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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2015

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 000-26207

 

 

BELK, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		56-2058574
(State of incorporation)		(IRS Employer Identification No.)
2801 West Tyvola Road, Charlotte, North Carolina		28217-4500
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(704) 357-1000

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

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

Title of each class

Class A Common Stock, $0.01 per share

Class B Common Stock, $0.01 per share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) 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.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and directors are “affiliates” of the Registrant) as of August 2, 2014 (based on the price at which the common equity was last sold on June 5, 2014, the date closest to the last business day of the Company’s most recently completed second fiscal quarter) was $584,413,848. 39,371,245 shares of common stock were outstanding as of April 3, 2015, comprised of 38,300,291 shares of the Registrant’s Class A Common Stock, par value $0.01, and 1,070,954 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 27, 2015 are incorporated herein by reference in Part III.

 

 

 

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BELK, INC.

TABLE OF CONTENTS

 

Item No.				Page No.
Part I
1.		Business			1
1A.		Risk Factors			8
1B.		Unresolved Staff Comments			13
2.		Properties			13
3.		Legal Proceedings			14
4.		Mine Safety Disclosures			14
Part II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			15
6.		Selected Financial Data			15
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
7A.		Quantitative and Qualitative Disclosures About Market Risk			27
8.		Financial Statements and Supplementary Data			28
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			59
9A.		Controls and Procedures			59
9B.		Other Information			61
Part III
10.		Directors, Executive Officers and Corporate Governance			61
11.		Executive Compensation			61
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			61
13.		Certain Relationships and Related Transactions, and Director Independence			61
14.		Principal Accountant Fees and Services			62
Part IV
15.		Exhibits and Financial Statement Schedules			63

 

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PART I

 

Item 1.

Business

General

Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the nation’s largest family owned and operated department store business in the United States, with 297 stores in 16 states, as of the fiscal year ended January 31, 2015. With stores located primarily in the southern United States and with a growing eCommerce business on its belk.com website, the Company generated revenues of $4.1 billion for the fiscal year 2015, and together with its predecessors, has been successfully operating department stores since 1888. Belk is committed to providing its customers a compelling shopping experience and merchandise that reflects “Modern. Southern. Style.”

The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. The fiscal year end dates and number of weeks in fiscal years 2013 – 2016 are reflected in the table below.

 

Fiscal Year		End Date		Weeks
2016		January 30, 2016			52
2015		January 31, 2015			52
2014		February 1, 2014			52
2013		February 2, 2013			53

Belk seeks to provide customers with a convenient and enjoyable shopping experience both in stores and online at belk.com, by offering an appealing merchandise mix that includes extensive assortments of brands, styles, and sizes. Belk stores and belk.com sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, fine jewelry, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.

The Company operates 93 stores that exceed 100,000 square feet in size, although the majority of Belk stores range in size from 60,000 to 100,000 square feet. Most of the Belk stores are anchor tenants in major regional malls or in open-air shopping centers in medium and smaller markets. In the aggregate, the Belk stores occupy approximately 22.6 million square feet of selling space. The Company is making significant investments in its eCommerce business to expand the capabilities of its belk.com website and increase online sales. It has also begun an Omnichannel initiative to expand the inventory available online and in stores and to provide a seamless shopping experience for its customers.

Management of Belk’s store operations is organized into three regional operating divisions, with offices in Raleigh, NC, Atlanta, GA and Birmingham, AL. Each unit is headed by a division chair and a director of stores. Division offices execute centralized initiatives at the individual stores, and their primary activities relate to providing management and support for the personnel, operations and maintenance of the Belk stores in their regions. These divisions are not considered segments for financial reporting purposes.

Belk Stores Services, Inc., a subsidiary of Belk, Inc., and its subsidiary Belk Administration Company, along with Belk International, Inc., a subsidiary of Belk, Inc., and its subsidiary, Belk Merchandising Company, LLC (collectively “BSS”), coordinate the operations of Belk stores on a company-wide basis. BSS provides a wide range of services to the Belk division offices and stores, such as merchandising, merchandise planning and allocation, advertising and sales promotion, information systems, human resources, public relations, accounting, real estate and store planning, credit, legal, tax, distribution and purchasing.

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.

 

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Business Strategy

Belk’s mission is “to satisfy the modern Southern lifestyle like no one else, so that our customers get the fashion they desire and the value they deserve.” The vision is “for the modern Southern woman to count on Belk first. For her, for her family, for life.” Belk is positioning itself for success by providing modern Southern fashion that is aligned with its customers’ lifestyles, by delivering Southern hospitality to deepen customer relationships, and by impacting local communities positively through its charitable contributions.

The Company seeks to maximize its sales opportunities by providing quality merchandise assortments of fashion goods that differentiate its stores from competitors. Belk merchants and buyers monitor fashion merchandising trends, shop domestic and international markets, and leverage relationships with key vendors in order to provide the latest seasonal assortments of most-wanted styles and brands of merchandise. Through merchandise planning and allocation, the Company tailors its assortments to meet the particular needs of customers in each market. The Company conducts customer research and participates in market studies on an ongoing basis in order to obtain information and feedback from customers that will enable it to better understand their merchandise needs and service preferences.

The Company’s marketing and sales promotion strategy seeks to attract customers to shop at Belk by keeping them informed of the latest fashion trends, merchandise offerings, and sales promotions through a combination of advertising and interactive media, including direct mail, circulars, broadcast, Internet, social media (including email, Facebook, Twitter, Pinterest and YouTube) and in-store special events. Belk uses its proprietary database to communicate directly to key customer constituencies with special offers designed to appeal to these specific audiences. The sales promotions are designed to promote desirable merchandise brands and styles at compelling price values with adequate inventories planned and allocated to ensure that stores will be in stock on featured merchandise.

Belk strives to attract and retain talented, well-qualified associates who provide a high level of friendly, personal service to enhance the customer’s shopping experience. Through the Company’s service excellence program, Belk associates are trained to be knowledgeable about the merchandise they sell, approach customers promptly, help when needed, and provide quick checkout. The Company desires to be an inclusive company that embraces diversity among its associates, customers, and vendors. Its ongoing diversity program includes a number of company-wide initiatives aimed at increasing the diversity of its management and associate teams, increasing its spend with diverse vendors, creating awareness of diversity issues, and demonstrating the Company’s respect for, and responsiveness to, the rapidly changing cultural and ethnic diversity in Belk markets.

Strategic Investments

Belk has invested over $600 million in key strategic initiatives over the last three fiscal years. Belk intends to invest approximately $450 million, the majority of which will be capital expenditures, over the three-year period beginning in fiscal year 2016 on these key strategic initiatives. Based on our current plan, approximately $230 million will be focused on our comprehensive Omnichannel initiative, $110 million on creating compelling shopping environments through new stores, expansions, remodels, and an expanded flagship strategy, $45 million on information technology that delivers new business capabilities, and $65 million on supply chain initiatives that align distribution capabilities to support our Omnichannel initiative.

Growth Strategy

The Company has focused its growth strategy on new stores, expanding and remodeling existing stores, developing new merchandising concepts in targeted demand centers, and expanding its online capabilities. In addition, the Company continues to expand the number of Belk flagship locations and, as of the 2015 fiscal year end, operates 21 flagship stores that meet certain standards based on size, sales volume, location, premium brand assortments and Belk brand image.

The Company will continue to explore new store opportunities within its existing 16-state footprint and in contiguous markets where Belk can leverage its name and reputation to distinguish its stores from the competition. The Company will also consider closing stores in markets where more attractive locations become

 

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available or where the Company does not believe there is potential for long term growth and success. In addition, the Company periodically reviews and adjusts its space requirements to create greater operating efficiencies and convenience for the customer.

In fiscal year 2015, the Company completed major remodel projects in two stores, opened two stores in new markets, opened two new stores as replacements for existing stores, and completed expansions of three stores. The new stores and store expansions include:

New Stores

 

Location		Size (Selling Sq. Ft.)				Opening Date				New or Existing Market
High Point, NC			67,809				3/12/14			Existing
Dallas, TX			142,123				4/9/14			New
Denham Springs, LA			67,414				10/15/14			New
Huntsville, AL			147,327				10/15/14			Existing

Store Expansions

 

Location		Expanded Size (Selling Sq. Ft)				Completion Date
Mt. Pleasant, SC (Town Center)			117,605				10/15/14
Greensboro, NC (Friendly)			141,613				10/15/14
Corbin, KY (Trademart Shopping Center)			50,143				11/4/14

In fiscal year 2016, the Company plans to open two new stores as replacements of existing stores and to complete three store expansions (including one existing and one new flagship store) and two remodels.

Merchandising

Belk stores and belk.com feature quality name brand and private label merchandise in better and moderate price ranges, providing fashion, selection and value to customers. The merchandise mix is targeted to upper and middle 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 as the leader in providing modern, fashionable assortments with depth in style, selection and value to its store and online customers.

Belk stores and belk.com offer large assortments of many national brands. The Company has enjoyed excellent long-term relationships with many top apparel and cosmetics suppliers and is often the sole distributor of desirable apparel, accessories and cosmetic lines in its markets. Belk stores and belk.com also offer exclusive private brands in selected merchandise categories that are designed and manufactured to provide compelling fashion assortments that meet customers’ needs and set Belk apart from competitors through their styling, quality and price. The Company’s private brands include MADE Cam Newton, CYNTHIA Cynthia Rowley, Crown and Ivy, Chip & Pepper^® California, ND-New Directions, ND Weekend, Kim Rogers, J. Khaki, Pro Tour, SB Tech, Ocean & Coast, Saddlebred 1888, Red Camel, Nursery Rhyme, Belk Silverworks, Be Inspired, Biltmore™, Home Accents and Cook’s Tools.

The Company operates its own fine jewelry business with buying and administrative offices at the corporate office in Charlotte and a state of the art repair and distribution center located in Ridgeland, Mississippi. The shops offer expanded assortments of high quality diamond jewelry, rubies, emeralds and other fine gemstones, and top brands of fine watches and jewelry. During fiscal year 2015, the Company opened six new fine jewelry shops and was operating 160 fine jewelry shops in its stores under the “Belk and Co. Fine Jewelers” name as of the fiscal year end. Belk and Co. Fine Jewelers merchandise is also sold on belk.com.

