home Accents, provide outstanding value for customers and set Belk apart from its competitors. During fiscal year 2004, the Company significantly expanded its private brand business as a percentage of total sales and achieved excellent sales and gross margin performance.

The Merchandising Restructuring

      In August 2002, the Company consolidated its merchandising, marketing and sales promotion functions into a single organization located at the Company’s corporate offices in Charlotte, NC. The new organization includes a central planning and allocation function that oversees the distribution and allocation of merchandise to all Belk stores. The consolidation has enabled the Company to achieve more unified and consistent execution of its merchandising, marketing and advertising strategies and provide more focused merchandise assortments at the store level. The consolidation has also produced cost savings and greater operating efficiencies. The consolidation was substantially completed in the third quarter of fiscal year 2003.

Marketing

      The Company employs strategic marketing initiatives and strategies to develop and enhance the equity of the Belk brand, strengthen its relationship with and become the desired destination for the target customer, and create and strengthen “one-to-one” relationships with customers. The Company’s primary marketing strategy emphasizes direct communications with customers through personal contact and the use of multi-faceted advertising, marketing and sales promotion programs. This strategy involves extensive mass media print and broadcast advertising, direct mailings to charge customers, comprehensive store visual merchandising and signing, in-store special events (e.g., trunk shows, celebrity and designer appearances, Charity Day and Seniors’ Day) and magazine, newspaper and billboard advertising. The Company also provides information about the Company and its bridal gift registry on the www.belk.com website.

      Major sales promotions and sales events are planned and implemented in Belk stores throughout the year. The Company regularly produces advertising circulars that are distributed to millions of customers via newspaper inserts or direct mailings. The Company uses creative advertising that effectively communicates the Company’s merchandise offerings, fashion image and reputation for superior service to store customers in a variety of media, including customized advertising based upon the particular merchandise needs and shopping preferences of its customers.

Gift Cards

      The Company’s “Great Gifts Card” program provides a convenient option for customer gift-giving and enables stores to issue electronic credits to customers in lieu of cash refunds for merchandise returned without

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Salons and Spas

      The Company owns and operates twelve hair styling salons in various store locations, nine of which also offer spa services. The hair salons offer the latest hair styling services as well as wide assortments of top brand name beauty products, including Aveda. The spas offer massage therapy, skincare, nail treatments and other specialized services. The salons and spas in the Belk stores at SouthPark Mall in Charlotte, NC, Asheville Mall in Asheville, NC, Columbiana Centre in Columbia, SC, Triangle Towne Center in Raleigh, NC, the Streets at Southpoint in Durham, NC, and Westfield Shoppingtown/Independence Mall in Wilmington, NC operate under the name of “Carmen! Carmen! Prestige Salon and Spa at Belk.” In fiscal year 2005, the Company plans to open one additional “Carmen! Carmen! Prestige Salon and Spa at Belk” at Belk of Coastal Grand Myrtle Beach, Myrtle Beach, SC.

Belk Gift Registry

      The Company’s gift registry offers a wide assortment of bridal merchandise that can be registered and purchased online at www.belk.com or in local Belk stores and shipped directly to the customer or gift recipient. The gift registry is a fully integrated system that combines the best of Internet technology and in-store shopping. Brides and engaged couples can conveniently create their gift registry and make selections through www.belk.com from a home computer, or they can go to a Belk store where a certified professional bridal consultant can provide assistance using the store’s online “Great Gifts” kiosk. In the Belk stores that have kiosks, brides and engaged couples can use a portable scanning device, which enables them to quickly and easily enter information on their gift selections directly into the registry system.

Belk Proprietary Charge Programs

      The Company offers its customers the convenience of paying for their purchases on credit using a variety of proprietary charge payment programs, including a 30-day revolving account, an interest-free 30-60-90 day account, an interest-free table top plan (for china, crystal, silver and other gift purchases) and an interest-free fine jewelry plan.

      The Company promotes the development of new and existing cardholder business through targeted marketing campaigns and active solicitation efforts within Belk stores. The Company’s “Belk Select” affinity program is designed to recognize and reward its best Belk charge customers, attract profitable new customers, increase sales from existing customers and expand the active Belk credit card account base. The program offers special benefits and services to charge customers whose Belk charge purchases total $650 or more in a calendar year. The benefits and services include $5 in free “Belk Reward Dollars” for every $150 charged to their Belk Select card which can be applied toward future Belk purchases, “Make Your Own Sale” certificates, free deluxe gift wrapping, free basic alterations, choice of billing dates, no annual fee, and notifications of special savings, sales events and courtesy shopping days.