 

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Marketing and Branding

The Company employs strategic marketing initiatives to develop and enhance the equity of the Belk brand and to create and strengthen “one-to-one” relationships with customers. The Company’s marketing strategy involves a combination of mass media print and broadcast advertising, direct marketing, Internet marketing, social media, mobile advertising, comprehensive store visual merchandising, signing and in-store special events, such as trunk shows, celebrity and designer appearances, Charity Sale, KidFest, Educator Appreciation Day, Healthcare Appreciation Day and Senior Day.

During fiscal year 2012, the Company became the title sponsor of the annual Belk Bowl college football game held at Bank of America Stadium in Charlotte, NC. The game is televised nationally on ESPN and provides a vehicle for the Company to market the Belk brand beyond its geographic footprint. In the fourth quarter of fiscal year 2014, Belk announced an agreement with the Charlotte Sports Foundation that, starting in 2014, brought a Southeastern Conference team to the Belk Bowl to face an Atlantic Coast Conference opponent. The first game of the series between Georgia and Louisville achieved the highest television viewing rating in Belk Bowl history and was the eighth most watched bowl game of the season, including the new college playoff games. Belk also announced that it signed on as a founding sponsor of the Southeastern Conference Network, which launched in August of fiscal year 2015 with 94 million subscribers.

In fiscal year 2016, the Company’s latest marketing campaign – The Road South – will showcase the best of modern, Southern fashion, music and college athletics. Customers will be invited to travel on The Road South to major fashion, music and sporting events, such as Charleston Fashion Week, the Country Music Festival in Nashville, and SEC Championship events in Atlanta, Birmingham and Nashville. The 12-month campaign will include the return of the Belk Southern Designer Showcase and the second annual Belk Southern Musicians Showcase, and will encompass special sweepstakes and various types of promotional media and major social media and online components.

Omnichannel

The Company has undertaken a multi-year Omnichannel initiative designed to address customers’ rapidly-changing shopping preferences and service expectations by creating a consistent, compelling and seamless shopping experience in stores and online. In fiscal year 2015, the Company expanded its “Yes, We Have It!” program consisting of an item locator initiative, which generates incremental demand by enabling customers to order inventory not available in a particular location, and a store fulfillment initiative, which allows certain stores to function as supplemental fulfillment centers. Store fulfillment efforts expanded from 17 to 48 store locations that filled both item locator and belk.com orders, and more than 17% of belk.com sales were fulfilled by stores. The Company plans to further expand both its item locator and store fulfillment efforts in fiscal year 2016.

The Company also made significant investments in fiscal year 2015 to improve the stability and performance of its belk.com website and began the planning for a new digital commerce platform with enhanced order management capabilities to replace the current website. Other Omnichannel programs in development include a digital store initiative to upgrade store technology, customer Wi-Fi, new PIN pads, a new touch-screen point-of-sale platform with belk.com access at the register, and the use of both fixed registers and mobile devices to process in-store customer transactions. In fiscal year 2015, new store technology was piloted in 10 stores, and the Company plans to deploy an additional 11 test stores in fiscal year 2016.

eCommerce

The Company continues to make significant investments in its growing eCommerce business and to expand the capabilities of its belk.com website, which features a wide assortment of fashion apparel, accessories, shoes and cosmetics, plus home and gift merchandise. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands. The website also provides information about the Company, including its history, career opportunities, community involvement, diversity and sustainability initiatives, a Company media room, links to its Securities and Exchange Commission (“SEC”) filings, and more. The Company’s mobile website and mobile apps for smartphones and tablet devices make it easy and convenient for customers to connect and shop with Belk online and increase customer engagement.

 

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In fiscal year 2015, the Company continued to grow and enhance its eCommerce business and belk.com website with systems improvements, expansion of merchandise assortments, added investments to enhance the customer’s mobile experience, increased multimedia and mobile marketing, and implementation of ongoing social media and community engagement strategies.

Gift Cards

The Company’s gift 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 sales receipts. Several types of gift cards are available, each featuring a distinctive design and appeal. Belk gift cards can be redeemed in stores and for purchases made on belk.com. The Company offers Belk gift cards for sale outside of its stores, mainly in select grocery store outlets through third parties.

Salons and Spas

As of the end of fiscal year 2015, the Company owned and operated salons and spas in 18 Belk locations that specialize in the latest trends in hair, spa and relaxation services. The salons and spas offer assortments of top brand name beauty products, including Aveda, Bumble and Bumble, Redken and Pureology. The spas offer massage therapy, full skincare, manicure and pedicure services, and specialized body treatments. Eight of the salons and spas operate under the name “Carmen! Carmen! Prestige Salon and Spa at Belk,” and the balance under the name “Belk Salon and Spa.”

Belk Gift Registry

The Company’s gift registry offers a wide assortment of bridal merchandise that can be registered for and purchased online at belk.com or in local Belk stores and shipped directly to the customer or gift recipient. Brides and engaged couples can conveniently create their gift registry and make selections through the belk.com website, or they can go to a Belk store where a certified professional bridal consultant can provide assistance using the store’s online gift registry 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

Belk seeks to generate sales growth and win customer loyalty through its Belk Rewards Card Loyalty Program. In partnership with Synchrony Bank (formerly GE Capital Retail Bank), the Company conducts ongoing marketing and promotional programs designed to recognize and reward Belk card customers, attract profitable new customers and increase sales from existing card customers. The Belk Rewards Card Loyalty Program issues certificates for discounts on future purchases to Belk Rewards Card customers based on their spending levels. The rewards program is cumulative, with no expiration of points earned, issuing a $10 certificate for every 400 points earned. Belk Rewards Card customers whose purchases total $600 or more in a calendar year qualify for a Belk Premier Rewards Card that entitles them to unlimited free gift wrapping and basic alterations, an interest-free Flex Pay Plan account and notifications of special savings and sales events. Customers who spend more than $1,500 annually at Belk qualify for a Belk Elite Rewards Card that offers additional benefits, including a specially designed black Elite credit card, free shipping for belk.com and store purchases, triple points events, a 20% off birthday shopping pass, and quarterly Pick Your Own Sale Days.

Systems and Technology

The Company continued to make substantial investments in technology and information systems during fiscal year 2015 to support sales and merchandising initiatives, reduce costs, improve core business processes and support its overall business strategy. These investments included people, processes and technology. Key systems initiatives included the optimization of core merchandise and planning systems that were deployed with the Company’s strategic merchandising and retail technology program (Project SMART). The Company plans additional investments in these solutions in fiscal year 2016 to further build upon and optimize its technology and business processes.

 

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The Company also made significant investments in fiscal year 2015 to optimize the stability of the belk.com website and expand the merchandise fulfillment capabilities of its fulfillment centers and stores. In addition to these customer facing technologies, the Company completed deployment of a new workforce management system to more effectively align store staffing with customer traffic patterns and implemented other key systems and technology solutions, including the deployment of store based PIN pad payment devices, implementation of enhanced data security and improvement of infrastructure scaling and service capabilities across the Company. Belk expects to continue making significant investments in its information systems, Omnichannel capabilities and store technologies in fiscal year 2016.

Inventory Management and Logistics

The Company currently operates four distribution facilities that receive and process merchandise for delivery to Belk stores and belk.com customers. A 410,000 square foot distribution center in Blythewood, SC services the stores located in the northern and eastern areas of the Company’s footprint; a 174,000 square foot distribution center at the Greater Jackson Industrial Park in Byram, MS services the central and western areas; an 8,300 square foot distribution center in Ridgeland, MS services the Company’s fine jewelry operations and began fulfilling direct to consumer orders during the past fiscal year. The Jonesville, SC eCommerce fulfillment center that opened in fiscal year 2013 was expanded from 515,000 square feet to 861,000 square feet during the past fiscal year to increase its processing and storage capacity and support the Company’s growing eCommerce business. In connection with that expansion, the Company announced plans to cease operations of its 259,000 square foot eCommerce fulfillment center in Pineville, NC in August of fiscal year 2016.

Service Excellence

In fiscal year 2015, the Company completed the multi-phase rollout of its Service Excellence program aimed at improving in-store support processes such as increasing dock efficiencies and inbound freight processing, achieving customer service excellence through development of associates’ selling skills and behaviors, and implementation of a workforce management system designed to effectively align work schedules of selling associates with customer traffic and support associates with workload demands.

Strategic Sourcing

The Company’s strategic sourcing program is designed to streamline and institute best practices for its sourcing and procurement processes for non-retail goods and supplies. Strategic sourcing has become a standard business practice for the Company, with sourcing efforts continuing to yield significant savings in many areas of the business, including purchases for construction projects and fixtures, software and supplies.

Sustainability

The Company’s ongoing sustainability initiatives are aimed at fulfilling its commitment to be a good steward of the environment by eliminating waste, conserving energy, using resources more responsibly and embracing and promoting sustainable practices. Current initiatives include expanding the recycling of cardboard, hangers and plastic; increasing energy efficiency through use of LED lighting and other technology; using sustainability practices in store construction and maintenance; reducing product packaging materials; and using solar energy in company facilities. During fiscal year 2015, the Company promoted the use of reusable shopping bags and sustainably made clothing in its stores and, in partnership with vendors and local environmental groups, sponsored volunteer events to clean up beaches, rivers and waterways in select Belk communities. The Company also continued its Employee Environment giving campaign and partnered with EarthShare and the HERproject, which links multinational companies and their factories to create sustainable workplace programs that increase women’s health awareness.

Philanthropy

In fiscal year 2015, the Company and its associates, customers and vendors contributed $21.5 million to local communities. Of that amount, the Company funded $6.1 million to over 250 nonprofit organizations, with a focus on education, breast cancer research and awareness, and community strengthening. The remainder of the

 

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funding included associate, vendor and customer dollars raised in Belk-led charitable initiatives, including the semi-annual Belk Charity Sale, local United Way campaigns, the American Heart Association’s “Our Heart to Yours” campaign, and the Susan G. Komen for the Cure campaign. During fiscal year 2014, in partnership with Charlotte Radiology and Foundation for the Carolinas, Belk announced an approximate $6 million, multi-year investment in the Belk Gives on the Go Mobile Mammography Center. In fiscal year 2016, the Center will visit more than 80 Southern cities, delivering breast cancer screenings and spreading awareness across the South. As of the fiscal 2015 year end, the Center had screened more than 7,400 women.

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 (“UES”), a division of the Company, which provides equipment maintenance services to Belk stores and third parties.

Industry and Competition

The Company operates department stores in the highly competitive retail industry. Management 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, direct merchant firms and online retailers, including Macy’s, Inc., Dillard’s, Inc., Nordstrom, Inc., Kohl’s Corporation, Target Corporation, Sears Holding Corporation, TJX Companies, Inc., Wal-Mart Stores, Inc., J.C. Penney Company, Inc., and Amazon.com, 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.” 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 its private brands program. The Company intends to vigorously protect its trademarks and service marks and initiate appropriate legal action whenever necessary.

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 operating and net income are realized during the fourth quarter, which includes the holiday 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 holiday 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 the end of fiscal year 2015, the Company had approximately 24,350 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.

 

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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, proxy statements 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.

 

Item 1A.

Risk Factors

Certain statements made in this report, and other written or oral statements made by or on our behalf, may constitute “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our 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, general economic conditions, our ability to be competitive in the retail industry, our ability to execute profitability and efficiency strategies, our ability to execute growth strategies, anticipated benefits from our belk.com website and our eCommerce fulfillment centers, the expected benefits of new systems and technology, and the anticipated benefits under our Program Agreement with Synchrony Bank. 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. Any such forward-looking statements are qualified by the following important risk factors and other risks which may be disclosed from time to time in our filings that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them.

Economic, political and business conditions could negatively affect our financial condition and results of operations.

Economic, political and business conditions, nationally and in our market areas, are beyond our control. These factors influence our forecasts and impact actual performance. Factors include rates of economic growth, interest rates, inflation or deflation, consumer credit availability, levels of consumer debt and bankruptcies, tax rates and policy, unemployment trends, a health pandemic, catastrophic events, potential acts of terrorism and threats of such acts and other matters that influence consumer confidence and spending. Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. The downturn in the economy during fiscal years 2009 and 2010 and the continuing uncertain economic climate that has continued since fiscal year 2011 have affected, and will continue to affect for an undetermined period of time, consumer purchases of our merchandise. The precise future impact and duration of these economic conditions are uncertain, but they could continue to adversely impact our financial condition and results of operations.

Our sales and operating results depend on accurately anticipating customer demands.

Our business depends upon the ability to anticipate the demands and expectations of our customers for a wide variety of merchandise and services. We routinely make predictions about the merchandise mix, quality, style, service, convenience and credit availability of our customers. If we do not accurately anticipate changes in buying, charging and payment behavior among our customers, or consumer tastes, preferences, spending patterns and other lifestyle decisions, we may be faced with excess inventories for some products and/or missed opportunities for others. Excess inventories can result in lower gross margins due to greater than anticipated discounts and markdowns that might be necessary to reduce inventory levels. Low inventory levels can adversely

 

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affect the fulfillment of customer demand and diminish sales and brand loyalty. Our inability to identify and respond to lifestyle and customer preferences and buying trends could have an adverse impact on our business, and our failure to accurately predict inventory demands could adversely impact our results of operations.

Unseasonable and extreme weather conditions in our market areas may adversely affect our business.

Apparel comprises a majority of our sales. If the weather in our market areas is unseasonably warm or cold for an extended period of time, it can affect the timing of apparel purchases by our customers and result in an inventory imbalance. In addition, frequent or unusually heavy snow or ice storms, hurricanes or tropical rain storms in our market areas may affect our hours of operation, decrease customer traffic in our stores and adversely affect our business.

The seasonal nature of our business could have a material adverse effect on our financial results and cash flows.

We experience seasonal fluctuations in quarterly net income, as is typical in the retail industry. A significant portion of our revenues are generated during the holiday season in the fourth fiscal quarter. Because we order merchandise in advance of our peak season, we carry a significant amount of inventory during that time. A decrease in the availability of working capital needed in the months before the peak period could impact our ability to build up an appropriate level of merchandise in our stores. If we do not order the merchandise mix demanded by our customers or if there is a decrease in customer spending during the peak season due to a downturn in the economy, unseasonable and extreme weather or for any other reason, we may be forced to rely on markdowns or promotional sales to dispose of the inventory, which could have a material adverse effect on our financial results and cash flows. The number of selling days during the peak season between Thanksgiving and Christmas can also affect our results.

The retail industry is highly competitive, which could adversely impact our revenues and profitability.

We face competition from other 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 in the highly competitive retail industry. Although we offer extensive Internet purchasing options and online gift registry for our customers, we rely on in-store sales for the majority of our revenues. Competition is characterized by many factors, including price, merchandise mix, quality, style, service, convenience, credit availability and advertising. We have expanded and continue to expand into new markets served by our competitors. We have also expanded our eCommerce capabilities in the past few years. We face the entry of new competitors into or expansion of existing competitors in our existing markets, all of which further increase the competitive environment and cause downward pressure on prices and reduced margins, which could adversely impact our revenues and profitability. In addition, a significant shift in consumer buying patterns from in-store purchases to Internet purchases could negatively impact our revenues.

A security breach that results in the unauthorized disclosure of Company, employee or customer information could adversely affect our business, reputation and financial condition.

Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our business, customers and employees, including credit card information. Security breaches could expose us to a risk of loss or misuse of this information and potential liability. We may not be able to anticipate or prevent rapidly evolving types of cyber-attacks. Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional personnel and protection technologies, train employees and engage third party experts and consultants. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. Data and security breaches can also occur as a result of non-technical issues including intentional or inadvertent breaches by employees or persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

 

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If we do not successfully implement our new information technology platform, our financial performance could be adversely affected.

We have undertaken a process of transforming our technology infrastructure and implementing new systems that will impact our primary merchandising, planning and core financial processes. Implementing new systems carries substantial risk, including implementation delays, cost overruns, disruption of operations, potential loss of data or information, lower customer satisfaction resulting in lost customers or sales, inability to deliver merchandise to our stores or our customers, and the potential inability to meet reporting requirements. If we do not implement these systems successfully, our ability to perform our key business processes could be disrupted and our financial performance could be adversely affected.

Our ability to manage multiple initiatives simultaneously could impact our operating results.

The Company is currently managing a number of significant change initiatives, such as systems and technology enhancements, changes in our merchandising and planning processes, store process improvements, strategic sourcing, store remodels and others. If we are unable to successfully coordinate and execute these initiatives while managing the other areas of our business, our results could be adversely affected.

Variations in the amount of vendor allowances received could adversely impact our operating results.

We receive vendor allowances for advertising, payroll and margin maintenance that are a strategic part of our operations. A reduction in the amount of cooperative advertising allowances would likely cause us to consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures and/or revenue. Decreased payroll reimbursements would either cause payroll costs to rise, negatively impacting operating income, or cause us to reduce the number of employees, which may cause a decline in sales. A decline in the amount of margin maintenance allowances would either increase cost of sales, which would negatively impact gross margin and operating income, or cause us to reduce merchandise purchases, which may cause a decline in sales.

If we do not successfully operate our website and our fulfillment facilities, our financial performance could be adversely affected.

In fiscal year 2009, we launched a substantially updated and redesigned website that enhanced customers’ online shopping capabilities, offered expanded merchandise assortments and enabled customers to access a broader range of our information online, including current sales promotions, special events and corporate information. In fiscal year 2011, we expanded our online capabilities, increased multimedia marketing and implemented social community engagement strategies. In fiscal year 2015, we made investments to improve the stability and performance of the website and began the planning for a new digital commerce platform with enhanced order management capabilities to replace the current website. If we do not successfully meet the challenges of successfully operating and improving our website, our financial performance could be adversely affected.

If we are unable to successfully develop and maintain a relevant and reliable Omnichannel experience for our customers, our financial performance could be adversely affected.

The Company introduced a multi-year comprehensive Omnichannel initiative in fiscal year 2014 designed to address customers’ shopping preferences and service expectations by creating a consistent, compelling and seamless shopping experience whether they choose to shop in stores, online or via mobile devices. Our success depends to a large degree on our ability to plan and manage inventory levels and the fulfillment of orders, address operational issues in stores and online and further align both channels to optimize our Omnichannel initiative. In addition, our success also depends on our ability to anticipate and implement innovations in sales and marketing technology to appeal to existing and potential clients who increasingly rely on multiple portals, including mobile technologies, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our clients’ shopping preferences could significantly impair our ability to meet our strategic business and financial goals. If we do not successfully optimize the implementation of our Omnichannel initiative or it does not achieve its intended results, we may experience an adverse impact on our business and financial performance.

 

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Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.

Our merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors, including the vendor’s ability to secure adequate financing and obtain access to products in a timely and efficient manner, could be a significant challenge, especially with respect to goods sourced outside the United States.

Political or financial instability, trade restrictions, tariffs, transport capacity, costs and other factors relating to foreign trade are beyond our control, and we may experience supply problems or untimely delivery of merchandise as a result. If we are not able to source merchandise at an acceptable price and in a timely manner, it could negatively impact our results.

Changes in the income and cash flow from our long-term marketing and servicing alliance related to our proprietary credit cards could impact operating results and cash flows.

In fiscal year 2006, we sold our proprietary credit card business to, and entered into a 10-year strategic alliance with, Synchrony Bank to operate our private label credit card business, and we extended that alliance in March 2013 for an additional 18 months ending in December 2017. Sales of merchandise and services are facilitated by these credit card operations. We receive income from Synchrony Bank relating to the credit card operations based on a variety of variables, but primarily from the amount of purchases made through the proprietary credit cards. The income we receive from this alliance and the timing of receipt of payments will vary based on changes in customers’ credit card use, and Synchrony Bank’s ability to extend credit to our customers, all of which can vary based on changes in federal and state banking and consumer protection laws and from a variety of economic, legal, social, and other factors that we cannot control.