      The Company’s charge cards are issued through Belk National Bank, a subsidiary of the Company located in Lawrenceville, Georgia.

Systems and Technology

      Belk makes significant investments in technology and information systems in order to drive sales, improve operating efficiency and support its overall business strategy. The Company has prioritized the development and implementation of computerized systems to support its merchandising, marketing, sales floor, inventory management, logistics, finance, operations and human resources initiatives. These systems enable management quickly to identify sales trends, order, track and distribute merchandise, manage markdowns and monitor merchandise mix and inventory levels. During fiscal year 2004, the Company began development of a new information system to support its merchandise planning and allocation organization; began development of a coupon management system that enables the scanning of bar coded coupons at the point of sale; expanded

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Inventory Management and Logistics

      The Company operates a 371,000 square foot Central Distribution Center in Blythewood, SC that incorporates the latest distribution center design, technology and equipment and facilitates the automation of many labor-intensive processes. During fiscal year 2004, the Company continued its focus on increasing the number of merchandise vendors certified for cross-dock shipments and on ensuring ongoing vendor compliance with “floor ready” industry standards. The Company reduced on-hand carton inventory and aging, decreased the number of freight carriers used, and continued to enforce new standards of performance.

      The Central Distribution Center, working in conjunction with the Company’s inventory management systems and “floor ready” initiatives, continued to reduce merchandise cycle time, improve merchandise margin and reduce expenses. The Company’s “Store Ready” processes for store merchandise receiving enable stores to receive and process merchandise shipments and move goods to the sales floor quickly and efficiently, thus ensuring the ongoing timely delivery of fresh goods to meet customers’ shopping needs.

Non-Retail Businesses

      Several of the Company’s subsidiaries engage in businesses that indirectly or directly support the operations of the retail department stores. The non-retail businesses include United Electronic Services, Inc. (“UES”), a wholly owned subsidiary of Belk, Inc., which provides equipment maintenance services, primarily for cash registers, but also for other equipment. UES provides these services to the Company pursuant to contracts with BSS.

Industry and Competition

      The Company operates retail department stores in the highly competitive retail apparel industry. Management of the Company believes that the principal competitive factors for retail department store operations include merchandise selection, quality, value, customer service and convenience. The Company believes its stores are strong competitors in all of these areas. The Company’s primary competitors are traditional department stores, mass merchandisers, national apparel chains, individual specialty apparel stores and direct merchant firms, including Federated Department Stores, Inc., Wal-Mart Stores, Inc., Target Corp., Kohl’s Corporation, The May Department Stores Company, Dillard’s, Inc., Saks, Inc., Sears Roebuck & Co. and J.C. Penney Company, Inc.

Trademarks and Service Marks

      Belk Stores Services, Inc. owns all of the principal trademarks and service marks now used by the Company, including “Belk” and “All for You”. These marks are registered with the United States Patent and Trademark Office. The term of each of these registrations is generally ten years, and they are generally renewable indefinitely for additional ten-year periods, so long as they are in use at the time of renewal. Most of the trademarks, trade names and service marks employed by the Company are used in the Company’s private brands program. The Company intends to vigorously protect its trademarks and service marks and initiate appropriate legal action whenever necessary.

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Seasonality and Quarterly Fluctuations

      Due to the seasonal nature of the retail business, the Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenues, operating income and net income. A disproportionate amount of the Company’s revenues and a substantial amount of the Company’s operating and net income are realized during the fourth quarter, which includes the Christmas selling season. Working capital requirements also fluctuate during the year, increasing somewhat in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the Christmas selling season when the Company carries higher inventory levels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

Associates

      As of January 31, 2004, the Company had approximately 17,200 full-time and part-time associates. Because of the seasonal nature of the retail business, the number of associates fluctuates from time to time and is highest during the holiday shopping period in November and December. The Company as a whole considers its relations with associates to be good. None of the associates of the Company are represented by unions or subject to collective bargaining agreements.

Where You Can Find More Information

      The Company makes available free of charge through its website, www.belk.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.

Store Locations

      As of January 31, 2004, the Company operated a total of 221 retail stores, with approximately 14.7 million selling square feet, in the following states:

      Belk stores are located in regional malls (117), strip shopping centers (89), “power” centers (6) and “lifestyle” centers (4). Additionally, there are five freestanding stores. Approximately 82% of the gross square footage of the typical Belk store is devoted to selling space to ensure maximum operating efficiencies. A majority of the stores are either new or have undergone renovations within the past ten years. The new and renovated stores feature the latest in retail design, including updated exteriors and interiors. The interiors are designed to create an exciting, comfortable and convenient shopping environment for customers. They include the latest lighting and merchandise fixturing, as well as quality decorative floor and wall coverings and other special decor. The store layout is designed for ease of shopping, and store signage is used to help customers identify and locate merchandise.