If we do not manage expenses appropriately, our results of operations could be adversely affected.

Our performance depends on appropriate management of our expense structure, including our selling, general and administrative costs. If we fail to meet our anticipated cost structure based on our anticipated sales level or to appropriately reduce expenses during a weak sales environment, our results of operations could be adversely affected.

Capital investments in store growth and remodels may not produce the returns we anticipate.

Our ability to identify strategic opportunities to open new stores, or to remodel or expand existing stores, will depend in part upon general economic conditions and the availability of existing retail stores or store sites on acceptable terms. It will also depend on our ability to successfully execute our retailing concept in new markets and geographic regions and to design and implement remodeling plans and new merchandising concepts. In addition, we will need to identify, hire and retain a sufficient number of qualified personnel to work in our new and remodeled stores. Increases in real estate, construction and development costs, consolidation or viability of prospective developers and the availability of financing to potential developers could limit our growth opportunities. If consumers are not receptive to us in new markets or regions or to our remodels and expansions in existing markets, our financial performance could be adversely affected.

Our failure to protect our reputation could have an adverse effect on our business.

We offer our customers quality merchandise at competitive prices and a high level of customer service, resulting in a strong brand and customer loyalty to the Belk name. Any significant damage to our brand or reputation could negatively impact sales, diminish customer trust and generate negative sentiment, any of which could harm our business and results of operation.

 

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Loss of our key management, or an inability to attract such management and other personnel, could adversely impact our business.

We depend on our senior executive officers and other key associates to run our business. The loss of any of these officers or associates could materially adversely affect our operations. Competition for qualified employees is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could adversely impact our business.

We may not be able to develop and implement effective advertising, marketing and promotional campaigns.

We spend significant amounts on advertising, marketing and promotional campaigns. Our business depends on effective marketing to generate high customer traffic in our stores and through online sales. If our advertising, marketing and promotional efforts are not effective, it could negatively impact our operating results.

Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of goods and negatively impact our financial results.

We have experienced inflation from time to time in some of our merchandise costs due to increases in raw materials, fuel and labor costs. The cost of cotton, which is a key raw material in many of our products, has had the most significant increases in the past. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Inflation has not to date had a material negative impact on our sales or profitability, but an inability to mitigate future cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability; while any related pricing actions might cause a decline in our sales volume. Additionally, any decrease in the availability of raw materials could impair the ability of our suppliers to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

Our ownership and leasing of real estate could expose us to potential liabilities or losses.

We own or lease 312 store buildings, which subjects us to all the risks associated with owning and leasing real estate. If a store is not profitable and we make the decision to close it, we may remain committed to perform certain obligations under the lease, including the payment of rent, for the balance of the lease term. In addition, as each of the leases expires, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. If an existing owned store is not profitable and we make the decision to close it, we may be required to record an impairment charge and/or exit costs associated with the closing of that store. In addition, lease or other obligations may restrict our right to cease operations of an unprofitable owned or leased store, which may cause us to continue to operate the location at a loss.

If our logistics or distribution processes do not operate effectively, our business could be disrupted.

We currently operate distribution centers in South Carolina and Mississippi that service all of our stores and fulfillment centers in North Carolina and South Carolina that process belk.com customer orders. The efficient operation of our business is dependent on receiving and distributing merchandise in a cost-effective and timely manner. We also rely on information systems to effectively manage sales, distribution, merchandise planning and allocation functions. We are continuing to implement software technology to assist with these functions. If we do not effectively operate the distribution network or if information systems fail to perform as expected, our business could be disrupted.

We rely on third party vendors for certain business support.

Some business support processes are outsourced to third parties. We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, including secure data transfers

 

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between us and third-party vendors; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting.

Changes in federal, state or local laws and regulations could expose us to legal risks and adversely affect our results of operations.

Our business is subject to a wide array of laws and regulations. While our management believes that our associate relations are good, significant legislative changes that impact our relationship with our associates could increase our expenses and adversely affect our results of operations. Examples of possible legislative changes impacting our relationship with our associates include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to legal risk, including government enforcement action and class action civil litigation. Changes in the regulatory environment regarding other topics such as privacy and information security, product safety or environmental protection, among others, could also cause our expenses to increase and adversely affect our results of operations.

Covenants in our debt agreements impose some financial restrictions on us.

Our debt agreements contain certain restrictive financial covenants, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. Our failure to comply with these covenants could adversely affect capital resources, financial condition and liquidity. As of January 31, 2015, we were in compliance with our debt covenants; however, if we fail to comply with our debt covenants, we could be forced to settle outstanding debt obligations, negatively impacting cash flows, and our ability to obtain future financing.

 

Item 1B.    Unresolved

Staff Comments

None.

 

Item 2.

Properties

Store Locations

As of the end of fiscal year 2015, the Company operated a total of 297 retail stores, with approximately 22.6 million selling square feet, in the following 16 states:

 

Alabama – 22		Louisiana – 5		Oklahoma – 3
Arkansas – 7		Maryland – 2		South Carolina – 36
Florida – 25		Mississippi – 16		Tennessee – 23
Georgia – 45		Missouri – 1		Texas – 15
Kentucky – 6		North Carolina – 67		Virginia – 20
				West Virginia – 4

Belk stores are located in regional malls (139), strip shopping centers (105), “power” centers (28), “lifestyle” centers (23), and freestanding stores (2). Approximately 80% of the gross square footage of the typical Belk store is devoted to selling space to ensure maximum operating efficiencies. 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 fixtures, 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 the end of fiscal year 2015, the Company owned 73 store buildings, leased 159 store buildings under operating leases and owned 80 store buildings under ground leases. The typical operating lease has an initial term

 

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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.

Non-Store Facilities

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

 

Belk Property		Location		Own/Lease
Belk, Inc. Corporate Offices (Two locations)		Charlotte, NC		Lease
Belk Central Distribution Center		Blythewood, SC		Lease
Belk Distribution Center		Byram, MS		Own
Belk, Inc. Fine Jewelry Distribution Center		Ridgeland, MS		Own
Belk, Inc. eCommerce Fulfillment Center		Jonesville, SC		Lease
Belk, Inc. eCommerce Fulfillment Center		Pineville, NC		Lease

The Jonesville, SC eCommerce fulfillment center that opened in fiscal year 2013 was expanded from 515,000 square feet to 861,000 square feet during the past fiscal year to increase its processing and storage capacity and support the Company’s growing eCommerce business. In connection with that expansion, the Company announced plans to cease operations of its 259,000 square foot eCommerce fulfillment center in Pineville, NC in August of fiscal year 2016.

Other

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

 

Item 3.

Legal Proceedings

In the ordinary course of business, the Company is subject to various legal proceedings and claims. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on its consolidated financial position or results of operations.

 

Item 4.

Mine Safety Disclosures

None.

 

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PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

In fiscal year 2015, there was no established public trading market for either the Belk Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) or the Belk Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”). There were limited and sporadic quotations of bid and ask prices for the Class A Common Stock and the Class B Common Stock on the Over the Counter Bulletin Board and on the OTC Market, in the OTCQB Tier, under the symbols “BLKIA” and “BLKIB,” respectively. As of April 3, 2015, there were approximately 546 holders of record of the Class A Common Stock and 278 holders of record of the Class B Common Stock.

On March 26, 2015, the Company declared a regular dividend of $0.80 on each share of Class A and Class B Common Stock outstanding on that date. On March 26, 2014, the Company declared a regular dividend of $0.80 on each share of Class A and Class B Common Stock outstanding on that date. On December 11, 2012, the Company declared a regular dividend of $0.75 and a special one-time additional dividend of $0.25 on each share of Class A and Class B Common Stock outstanding on that date. The $0.75 per share regular dividend represented an acceleration of the regular dividend normally paid in April following the end of the fiscal year. On March 28, 2012, the Company declared a regular dividend of $0.75 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 2016 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.”

There were no purchases of issuer equity securities during the fourth quarter of fiscal year 2015.

 

Item 6.

Selected Financial Data

The following selected financial data is derived from the consolidated financial statements of the Company. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. All fiscal years for which financial information is set forth below contained 52 weeks, except for the fiscal year ended February 2, 2013, which contained 53 weeks.

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,				January 28,				January 29,
		2015				2014				2013(1)				2012				2011
		(in thousands, except per share amounts)
SELECTED STATEMENT OF INCOME DATA:
Revenues		$	4,109,561			$	4,038,118			$	3,956,866			$	3,699,592			$	3,513,275
Cost of goods sold			2,770,201				2,722,766				2,636,140				2,461,515				2,353,536
Depreciation and amortization expense			154,931				137,069				122,622				122,761				140,239
Operating income			271,360				288,327				339,937				300,910				245,981
Income before income taxes			224,755				243,877				290,504				250,098				195,871
Net income			146,062				158,533				188,370				183,148				127,628
Basic net income per share			3.67				3.82				4.34				4.04				2.72
Diluted net income per share			3.66				3.79				4.31				4.02				2.71
Cash dividends per share			0.80				—				1.75				0.55				0.80

 

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		Fiscal Year Ended
		January 31,				February 1,				February 2,				January 28,				January 29,
		2015				2014				2013(1)				2012				2011
		(in thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Accounts receivable, net		$	60,575			$	55,340			$	32,004			$	39,431			$	31,119
Merchandise inventory			959,645				987,778				1,009,687				887,029				808,503
Working capital			642,427				780,652				790,440				845,418				924,450
Total assets			2,654,491				2,564,638				2,478,626				2,514,216				2,389,631
Long-term debt and capital lease obligations			427,727				393,757				399,824				523,679				539,239
Stockholders’ equity			1,361,746				1,358,245				1,262,621				1,236,230				1,156,272
SELECTED OPERATING DATA:
Number of stores at end of period			297				299				301				303				305
Comparable store revenue increase(1)			1.5	%			2.9	%			6.3	%			5.5	%			5.1	%

 

(1)	Fiscal year 2013 was a 53-week year. On a 53- versus 52-week basis, comparable store net revenues increased 1.7% and 7.5% in fiscal years 2014 and 2013, respectively.

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the nation’s largest family owned and operated department store business in the United States, with 297 stores in 16 states, as of the fiscal year ended January 31, 2015. With stores located primarily in the southern United States and with a growing eCommerce business on its belk.com website, the Company generated revenues of $4.1 billion for the fiscal year 2015, and together with its predecessors, has been successfully operating department stores since 1888. Belk is committed to providing its customers a compelling shopping experience and merchandise that reflects “Modern. Southern. Style.”

The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. The comparable store net revenue increase for fiscal year 2013 discussed below is based on 52 weeks. The fiscal year end dates and number of weeks in fiscal years 2013 – 2016 are reflected in the table below.

 

Fiscal Year		End Date				Weeks
2016			January 30, 2016				52
2015			January 31, 2015				52
2014			February 1, 2014				52
2013			February 2, 2013				53

The Company’s total revenues increased 1.8% in fiscal year 2015 to $4.1 billion. Comparable store revenues increased 1.5% as a result of continued strong eCommerce sales and execution of the Company’s key strategic initiatives. Our eCommerce revenues increased by $83.4 million, or 43.3%, and contributed 2.1% of the 1.5% comparable store revenues for the period. The increase in revenues from comparable stores was generally the result of a 5.2% increase in holiday sales that occurred in the nine week period ending January 3, 2015. This increase was partially offset by the soft sales environment that persisted through the first nine months of fiscal year 2015. The Company calculates comparable store revenues as sales from stores that have reached the one-year anniversary of their opening as of the beginning of the fiscal year and eCommerce revenues, but excludes closed stores. Stores undergoing remodeling, expansion or relocation remain in the comparable store revenue calculation. Definitions and calculations of comparable store revenues differ among companies in the retail industry.

Operating income decreased to $271.4 million in fiscal year 2015 compared to $288.3 million in fiscal year 2014. Net income decreased to $146.1 million or $3.67 per basic share and $3.66 per diluted share in fiscal year 2015

 

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compared to $158.5 million or $3.82 per basic share and $3.79 per diluted share in fiscal year 2014. The decrease in net income was due primarily to higher expenses associated with the Company’s investments in key strategic initiatives, such as expanded Omnichannel and eCommerce capabilities.

Management believes that consumers will remain focused on value in fiscal year 2016. The Company intends to continue to be flexible in sales and inventory planning and in expense management in order to react to changes in consumer demand. Although the Company expects that operations will be influenced by general economic conditions, including rising food, fuel and energy prices, management does not believe that inflation has had a material effect on the Company’s results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.

Belk seeks to provide customers with a convenient and enjoyable shopping experience both in stores and online at belk.com, by offering an appealing merchandise mix that includes extensive assortments of brands, styles, and sizes. Belk stores and belk.com sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, fine jewelry, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.

The Company seeks to be the leading department store in its markets by selling merchandise to customers that meet their needs for fashion, selection, value, quality and service. To achieve this goal, Belk’s business strategy focuses on quality merchandise assortments, effective marketing and sales promotion strategies, attracting and retaining talented, well-qualified associates to deliver superior customer service, and operating efficiently with investments in information technology and process improvement.

The Company operates retail department stores in the highly competitive retail industry. Management believes that the principal competitive factors for retail department store operations include merchandise selection, quality, value, customer service and convenience. The Company believes it faces 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, direct merchant firms and online retailers, including Macy’s, Inc., Dillard’s, Inc., Nordstrom, Inc., Kohl’s Corporation, Target Corporation, Sears Holding Corporation, TJX Companies, Inc., Wal-Mart Stores, Inc., J.C. Penney Company, Inc., and Amazon.com, Inc.

The Company has focused its growth strategy on new stores, expanding and remodeling existing stores, developing new merchandising concepts in targeted demand centers, and expanding its online capabilities. In addition, the Company continues to expand the number of Belk flagship locations and, as of the 2015 fiscal year end, operates 21 flagship stores that meet certain standards based on size, sales volume, location, premium brand assortments and Belk brand image.

eCommerce

The Company continues to grow its eCommerce business and expand the capabilities of its belk.com website, which features a wide assortment of fashion apparel, accessories, shoes and cosmetics, plus home and gift merchandise. Many leading national brands are offered at belk.com, along with the Company’s exclusive private brands. The Company generated eCommerce revenues of $276.1 million, $192.7 million and $135.2 million in fiscal years 2015, 2014 and 2013, respectively. On a 52- versus 52-week basis, eCommerce revenues increased 43.3%, 44.6% and 84.0%, and contributed 2.1%, 1.5% and 1.6% to the comparable store revenue increases in fiscal years 2015, 2014 and 2013, respectively.

In fiscal year 2015, the Company continued to grow and enhance its eCommerce business and belk.com website with systems improvements, expansion of merchandise assortments, added investments to enhance the customer’s mobile experience, increased multimedia and mobile marketing, and implementation of ongoing social media and community engagement strategies.

 

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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.

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
SELECTED FINANCIAL DATA:
Revenues			100.0	%			100.0	%			100.0	%
Cost of goods sold			67.4				67.4				66.6
Selling, general and administrative expenses			25.9				25.3				24.9
Gain on sale of property and equipment			0.2				0.1				0.1
Asset impairment and exit costs			0.3				0.2				—
Operating income			6.6				7.1				8.6
Interest expense			1.1				1.1				1.3
Income tax expense			1.9				2.1				2.6
Net income			3.6				3.9				4.8
SELECTED OPERATING DATA:
Selling square footage (in thousands)			22,600				22,600				22,700
Revenues per selling square foot		$	182			$	179			$	174
Comparable store revenues increase(1)			1.5	%			2.9	%			6.3	%
Number of stores
Opened			4				3				2
Closed			(6	)			(5	)			(4	)
Total — end of period			297				299				301

 

(1)	Fiscal year 2013 was a 53-week year. On a 53- versus 52-week basis, comparable store net revenues increased 1.7% and 7.5% in fiscal years 2014 and 2013, respectively.

The Company’s store and eCommerce operations have been aggregated into one reporting segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.

The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.

 

Merchandise Areas		Fiscal Year 2015				Fiscal Year 2014				Fiscal Year 2013
Women’s			33	%			32	%			33	%
Cosmetics, Shoes and Accessories			34	%			34	%			34	%
Men’s			17	%			18	%			17	%
Home			9	%			9	%			10	%
Children’s			7	%			7	%			6	%
Total			100	%			100	%			100	%

 

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Comparison of Fiscal Years Ended January 31, 2015 and February 1, 2014

Revenues.    The Company’s total revenues increased 1.8%, or $71.4 million, in fiscal year 2015 to $4.1 billion. The increase was primarily attributable to an increase in revenues from comparable stores of 1.5% and a $28.8 million increase in revenues from new stores. This increase in revenues was offset by a $15.6 million decrease in revenues due to closed stores. The increase in revenues from comparable stores was generally the result of a 5.2% increase in holiday sales that occurred in the nine week period ending January 3, 2015, as our customers accepted our offerings from a style and value perspective. While our initial markup was higher, due to the soft sales environment that persisted through the first nine months of fiscal year 2015, our number of units sold were flat to prior year and markdowns increased causing our average unit selling price to only increase 1%. Merchandise categories achieving the highest growth rate included activewear; ladies contemporary, resort and bridge fashions; ladies suits; men’s sportswear; and juniors.

Cost of Goods Sold.    Cost of goods sold was $2.8 billion, or 67.4% of revenues in fiscal year 2015 compared to $2.7 billion, or 67.4% of revenues in fiscal year 2014. The increase of $47.4 million in cost of goods sold was primarily due to the increase in revenues, the increased shipping and handling and fulfillment costs associated with the 43.3% increase in eCommerce sales, and increased markdown activity due to a soft sales environment in the first nine months of the year.

Selling, General and Administrative Expenses.    Selling, general and administrative (“SG&A”) expenses were $1.1 billion, or 25.9% of revenues in fiscal year 2015, compared to $1.0 billion, or 25.3% of revenues for fiscal year 2014. The increase in SG&A expense of $41.1 million was substantially due to our investment in key strategic initiatives such as expanded Omnichannel and eCommerce capabilities. These investments also increased the SG&A rate as a percentage of revenues and was partially offset by decreased employee benefit expenses as a percentage of revenues.

Gain on property and equipment.    Gain on property and equipment was $7.3 million for fiscal year 2015 compared to $2.3 million for fiscal year 2014. During fiscal year 2015, the Company recognized a $4.0 million gain associated with the sale of a former store location and a parcel of land the Company owned, $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods, offset by losses primarily due to the abandonment of property. During fiscal year 2014, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building, offset by losses primarily due to the abandonment of property.

Asset Impairment and Exit Costs.    Asset impairment and exit costs were $11.0 million for fiscal year 2015 compared to $6.1 million for fiscal year 2014. In fiscal year 2015, the Company recorded $7.2 million in impairment charges primarily to adjust a retail location’s net book value to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. The Company also recorded $3.1 million in charges for real estate holding costs primarily due to $1.7 million in dark rent for one retail location, and a $0.5 million early termination fee for another retail location. The Company recorded $0.7 million in exit costs associated with the closing of eight retail locations. In fiscal year 2014, the Company recorded $5.0 million in impairment charges primarily to adjust two retail locations’ net book value to fair value. The Company also recorded $1.1 million in charges for real estate holding costs primarily due to a $0.7 million early termination fee for one retail location and $0.3 million to relocate two retail locations.

Income tax expense.    Income tax expense for fiscal year 2015 was $78.7 million, or 35.0%, compared to $85.3 million, or 35.0%, for fiscal year 2014. The decrease in income tax expense was primarily due to the decrease in pre-tax income of $19.1 million in fiscal year 2015 compared to fiscal year 2014.