      As of January 31, 2004, the Company owned 60 store buildings, leased 147 store buildings under operating leases and owned 24 store buildings under ground leases. The typical operating lease has an initial term of between 15 and 20 years, with four renewal periods of five years each, exercisable at the Company’s option. The typical ground lease has an initial term of 20 years, with a minimum of four renewal periods of five years each, exercisable at the Company’s option.

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Non-Store Facilities

      The Company also owns or leases the following distribution centers, division offices and headquarters facilities:

Other

      The Company owns or leases various other real properties, including primarily former store locations and distribution centers. Such property is not material, either individually or in the aggregate, to the Company’s consolidated financial position or results of operations.

      The Company is engaged from time to time in various legal actions in the ordinary course of its business. Management of the Company believes that none of the various actions and proceedings involving the Company will have a material adverse effect on the Company’s consolidated financial position or results of operations.

ITEM 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of the security holders during the fourth quarter of the fiscal year ended January 31, 2004.

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PART II

      Neither the Class A Common Stock, par value $.01 per share (the “Class A Common Stock”) nor the Class B Common Stock, par value $.01 per share (the “Class B Common Stock”) was listed or traded on a public market during any part of fiscal year 2004. There is no established public trading market for either class of the Registrant’s common stock. As of January 31, 2004, there were approximately 560 holders of record of the Class A Common Stock and 261 holders of record of Class B Common Stock. On March 10, 2004, the Company declared a regular dividend of $0.275 and a special one-time dividend of $0.20 on each share of the Class A and Class B Common Stock outstanding on that date. On March 13, 2003, the Company declared a regular dividend of $0.275 on each share of the Class A and Class B Common Stock outstanding on that date. The amount of dividends paid out with respect to fiscal year 2005 and each subsequent year will be determined at the sole discretion of the Board of Directors based upon the Company’s results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. For a discussion of the Company’s debt facilities and their restrictions on dividend payments, see “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(1)	Loss from discontinued operations represents the operating results of TAGS, LLC, which owned and operated outlet stores.

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(2)	On a 52 versus 52 week basis, comparable store net revenues decreased 0.7% in fiscal year 2002 and increased 3.2% in fiscal year 2001. Comparable store net revenue includes sales from stores open during the entire fiscal year in both the current and prior year, excluding stores that have been expanded in either fiscal year.

Overview

      Belk, together with its subsidiaries, is the largest privately owned department store business in the United States, with total revenues of approximately $2.26 billion for the fiscal year ended January 31, 2004. The Company and its predecessors have been successfully operating department stores since 1888 by seeking to provide superior service and merchandise that meets customers’ needs for fashion, value and quality.

      The Company’s fiscal year ends on the Saturday closest to each January 31. All references to “fiscal year 2005” refer to the fiscal year ending January 29, 2005; references to “fiscal year 2004” refer to the period ended January 31, 2004; references to “fiscal year 2003” refer to the period ended February 1, 2003; and references to “fiscal year 2002” refer to the period ended February 2, 2002.

      As of the end of its fiscal year 2004, the Company operated 221 retail department stores in 13 states primarily in the southeastern United States. Belk stores seek to provide customers the convenience of one-stop shopping, with an appealing merchandise mix and extensive offerings of brands, styles, assortments and sizes. Belk stores sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections at better values. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.

      Belk’s mission is to be the dominant department store in its markets by selling merchandise to customers that meets their needs for fashion, selection, value, quality and service. To achieve this mission, Belk’s business strategy includes five key elements: (1) a target customer focus; (2) focused merchandise assortments; (3) compelling sales promotions; (4) distinctive customer service; and (5) a winning store and market strategy.

      The Company operates retail department stores in the highly competitive retail apparel industry. The Company’s primary competitors are traditional department stores, mass merchandisers, national apparel chains, individual specialty apparel stores and direct merchant firms. In addition to intense competition, the retail industry has experienced downward sales pressure in recent years due primarily to national, regional and local economic conditions.

      Management believes that significant opportunities for growth exist in Belk markets where the Belk name and reputation are well known and in contiguous markets where Belk can distinguish its stores from the competition. Although the Company will continue to take advantage of prudent opportunities to expand into large markets, the Company will focus its expansion in medium-sized markets with store units in the 50,000 to 80,000 square-foot size range. One of the more significant challenges currently facing the Company’s management team is to continue to identify new Belk markets and to effectively increase the Company’s net store selling square footage. In fiscal year 2004, the Company increased net store selling square footage by 343,700 square feet, or 2.4%, and plans to expand by an additional 733,800 square feet, or 5.0%, in 2005.