Comparison of Fiscal Years Ended February 1, 2014 and February 2, 2013

Revenues.    In fiscal year 2014, the Company’s revenues increased 2.1% or $81.3 million to $4.0 billion. The increase was primarily attributable to an increase in revenues from comparable stores of 2.9%. This increase in revenues was offset by the 53^rd week revenues in the prior fiscal year of $44.4 million, and by an $11.4 million decrease in revenues due to closed stores. The increase in revenues from comparable stores was generally the result of general economic conditions and the acceptance by our customers of our merchandise offerings from

 

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both a style and value perspective. Primarily as the result of a shorter holiday selling season and a softening sales environment in the latter half of the year, the number of units sold were flat compared to fiscal year 2013. Additionally, markdowns increased as a result of the softening sales environment, which led to our average unit selling price only increasing 1% compared to fiscal year 2013. Merchandise categories achieving the highest growth rate included activewear, ladies contemporary, resort and bridge fashions, ladies suits, men’s better sportswear and clothing, and kids apparel and shoes.

Cost of Goods Sold.    Cost of goods sold was $2.7 billion, or 67.4% of revenues in fiscal year 2014 compared to $2.6 billion, or 66.6% of revenues in fiscal year 2013. The increase in cost of goods sold as a percentage of revenues was primarily attributable to the increased shipping and handling and fulfillment center costs associated with the 42.5% increase in eCommerce sales, and increased markdown activity due to a softening sales environment in the latter half of fiscal year 2014.

Selling, General and Administrative Expenses.    SG&A expenses were $1.0 billion, or 25.3% of revenues in fiscal year 2014, compared to $985.2 million, or 24.9% of revenues for fiscal year 2013. The increase in SG&A expense of $38.0 million was substantially due to our investment in key strategic initiatives. These investments also increased the SG&A rate as a percentage of revenues and was partially offset by decreased store payroll and advertising expenses as a percentage of revenues.

Gain on property and equipment.    Gain on property and equipment was $2.3 million for fiscal year 2014 compared to $4.2 million for fiscal year 2013. The fiscal year 2014 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building, offset by losses primarily due to the abandonment of property. The fiscal year 2013 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods.

Asset Impairment and Exit Costs.    Asset impairment and exit costs were $6.1 million for fiscal year 2014 compared to $0.3 million for fiscal year 2013. In fiscal year 2014, the Company recorded $5.0 million in impairment charges primarily to adjust two retail locations’ net book values to fair value. The Company also recorded $1.1 million in charges for real estate holding costs primarily due to a $0.7 million early termination fee for one retail location and $0.3 million to relocate two retail locations. In fiscal year 2013, the Company recorded $0.7 million in rent adjustments due to space reductions at two stores, partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book values to fair value, and a $0.2 million charge for exit costs primarily associated with the closing of two stores.

Interest Expense.    In fiscal year 2014, the Company’s interest expense decreased $4.9 million to $44.6 million from $49.5 million for fiscal year 2013. The decrease in interest expense was primarily due to the maturity of the $80.0 million floating rate senior note and associated interest rate swap, the maturity of the $20.0 million 5.05% fixed rate senior note, and the extinguishment of the $17.8 million state bond facility in fiscal year 2013.

Income tax expense.    Income tax expense for fiscal year 2014 was $85.3 million, or 35.0%, compared to $102.1 million, or 35.2%, for fiscal year 2013. The decrease in income tax expense was primarily due to the decrease in pre-tax income of $46.6 million in fiscal year 2014 compared to fiscal year 2013.

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 operating and net income are realized during the fourth quarter, which includes the holiday selling season. 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.

 

		2015				2014				2013
First quarter			23.2	%			23.7	%			23.0	%
Second quarter			22.1				22.3				21.9
Third quarter			20.9				21.3				21.2
Fourth quarter			33.8				32.7				33.9

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, expansions and remodels.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash on hand of $294.4 million as of January 31, 2015, cash flows from operations, and borrowings under debt facilities, which consist of a $500.0 million credit facility and $375.0 million in senior notes. The credit facility, which was refinanced on October 22, 2014 and matures in October 2019, allows for up to $100.0 million of outstanding letters of credit. As of January 31, 2015, the Company had $14.0 million of standby letters of credit outstanding under the credit facility, and availability under the credit facility was $486.0 million.

The new credit facility contains restrictive covenants including leverage and fixed charge coverage ratios. The Company’s calculated leverage ratio dictates the LIBOR spread that will be charged on outstanding borrowings in the subsequent quarter. The leverage ratio is calculated by dividing adjusted debt, which is the sum of the Company’s outstanding debt and rent expense multiplied by a factor of eight, by pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. The maximum leverage ratio of 4:1 remains the same as under the previous facility. At the Company’s discretion, amounts outstanding under the credit facility bear interest based on either (1) current LIBOR plus the applicable spread which ranges from 0.875% to 1.75%, or (2) the greater of the prime rate, the federal funds rate plus 0.50% or the one-month LIBOR plus 1.0% (the “Base Rate”), plus the applicable spread which ranges from 0.0% to 0.75%. The current applicable spread of 1.125% is based upon the calculated leverage ratio of 1.96 as of January 31, 2015. Previous dividend, share repurchase, and acquisition limitations were removed and changed under the new credit facility to pro forma covenant compliance. Pro forma covenant compliance would be reflective of the covenant calculations after giving effect for the applicable transaction. The Company was in compliance with all covenants as of January 31, 2015 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future.

The senior notes have restrictive covenants that are similar to the Company’s credit facility, and had the following terms as of January 31, 2015:

 

Amount (in millions)				Type of Rate		Rate				Maturity Date
	$  100.0			Fixed			5.31	%			July 2015
	125.0			Fixed			6.20	%			August 2017
	50.0			Fixed			5.70	%			November 2020
	100.0			Fixed			5.21	%			January 2022
	$ 375.0

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, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. These ratios are calculated exclusive of non-cash charges, such as fixed assets, goodwill and other intangible asset impairments.

 

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The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. As of January 31, 2015, the Company did not have any interest rate swaps outstanding. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. Previous swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt.

Belk has invested over $600 million in key strategic initiatives over the last three fiscal years. Below is a breakdown of the capital expenditures associated with these initiatives.

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
		(in thousands)
Omnichannel		$	36,635			$	16,250			$	9,373
New stores, expansions and remodels			92,976				102,964				68,290
Information technology			37,301				46,704				48,966
Supply chain			36,702				11,040				2,724
		$	203,614			$	176,958			$	129,353

Belk intends to invest approximately $450 million, the majority of which will be capital expenditures, over the three-year period beginning in fiscal year 2016 on these key strategic initiatives. Based on our current plan, of this amount, approximately $230 million will be focused on our comprehensive Omnichannel initiative, $110 million on creating compelling shopping environments through new stores, expansions, remodels, and an expanded flagship strategy, $45 million on information technology that delivers new business capabilities, and $65 million on supply chain initiatives that align distribution capabilities to support our Omnichannel initiative.

Management believes that cash on hand of $294.4 million as of January 31, 2015, cash flows from operations and existing credit facilities will be sufficient to cover working capital needs, stock repurchases, dividends, key strategic initiatives and other capital expenditures, pension contributions and debt service requirements for the next twelve months and foreseeable future.

Net cash provided by operating activities was $363.9 million for fiscal year 2015 compared to $367.5 million for fiscal year 2014. The decrease in cash provided by operating activities for fiscal year 2015 was principally due to a $51.0 million increase in cash generated from inventory, net of merchandise payables and $12.5 million decrease in net income. This was offset by a $25.0 million decrease in pension contributions, an $18.1 million decrease in cash generated from accounts receivables and a $17.9 million increase in depreciation expense.

Net cash used by investing activities decreased $2.2 million to $221.4 million for fiscal year 2015 from $223.6 million for fiscal year 2014. The decrease in cash used by investing activities primarily resulted from a $9.3 million increase in proceeds from the sale of property and a $7.1 million increase in capital expenditures in fiscal year 2015 compared to fiscal year 2014.

Net cash used by financing activities increased $25.8 million to $143.5 million for fiscal year 2015 from $117.7 million for fiscal year 2014. The increase in cash used by financing activities primarily relates to a $33.0 million increase in dividends paid in fiscal year 2015 compared to the same period in fiscal year 2014, as the regular dividend normally paid in April following the end of the fiscal year was accelerated in the prior year and paid in fiscal year 2013. This was partially offset by a $7.6 million decrease in the shares redeemed during the tender offer finalized in May 2014 versus the May 2013 tender offer.

 

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Contractual Obligations and Commercial Commitments

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

 

		Payments Due by Period
		Total				Within 1 Year				1 - 3 Years				3 - 5 Years				After 5 Years
		(dollars in thousands)
Contractual Obligations
Long-Term Debt		$	375,000			$	100,000			$	125,000			$	—			$	150,000
Estimated Interest Payments on Debt(a)			79,041				18,968				29,961				17,473				12,639
Capital Lease Obligations			52,727				8,736				7,512				5,542				30,937
Operating Leases(b)			522,073				74,538				130,284				99,825				217,426
Purchase Obligations(c)			85,773				59,864				18,867				6,935				107
Total Contractual Cash Obligations		$	1,114,614			$	262,106			$	311,624			$	129,775			$	411,109
		Amount of Commitment Expiration per Period
		Total Amounts Committed				Within 1 Year				1 - 3 Years				3 - 5 Years				After 5 Years
		(dollars in thousands)
Other Commercial Commitments
Standby Letters of Credit		$	14,040			$	14,040			$	—			$	—			$	—

 

(a)	Interest rates used to compute estimated interest payments utilize the stated rate.

 

(b)	Lease payments consist of base rent only and do not include amounts for percentage rents, real estate taxes, insurance and other expenses related to those locations.

 

(c)

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty, such as merchandise purchase orders, have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts.

Obligations under the deferred compensation and postretirement benefit plans are not included in the contractual obligations table. The Company’s deferred compensation and postretirement plans are not funded in advance. Deferred compensation and other non-qualified plan payments during fiscal years 2015 and 2014 totaled $8.5 million and $8.7 million, respectively. Postretirement benefit payments totaled $1.9 million and $2.1 million during the fiscal years 2015 and 2014, respectively.

Obligations under the Company’s defined benefit pension plan are not included in the contractual obligations table. Under the current requirements of the Pension Protection Act of 2006 (“PPA”), the Company is required to fund the net pension liability over the subsequent seven years. The net pension liability under PPA is calculated based on certain assumptions at January 1 of each year that are subject to change based on economic conditions (and any regulatory changes) in the future. The Company expects to contribute sufficient amounts to the pension plan so that the PPA guidelines are met or exceeded.

As of January 31, 2015, the total uncertain tax position liability was approximately $24.8 million, including tax, penalty and interest. The Company is not able to reasonably estimate the timing of these tax related future cash flows and has excluded these liabilities from the table. At this time, the Company does not expect a material change to its gross unrecognized tax benefit during fiscal year 2016.

 

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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.

Off-Balance Sheet Arrangements

The Company has not provided any financial guarantees as of January 31, 2015. The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.

New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30),” which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This guidance will be effective at the beginning of fiscal year 2017, and the Company does not expect the adoption to have a material impact on the consolidated financial statements.

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 255-20),” which eliminates from GAAP the concept of extraordinary items. This guidance will be effective at the beginning of fiscal year 2017, and the Company does not expect the adoption to have an impact on the consolidated financial statements or related disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40),” which requires disclosure of uncertainties about an entity’s ability to continue as a going concern. This guidance will be effective at the beginning of fiscal year 2018, and the Company does not expect the adoption to have an impact on the consolidated financial statements or related disclosures.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective at the beginning of fiscal year 2018, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact that the adoption will have on the consolidated financial statements and related disclosures but does not believe it will have a material impact. The Company has not yet selected a transition method.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the definition of a discontinued operation and the requirements for reporting discontinued operations. This guidance will be effective at the beginning of fiscal year 2016, and the Company does not expect the adoption to have a material impact on the consolidated financial statements.

Impact of Inflation or Deflation

Although the Company expects that operations will be influenced by general economic conditions, including rising food, fuel and energy prices, management does not believe that inflation has had a material effect on the Company’s results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.

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 GAAP. As

 

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discussed in the Company’s notes to the 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, recoverability of long-lived assets, the calculation of pension and postretirement obligations, self-insurance reserves, and income taxes.

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 the Company’s notes to the consolidated financial statements for a discussion of the Company’s significant accounting policies.

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 (“RIM”). Under RIM, inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. Since the retail value of our inventory is adjusted on a regular basis to reflect current market conditions, our carrying value should approximate the lower of cost or market. RIM is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, permanent markdowns and shrinkage, which may affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold.

Permanent markdowns designated for clearance activity are recorded when the salability of the inventory has diminished. Factors taken into consideration when making a permanent markdown decision include current and anticipated demand, customer preference, age of merchandise and fashion trends. When a decision is made to permanently markdown inventory, the resulting charge to cost of goods sold is made in the same period. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $3 million for fiscal years 2015, 2014 and 2013, respectively.

Shrinkage primarily results from adjusting the inventory records for the results of the physical inventories taken. At interim periods, shrinkage is estimated as a percentage of sales based on historical shrinkage rates. Historically, our actual physical inventory count results have shown our estimates to be reliable. Based on prior experience, we do not believe that the actual results will differ significantly from the assumptions used in these estimates. Shrinkage occurs due to theft, loss, and inaccurate records for the receipt of inventory, among other things. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies in place intended to minimize it, including interim inventories to keep the Company’s inventory records accurate.

The Company receives markdown allowances, which represent partial reimbursement of markdowns taken and/or to support the gross margins earned in connection with the sale of 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. The arrangements pursuant to which the Company’s vendors provide allowances, while binding, are generally informal in nature. The terms and conditions of these arrangements vary significantly from vendor to vendor and are influenced by, among other things, the type of merchandise to be supported. Although it is highly unlikely that there will be any significant reduction in historical levels of vendor support, if such a reduction were to occur, the Company could experience higher costs of sales depending on the specific vendors involved and market conditions existing at the time.

 

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Recoverability of Long-Lived Assets.    The carrying value of long-lived assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as historical operating losses or plans to close stores before the end of their previously estimated useful lives. Additionally, on an annual basis, the recoverability of the carrying amounts of individual stores are evaluated. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of future cash flows based upon the future highest and best use of the asset. When determining the stream of projected future cash flows associated with an individual store, management estimates future store performance, including sales growth rates, gross margin and controllable expenses, such as store payroll and supplies expense. Projected cash flows must be estimated for future periods throughout the remaining life of the property, which may be as many as 40 years in the future. The accuracy of these estimates will be impacted by a number of factors, including general economic conditions, changes in competitive landscape and our ability to effectively manage the operations of the store. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. A 10% decrease in the estimated undiscounted cash flows for the stores with indicators of impairment would not have had a material impact on our results of operations for fiscal years 2015, 2014 or 2013.

Pension and Postretirement Obligations.    The Company has a defined benefit pension plan, the Belk Pension Plan, a non-qualified defined benefit Supplemental Executive Retirement Plan, (“Old SERP”), which provides retirement and death benefits to certain qualified executives, and the Company provides postretirement medical and life insurance benefits to certain employees. The Company utilizes significant assumptions, along with the actual employee census data, 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 and long-term rate of return on plan assets (in the case of the Pension Plan).

The Company discounted its future pension and post retirement obligations using a rate of 3.50% at January 31, 2015, compared to 4.50% at February 1, 2014. The Company developed the discount rate by matching the projected future cash flows of the plan to a modeled yield curve consisting of over 500 Aa-graded, noncallable bonds, then rounded up to the nearest eighth of a point. As the discount rate is reduced or increased, the pension and post retirement obligation would increase or decrease, respectively, and future pension and post retirement expense would increase or decrease, respectively. Lowering the discount rate by 0.25% (from 3.50% to 3.25%) would increase the pension and post retirement obligation at January 31, 2015 by approximately $22 million and would increase estimated fiscal year 2016 expense by less than $1 million. Increasing the discount rate by 0.25% (from 3.50% to 3.75%) would decrease the pension and post retirement obligation at January 31, 2015 by approximately $19 million and would decrease estimated fiscal year 2016 expense by less than $1 million.

As of January 31, 2015, the Company lowered the assumed annual long-term rate of return for the Pension Plan from 6.75% to 5.75% based on expected future returns on the portfolio. The Pension Plan’s expected return assumption is based on weighted average aggregate long-term expected returns of various asset classes corresponding to the plan’s asset allocation. Pension expense increases or decreases as the expected rate of return on the assets of the Pension Plan decreases or increases, respectively. Lowering or raising the expected long-term rate of return on the Pension Plan’s assets by 0.25% would increase or decrease the estimated fiscal year 2016 pension expense by approximately $1.2 million.

Self-Insurance Reserves.    The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical claims experience, demographic and severity factors and actuarial assumptions. A change in claims frequency and severity of claims from historical experience, as well as changes in state statutes and the mix of states in which we operate, could result in a change to the required reserve levels. Changes in actuarial assumptions could also have an impact on estimated reserves. Historically, our actuarial estimates have not been materially different from actual results; however, a 10% pre-tax change in our estimate for our self-insurance liability would increase or decrease the liability by approximately $2 million as of the end of fiscal years 2015, 2014 and 2013.

 

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The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with estimated health and dental care trends are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided, which would not impact the financial statements materially.

Income Taxes.    Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit. If the reserve for income tax exposures decreased 10%, the impact would be approximately $2 million as of fiscal years 2015, 2014, and 2013.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates on its variable rate debt. The Company has used 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 designated interest rate swaps. On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note, which had an associated interest rate swap with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments. At January 31, 2015, the Company had no variable rate debt or interest rate swaps.

A discussion of the Company’s accounting policies for derivative financial instruments 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

 

		Page
Report of Independent Registered Public Accounting Firm			29
Consolidated Statements of Income			30
Consolidated Statements of Comprehensive Income			31
Consolidated Balance Sheets			32
Consolidated Statements of Changes in Stockholders’ Equity			33
Consolidated Statements of Cash Flows			34
Notes to Consolidated Financial Statements			35

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Belk, Inc.:

We have audited the accompanying consolidated balance sheets of Belk, Inc. and subsidiaries as of January 31, 2015 and February 1, 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belk, Inc. and subsidiaries as of January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Belk, Inc. and subsidiaries’ internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 14, 2015, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/    KPMG LLP

Charlotte, North Carolina

April 14, 2015

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
Revenues		$	4,109,561			$	4,038,118			$	3,956,866
Cost of goods sold (including occupancy, distribution and buying expenses)			2,770,201				2,722,766				2,636,140
Selling, general and administrative expenses			1,064,348				1,023,266				985,225
Gain on sale of property and equipment			7,328				2,349				4,168
Asset impairment and exit costs			10,980				6,108				(268	)
Operating income			271,360				288,327				339,937
Interest expense			(46,720	)			(44,604	)			(49,481	)
Interest income			115				154				175
Loss on extinguishment of debt			—				—				(127	)
Income before income taxes			224,755				243,877				290,504
Income tax expense			78,693				85,344				102,134
Net income		$	146,062			$	158,533			$	188,370
Basic net income per share		$	3.67			$	3.82			$	4.34
Diluted net income per share		$	3.66			$	3.79			$	4.31
Weighted average shares outstanding:
Basic			39,809,730				41,541,176				43,435,314
Diluted			39,912,606				41,812,750				43,712,263

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
Net income		$	146,062			$	158,533			$	188,370
Other comprehensive income (loss):
Unrealized gain on interest rate swap, net of $740 income taxes for the fiscal year ended February 2, 2013.			—				—				945
Defined benefit plan adjustments, net of ($15,400), $18,200 and $3,794 income taxes for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013, respectively.			(26,095	)			30,659				6,391
Total other comprehensive income (loss)			(26,095	)			30,659				7,336
Total comprehensive income		$	119,967			$	189,192			$	195,706