      The Company focuses on four key indicators to assess performance and growth. These key indicators are: (1) comparable store sales, (2) gross profit rate, (3) expense rate, and (4) net square footage growth. The Company’s progress against these indicators is discussed throughout Management’s Discussion and Analysis (“MD&A”).

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Results of Operations

      The following table sets forth, for the periods indicated, the percentage relationship to revenues of certain items in the Company’s consolidated statements of income and other pertinent financial and operating data.

Comparison of Fiscal Years Ended January 31, 2004 and February 1, 2003

      Revenues. In fiscal year 2004, the Company’s revenues increased 1.0%, or $23.4 million, to $2.265 billion from $2.242 billion. The increase resulted from additional revenue of $39.6 million from new, expanded and remodeled stores and from improved comparable store sales in the fourth quarter of fiscal year 2004. The increase was partially offset by a 0.9% decrease in revenue from comparable stores due to a soft economy and a difficult sales environment during the first half of fiscal year 2004.

      Expansion and replacement stores are excluded from the comparable store net revenue change disclosed above. Including the expansion and replacement stores as comparable stores, comparable store net revenue decreased by 0.5% for the twelve months ended January 31, 2004. Beginning in fiscal year 2005, the Company’s definition of comparable stores sales will no longer exclude replacement and expansion stores. Non-comparable stores will only include closing stores and new stores that have not reached the one-year anniversary of their opening prior to the beginning of the fiscal year in which they were constructed. The Company believes this revised measure is a more accurate indicator of existing store performance and is a common basis used by other retailers.

      Cost of Goods Sold. As a percentage of revenues, cost of goods sold decreased to 66.5% in fiscal year 2004 as compared to 67.5% in fiscal year 2003. The decrease is primarily attributable to improved margin on inventory purchases, improved operating efficiencies and a 0.15% reduction in direct costs as a percentage of revenues resulting from the Company’s Merchandising Restructuring completed during fiscal year 2003.

      Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $563.2 million in fiscal year 2004, compared to $553.4 million in fiscal year 2003. As a percentage of revenues, SG&A increased to 24.9% in fiscal year 2004 from 24.7% in fiscal year 2003. The increase in SG&A expenses as a percentage of revenues resulted primarily from increases in pension costs and casualty insurance costs as a percentage of revenues of approximately 0.22% each, and an increase in bad debt expense as a percentage of revenues of 0.08%. These increases were partially offset by a decrease in payroll costs as a percentage of revenues of 0.12%, a 0.08% increase in income as a percentage of revenues generated from the

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      During fiscal years 2004 and 2003, the Company’s bad debt expense, net of recoveries, associated with the issuance of credit on the Belk proprietary credit cards, was $17.5 million and $15.6 million, respectively. During fiscal years 2004 and 2003, finance charge income on the outstanding Belk proprietary credit card receivables was $63.0 million and $60.9 million, respectively. Accounts receivable management and collection services expenses for fiscal years 2004 and 2003 were $18.8 million and $19.9 million, respectively.

      Asset Impairment and Store Closing Costs. During fiscal year 2003, the Company recorded $0.5 million of exit costs related to the closing of one store in fiscal year 2003 and one store in the first quarter of fiscal year 2004. The exit costs consisted primarily of post-closing real estate lease obligations and severance costs. The Company did not incur any charges related to asset impairment or store closings in fiscal year 2004.

      Restructuring Charges. In fiscal year 2004 and 2003, the Company recorded a $2.0 million and $0.8 million charge, respectively, in connection with the restructuring of its logistics network. The charges are due to increases in projected costs related to post-closing real estate lease obligations.

      During fiscal year 2003, the Company recorded a restructuring charge of $7.1 million in connection with the consolidation of its divisional merchandising and marketing functions into a single organization located at the Company’s corporate offices in Charlotte, NC The consolidation also included implementation of a central planning and allocation function to oversee the distribution and allocation of merchandise to the stores. The charge consisted of $5.1 million of employee severance costs, $1.5 million of post-closing real estate lease obligation costs, and $0.5 million for the reduction to fair value of excess assets.

      Gain (loss) on property, equipment and investments. The gain on property, equipment and investments increased to $14.8 million for the fiscal year ended January 31, 2004, compared to losses of $0.4 million for the fiscal year ended February 1, 2003. The current year gain is primarily due to a $19.3 million gain recognized on the sale of property located in Charlotte, North Carolina, partially offset by a $6.5 million loss on the dedesignation of two interest rate swaps.

      Income taxes. For fiscal year 2004, the Company experienced a decrease in its effective tax rate from 37.2% to 34.6%. The decrease in rate is primarily attributable to an increase in non-taxable income and deductible expenses that qualify as permanent differences and a decrease in the effective state income tax rates.

Comparison of Fiscal Years Ended February 1, 2003 and February 2, 2002

      Revenues. In fiscal year 2003, the Company’s revenues increased 0.2%, or $5.5 million, to $2.242 billion from $2.236 billion. The increase resulted primarily from additional revenues of $73.7 million generated from new, expanded and remodeled stores, offset by a 3.2% decrease in net revenues from comparable stores due to an overall downward trend in department store sales experienced during the third and fourth quarters of fiscal year 2003.

      Cost of Goods Sold. As a percentage of revenues, cost of goods sold decreased to 67.5% in fiscal year 2003 as compared to 68.7% in fiscal year 2002. The decrease is primarily attributable to improved margin on inventory purchases and improved operating efficiencies related to the consolidation of the Company’s distribution facility and merchandising function in fiscal years 2002 and 2003, respectively.

      Selling, General and Administrative Expenses. SG&A expenses were $553.4 million in fiscal year 2003, compared to $548.3 million in fiscal year 2002, an increase of 0.9%. As a percentage of revenues, SG&A increased to 24.7% in fiscal year 2003 from 24.5% in fiscal year 2002. The increase in SG&A expenses as a percentage of revenues resulted primarily from incremental SG&A expenses of $8.5 million associated with the Merchandising Restructuring that do not qualify as restructuring expense. The majority of these expenses related to relocation costs for associates and accelerated amortization over the remaining useful life of abandoned leasehold improvements in the division offices. SG&A expenses were also negatively impacted by additional depreciation associated with the new stores and store expansions and an increase in overall

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      During fiscal years 2003 and 2002, the Company’s bad debt expense, net of recoveries, associated with the issuance of credit on the Belk proprietary credit cards, was $15.6 million and $18.7 million, respectively. During fiscal years 2003 and 2002, finance charge income on the outstanding Belk proprietary credit card receivables was $60.9 million and $57.7 million, respectively. Accounts receivable management and collection services expenses for fiscal years 2003 and 2002 were $19.9 million and $22.0 million, respectively.

      Asset Impairment and Store Closing Costs. During fiscal year 2003 the Company recorded $0.5 million of exit costs related to the planned closing of one store in fiscal year 2003 and one store in fiscal year 2004. The exit costs consisted primarily of post-closing real estate lease obligations and severance costs.

      During fiscal year 2002, the Company recorded a pre-tax charge of $13.5 million for asset impairment and store closing costs. The charge included (i) an $8.6 million reduction to fair value of the historical cost of assets associated with the Company’s e-commerce initiative as a result of reduced revenues and earnings projections for Belk.com and (ii) $1.6 million of exit costs and a $3.3 million reduction to fair value of long-term assets for four stores closed during fiscal years 2002 and 2003.

      Restructuring Charges. During fiscal year 2003, the Company recorded a restructuring charge of $7.1 million in connection with the consolidation of its divisional merchandising and marketing functions into a single organization located at the Company’s corporate offices in Charlotte, NC The consolidation also included implementation of a central planning and allocation function to oversee the distribution and allocation of merchandise to the stores. The charge consisted of $5.1 million of employee severance costs, $1.5 million of post-closing real estate lease obligation costs, and $0.5 million for the reduction to fair value of excess assets.

      For fiscal years 2003 and 2002, the Company recorded a $0.8 million and $0.1 million charge, respectively, in connection with the Logistics Restructuring. The charges primarily related to additional estimated liability associated with post-closing real estate lease obligations.

      During fiscal year 2002, the Company recorded a $0.5 million charge in connection with the consolidation of its thirteen operating divisions into four expanded regional divisions in June 1999. The charges resulted from increases in estimated costs associated with post closing lease obligations.

      Discontinued Operations. During fiscal year 2002, the Company recognized after-tax losses on disposal of discontinued operations of $0.2 million as a result of increases in the estimated costs associated with the disposal of the TAGS leased property and did not incur any additional charges related to discontinued operations in fiscal year 2003.

      Cumulative effect of change in accounting principle. In connection with the implementation of Statement of Financial Accounting Standards (“SFAS”) SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the Company recorded a $1.0 million charge to net income as of the beginning of fiscal year 2002 related to its interest rate swap contracts with option provisions. The adjustment represented the fair market value, net of tax benefit, of these contracts as of February 4, 2001.