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

		January 31,				February 1,
		2015				2014
Assets
Current Assets:
Cash and cash equivalents		$	294,359			$	295,334
Accounts receivable, net			60,575				55,340
Merchandise inventory			959,645				987,778
Prepaid income taxes, expenses and other current assets			27,323				28,964
Total current assets			1,341,902				1,367,416
Property and equipment, net			1,274,146				1,158,066
Other assets			38,443				39,156
Total assets		$	2,654,491			$	2,564,638
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	277,212			$	291,948
Accrued liabilities			254,084				239,658
Accrued income taxes			26,780				13,652
Deferred income taxes			32,663				33,422
Current installments of long-term debt and capital lease obligations			108,736				8,084
Total current liabilities			699,475				586,764
Deferred income taxes			17,721				16,613
Long-term debt and capital lease obligations, excluding current installments			318,991				385,673
Retirement obligations and other noncurrent liabilities			256,558				217,343
Total liabilities			1,292,745				1,206,393
Stockholders’ equity:
Preferred stock			—				—
Common stock, 400 million shares authorized and 39.3 and 41.0 million shares issued and outstanding as of January 31, 2015 and February 1, 2014, respectively.			393				410
Paid-in capital			94,877				178,362
Retained earnings			1,428,894				1,315,796
Accumulated other comprehensive loss			(162,418	)			(136,323	)
Total stockholders’ equity			1,361,746				1,358,245
Total liabilities and stockholders’ equity		$	2,654,491			$	2,564,638

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

 

																		Accumulated Other Comprehensive Income (Loss)
		Common Stock								Paid-in Capital				Retained Earnings
		Shares				Amount																Total
Balance at January 28, 2012			44,916			$	449			$	364,590			$	1,045,509			$	(174,318	)		$	1,236,230
Net income			—				—				—				188,370				—				188,370
Other comprehensive income			—				—				—				—				7,336				7,336
Cash dividends			—				—				—				(76,616	)			—				(76,616	)
Issuance of stock-based compensation			—				—				(4,352	)			—				—				(4,352	)
Stock-based compensation expense			—				—				12,827				—				—				12,827
Common stock issued			303				3				870				—				—				873
Repurchase and retirement of common stock			(2,501	)			(25	)			(102,022	)			—				—				(102,047	)
Balance at February 2, 2013			42,718				427				271,913				1,157,263				(166,982	)			1,262,621
Net income			—				—				—				158,533				—				158,533
Other comprehensive income			—				—				—				—				30,659				30,659
Issuance of stock-based compensation			—				—				(397	)			—				—				(397	)
Stock-based compensation expense			—				—				7,967				—				—				7,967
Common stock issued			311				3				770				—				—				773
Repurchase and retirement of common stock			(2,038	)			(20	)			(101,891	)			—				—				(101,911	)
Balance at February 1, 2014			40,991				410				178,362				1,315,796				(136,323	)			1,358,245
Net income			—				—				—				146,062				—				146,062
Other comprehensive income			—				—				—				—				(26,095	)			(26,095	)
Cash dividends			—				—				—				(32,964	)			—				(32,964	)
Issuance of stock-based compensation			—				—				934				—				—				934
Stock-based compensation expense			—				—				8,886				—				—				8,886
Common stock issued			234				2				1,000				—				—				1,002
Repurchase and retirement of common stock			(1,961	)			(19	)			(94,305	)			—				—				(94,324	)
Balance at January 31, 2015			39,264			$	393			$	94,877			$	1,428,894			$	(162,418	)		$	1,361,746

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
Cash flows from operating activities:
Net income		$	146,062			$	158,533			$	188,370
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairment and exit costs			10,980				6,108				(268	)
Deferred income tax expense			18,276				43,320				40,479
Depreciation and amortization expense			154,931				137,069				122,622
Stock-based compensation expense			8,124				11,021				17,572
(Gain) loss on sale of property and equipment			(4,699	)			280				(1,539	)
Amortization of deferred gain on sale and leaseback			(2,629	)			(2,629	)			(2,629	)
Amortization of deferred debt issuance costs			559				819				833
(Increase) decrease in:
Accounts receivable, net			(5,235	)			(23,335	)			7,427
Merchandise inventory			28,133				21,909				(122,658	)
Prepaid income taxes, expenses and other assets			915				(2,824	)			(16,193	)
Increase (decrease) in:
Accounts payable and accrued liabilities			(4,527	)			38,074				73,091
Accrued income taxes			13,128				(8,682	)			1,650
Retirement obligations and other liabilities			(81	)			(12,177	)			(8,700	)
Net cash provided by operating activities			363,937				367,486				300,057
Cash flows from investing activities:
Purchases of property and equipment			(231,324	)			(224,228	)			(182,773	)
Proceeds from sales of property and equipment			9,915				610				4,441
Net cash used by investing activities			(221,409	)			(223,618	)			(178,332	)
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations			(8,872	)			(8,474	)			(126,105	)
Dividends paid			(32,964	)			—				(76,616	)
Repurchase and retirement of common stock			(94,324	)			(101,911	)			(102,047	)
Stock compensation tax benefit			357				1,644				1,858
Cash paid for withholding taxes in lieu of stock-based compensation shares			(6,349	)			(8,970	)			(6,210	)
Deferred financing costs			(1,351	)			—				—
Proceeds from financing costs			—				—				300
Net cash used by financing activities			(143,503	)			(117,711	)			(308,820	)
Net increase (decrease) in cash and cash equivalents			(975	)			26,157				(187,095	)
Cash and cash equivalents at beginning of period			295,334				269,177				456,272
Cash and cash equivalents at end of period		$	294,359			$	295,334			$	269,177
Supplemental disclosures of cash flow information:
Income taxes paid		$	47,093			$	48,417			$	59,536
Interest paid, net of capitalized interest			27,040				27,115				30,458
Supplemental schedule of noncash activities:											—
Increase in property and equipment through accrued purchases			7,866				17,199				2,589
Increase in property and equipment through assumption of capital leases			23,932				2,479				2,249
Increase in property and equipment through financing obligations			18,910				—				—

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Belk, Inc. and its subsidiaries (collectively, the “Company” or “Belk”) operate retail department stores in 16 states primarily in the southern United States. All intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. The fiscal year end dates and number of weeks in fiscal years 2013 – 2016 are reflected in the table below.

 

Fiscal Year		End Date				Weeks
2016			January 30, 2016				52
2015			January 31, 2015				52
2014			February 1, 2014				52
2013			February 2, 2013				53

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are required as part of determining stock-based compensation, depreciation, amortization and recoverability of long-lived and intangible assets, valuation of inventory, establishing store closing and other reserves, self-insurance reserves and calculating retirement obligations and expense.

Revenues

The Company’s store and eCommerce operations have been aggregated into one reporting segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.

The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.

 

Merchandise Areas		Fiscal Year 2015				Fiscal Year 2014				Fiscal Year 2013
Women’s			33	%			32	%			33	%
Cosmetics, Shoes and Accessories			34	%			34	%			34	%
Men’s			17	%			18	%			17	%
Home			9	%			9	%			10	%
Children’s			7	%			7	%			6	%
Total			100	%			100	%			100	%

Revenues include sales of merchandise and the net revenue received from leased departments of $2.1 million for fiscal year 2015 and $2.2 million for fiscal years 2014 and 2013. Sales from retail operations are recorded at the time of delivery and reported net of sales taxes and merchandise returns. The reserve for returns is calculated as a percentage of sales based on historical return percentages.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company utilizes a customer loyalty program that issues certificates for discounts on future purchases to proprietary charge card customers based on their spending levels. The certificates are classified as a reduction to revenue as they are earned by the customers. The Company maintains a reserve liability for the estimated future redemptions of the certificates.

Cost of Goods Sold

Cost of goods sold is comprised principally of the cost of merchandise as well as occupancy, distribution and buying expenses. Occupancy expenses include rent, utilities and real estate taxes. Distribution expenses include all costs associated with distribution facilities and eCommerce fulfillment centers. Buying expenses include payroll and travel expenses associated with the merchandise buying function.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses are comprised principally of payroll and benefits for retail and corporate employees, depreciation, advertising and other administrative expenses. SG&A expenses are reduced by proceeds from the credit card program agreement (“Program Agreement) between Belk and Synchrony Bank. In March 2013, the Program Agreement was amended, extending the expiration date from June 30, 2016 to December 31, 2017. This Program Agreement sets forth among other things the terms and conditions under which Synchrony Bank will issue credit cards to Belk’s customers. The Company is paid a percentage of net credit sales, as defined by the Program Agreement. Belk is required to perform certain duties, including receiving and remitting in-store payments on behalf of Synchrony Bank and receiving fees for these activities. These amounts totaled $93.0 million, $90.2 million and $85.9 million in fiscal years 2015, 2014 and 2013, respectively.

Gift Cards

The Company issues gift cards which do not contain provisions for expiration or inactivity fees. At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the gift card. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise and/or services. The estimated values of gift cards expected to go unused are recognized as a reduction to SG&A expenses in proportion to actual gift card redemptions as the remaining gift card values are redeemed, when there is no requirement for remitting balances to government agencies under unclaimed property laws.

Advertising

Advertising costs, net of co-op recoveries from merchandise vendors, are expensed in the period in which the advertising event takes place and amounted to $164.8 million, $162.3 million and $164.1 million in fiscal years 2015, 2014 and 2013, respectively.

Recoverability of Long-Lived Assets

In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Cash Equivalents

Cash equivalents include liquid investments with an original maturity of 90 days or less.

Merchandise Inventory

Inventories are valued using the lower of cost or market value, determined by the retail inventory method (“RIM”). Under RIM, inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. Since the retail value of our inventory is adjusted on a regular basis to reflect current market conditions, our carrying value should approximate the lower of cost or market. RIM is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, permanent markdowns and shrinkage, which may affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold.

Property and Equipment, Net

Property and equipment owned by the Company are stated at cost less accumulated depreciation and amortization. Property and equipment leased by the Company under capital leases are stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are recorded utilizing straight-line and in