Seasonality and Quarterly Fluctuations

      The Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenues, operating income and net income due to the seasonal nature of the retail business. The highest revenue period for the Company is the fourth quarter, which includes the Christmas selling season. A disproportionate amount of the Company’s revenues and a substantial amount of the Company’s operating and net income are realized during the fourth quarter. If for any reason the Company’s revenues were below seasonal norms during the fourth quarter, the Company’s annual results of operations could be adversely affected. The Company’s inventory levels generally reach their highest levels in anticipation of increased revenues during these months.

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      The following table illustrates the seasonality of revenues by quarter as a percentage of the full year for the fiscal years indicated.

      The Company’s quarterly results of operations could also fluctuate significantly as a result of a variety of factors, including the timing of new store openings.

Liquidity and Capital Resources

      The Company’s primary sources of liquidity are cash on hand, cash flow from operations and borrowings under debt facilities. The Company’s debt facilities consist of a $250 million variable rate note, a $125 million ten-year variable rate bond facility, a $200 million revolving line of credit and a $127 million standby letter of credit, of which $0 was outstanding at January 31, 2004. The debt facilities place certain restrictions on mergers, consolidations, acquisitions, sales of assets, indebtedness, transactions with affiliates, leases, liens, investments, dividends and distributions, exchange and issuance of capital stock and guarantees, and require maintenance of minimum financial ratios. As of January 31, 2004, the Company was in compliance with all covenants and does not anticipate that compliance with the covenants will impact the Company’s liquidity in fiscal year 2005. The $250 million variable rate note is collateralized by the Company’s customer accounts receivable and limits borrowings under the facility to approximately 72% of the Company’s customer accounts receivable. The $250 million variable rate note expires in April 2005 and the Company intends to renew the facility and utilize it as long-term financing. The revolving credit facility and standby letter of credit facility expire in July 2005.

      Because the interest rates on some of the Company’s debt agreements vary with LIBOR or commercial paper rates, the Company has entered into interest rate swap agreements with a financial institution to manage the exposure to changes in interest rates. The notional amount of the interest rate swaps is $300 million for fiscal years 2004 through 2009, $125 million for fiscal years 2010 through 2012, and $50 million for fiscal year 2013. Due to reduced borrowing needs, during the third quarter of fiscal year 2004, the Company dedesignated two interest rate swaps with a combined notional amount of $50 million that had previously been accounted for as cash flow hedges. The swaps will mature in fiscal year 2009; however the Company may choose to terminate the dedesignated interest rate swaps prior to their maturity. As of January 31, 2004, the cost to terminate the swaps would have been $5.8 million. A fluctuation of 1% in the LIBOR interest rate would increase or decrease the termination cost by approximately $2.2 million.

      Operating activities provided cash of $273.0 million during fiscal year 2004, as compared to $203.3 million in fiscal year 2003. The increase in cash provided by operating activities compared to the prior period was principally due to a $27.5 increase in net income, decreases in accounts receivable and increases in accounts payable and accrued expenses.

      Investing activities used cash of $96.9 million during fiscal year 2004, as compared to $67.1 million in fiscal year 2003. The increase in cash used for investing activities was primarily due to a $52.0 million increase in purchases of property and equipment, partially offset by a $22.1 million increase in proceeds from the sale of property, equipment, and investments. The current year proceeds consist primarily of $25.6 million related to the sale of investment property described in Note 9 of the Notes to the Consolidated Financial Statements.

      Expenditures for property and equipment were $127.1 million during fiscal year 2004, compared to $75.0 million in fiscal year 2003. During fiscal year 2004, the Company’s capital expenditures included expenditures for opening eight new stores and making significant renovations to and/or expansions of four existing stores. The Company currently projects capital expenditures over the next three fiscal years to average approximately $140 million per year.

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      Net cash used by financing activities amounted to $101.3 million and $67.3 million during fiscal years 2004 and 2003, respectively. The increase is a result of reductions in outstanding debt and the repurchase of 2,808,998 shares of common stock at a cost of $26.7 million.

      Management of the Company believes that cash flows from operations and its credit facilities will be sufficient to cover working capital needs, capital expenditures and debt service agreements for the next 12 months.

Related Party Transactions

      In October 2001, the Company extended loans to Mr. Thomas M. Belk, Jr., Mr. H.W. McKay Belk and Mr. John R. Belk in the principal amounts of $2.5 million, $2.5 million and $2.0 million, respectively. In February 2002, the loan to Mr. John R. Belk was increased to $2.5 million. The loans are being repaid to the Company in equal annual installments of $1.5 million plus interest in cash or stock over a five-year period that began January 3, 2003. The loans bear interest at LIBOR plus 1.5%. The Company received the second of the five payments, including principal and interest, from the three executives on January 3, 2004. The Sarbanes-Oxley Act of 2002 prohibits extensions of credit to executive officers and directors and the “material modification” of any term of a loan that was extended before July 30, 2002. The Company entered into these loans in October 2001 and February 2002, before the Sarbanes-Oxley Act of 2002 was enacted. Since that time, the Company has not made any new extensions of credit to executive officers or directors nor materially modified the terms of any existing loans.

Contractual Obligations and Commercial Commitments

      To facilitate an understanding of the Company’s contractual obligations and commercial commitments, the following data is provided:

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      Obligations under the pension and postretirement benefit plans are not included in the contractual obligations table. The Company’s pension plan funding policy is to contribute amounts necessary to satisfy minimum pension funding requirements plus such additional amounts from time to time as are determined to be appropriate to improve the plan’s funded status. The pension plan’s funded status is affected by many factors including discount rates and the performance of plan assets. The Company is not required to make minimum pension funding payments in fiscal year 2005, but may make discretionary contributions during the year based on the plan’s expected November 1, 2004 funded status. During fiscal year 2004, the Company made a $10 million voluntary contribution to the pension plan. The Company’s postretirement plan is not funded in advance. Postretirement benefit payments during fiscal year 2004 totaled $2.4 million.

      Also excluded from the contractual obligations table are payments the Company may make for employee medical costs and workers compensation, general liability and automobile claims.

Implementation of New Accounting Standards

      In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 149 (“SFAS No. 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The provisions of SFAS No. 149 are effective for all derivatives and hedging activity entered into after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on the Company’s consolidated financial position or results of operations.

      In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS No. 150”) “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s consolidated financial position or results of operations.

Impact of Inflation

      While it is difficult to determine the precise effects of inflation, management of the Company does not believe inflation had a material impact on the consolidated financial statements for the periods presented.

Critical Accounting Policies

      Management’s Discussion and Analysis discusses the results of operations and financial condition as reflected in the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). As discussed in Note 1 to the Company’s consolidated financial statements, the preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation, vendor allowances, the allowance for doubtful accounts, useful lives of depreciable assets, recoverability of long-lived assets, including intangible assets, restructuring and store closing reserves and the calculation of pension and postretirement obligations and self-insurance reserves. Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See Note 1 to the Company’s consolidated financial statements for a discussion of the Company’s significant accounting policies.

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      While the Company believes that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the Company cannot guarantee that its estimates and assumptions will be accurate, which could require the Company to make adjustments to these estimates in future periods.

      The following critical accounting policies are used in the preparation of the consolidated financial statements:

      Inventory Valuation. Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as resulting gross margins. These significant estimates, coupled with the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted or inaccurate costs. In addition, failure to take markdowns currently can result in an overstatement of cost under the lower of cost or market principle.

      Vendor Allowances. The Company receives allowances from its vendors through a variety of programs and arrangements, including markdown reimbursement programs. These vendor allowances are generally intended to offset the Company’s costs of selling the vendors’ products in its stores. Allowances are recognized in the period in which the Company completes its obligations under the vendor agreements. Most incentives are deducted from amounts owed to the vendor at the time the Company completes its obligations to the vendor or shortly thereafter. The following summarizes the types of vendor incentives and the Company’s applicable accounting policy:

	•	Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to selling, general and administrative expenses in the period that the advertising expense is incurred.
	•	Markdown allowances — Represents reimbursement for the cost of markdowns to the selling price of the vendors merchandise. Amounts are recognized as a reduction to cost of goods sold in the later of the period that the merchandise is marked down or the reimbursement is negotiated. Amounts received prior to recognizing the markdowns are recorded as a reduction to the cost of inventory.
	•	Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expense in the period that the payroll cost is incurred.

      Allowance for Doubtful Accounts. The Company provides an allowance for doubtful accounts that is determined based on a number of factors, including delinquency rates, bankruptcy filings, historical charge-off patterns and management judgment.

      Useful Lives of Depreciable Assets. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is determined by the Company’s historical experience with the type of asset purchased.

      Recoverability of Long-Lived Assets. Long-lived assets, including intangible assets, are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally measured by discounting estimated future cash flows. Where available, the Company would also obtain individual appraisals or utilize other indicators of fair value. Considerable management judgment is necessary to estimate discounted future cash flows.

      Restructuring and Store Closing Reserves. The Company reduces the carrying value of property and equipment to fair value for owned locations or recognizes a reserve for future obligations for leased facilities at the time the Company ceases using property and/or equipment. The reserve includes future minimum lease

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      Pension and Postretirement Obligations. The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate, investment earnings, rate of compensation increase, as well as the remaining service period of active employees. The Company utilizes a qualified actuary to calculate the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.

      The funded status of the Company’s pension plan has experienced significant declines in recent years, due to the losses experienced in the stock market and the decrease in interest rates during fiscal years 2003 and 2004. The losses incurred on plan assets in fiscal years 2002 and 2003 amounted to $46.6 million and had a significant impact on the fair value of plan assets. The increases in the projected benefit obligation (“PBO”) and accumulated benefit obligation (“ABO”) have been attributable to reductions in the discount rates used to value these obligations. As a result of these factors, on November 1, 2003 (plan measurement date), the fair market value of the Company’s pension plan assets fell below the ABO by approximately $8.1 million. The ABO was determined using a 6.375% discount rate, which is 0.625% lower than the rate used on November 1, 2002. The Company charged off $62.9 million, net of a $36.9 million tax benefit, of prepaid pension costs to equity during the fourth quarter, recognized an intangible asset of $4.5 million for unrecognized prior service costs and a liability of approximately $8.1 million for accrued pension costs. This non-cash charge did not impact the Company’s liquidity. If the fair market value of the pension plan assets exceeds the ABO at a future valuation date, the charge off would be reversed and the remaining prepaid pension costs would be re-established as an asset on the consolidated balance sheets.

      The Company maintained the investment earnings assumption of 8.5% to determine its fiscal year 2005 expense. The Company believes that this assumption is appropriate given the composition of its plan assets and historical market returns thereon. Due to these factors and assumptions, pension expense for fiscal year 2005 is expected to increase to approximately $14.8 million, compared to $9.6 million in fiscal year 2004.

      Significant changes in actual results from the aforementioned assumptions may result in increases or decreases to pension and postretirement expenses in fiscal year 2006 and later years.

      The Company has evaluated the funded status of the pension plan and does not believe the underfunded position will materially affect the Company’s cash flow in fiscal year 2005 or future years. No contributions to the plan are required during fiscal year 2005, based on the plan’s current funding status.

      Self Insurance Reserves. The Company purchases third-party insurance for workers’ compensation, general liability and automobile claims that exceed certain dollar limits. The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under the insured limits. The Company records a liability for its obligation associated with incurred losses utilizing information from a third-party insurance broker. The broker utilizes historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. The loss estimates are adjusted based upon actual reported and settled claims.

      Stock Based Compensation. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires expanded and more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002.

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      As of January 31, 2004, the Company had two stock based compensation programs that are described in Note 16.

      The Company is exposed to market risk from changes in interest rates on its variable rate debt. The Company uses interest rate swaps to manage the interest rate risk associated with its borrowings and to manage the Company’s allocation of fixed and variable rate debt. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged derivative instruments. The Company’s net exposure to interest rate risk is based on the difference between the outstanding variable rate debt and the notional amount of its interest rate swaps. At January 31, 2004, the Company had $250 million of variable rate debt and $300 million of offsetting, receive variable rate, pay fixed rate swaps.

      Due to reduced borrowing needs, during the third quarter of fiscal year 2004, the Company dedesignated two interest rate swaps with a combined notional amount of $50 million that had previously been accounted for as cash flow hedges. The swaps will mature in fiscal year 2009; however the Company may choose to terminate the dedesignated interest rate swaps prior to their maturity.

      Prior to the dedesignation, the changes in fair values of effective interest rate swaps were recorded as adjustments to interest rate swap liability on the accompanying consolidated balance sheets with the offset recorded in accumulated other comprehensive loss. Subsequent to the dedesignation date, changes in the fair value of the dedesignated interest rate swap contracts are recognized in the consolidated statement of income as a loss on investments. As of January 31, 2004, the fair market value of the swaps was a liability of $5.8 million. A fluctuation of 1% in the LIBOR interest rate would increase or decrease fair market value by approximately $2.2 million.

      The Company also owns marketable equity securities that are subject to market risk. A discussion of the Company’s accounting policies for derivative financial instruments and equity securities is included in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements.

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ITEM 8.      Financial Statements and Supplementary Data

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INDEPENDENT AUDITORS’ REPORT

      We have audited the accompanying consolidated balance sheets of Belk, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended January 31, 2004. 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.

      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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belk, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities during the year ended February 2, 2002.

	KPMG LLP

Charlotte, North Carolina

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS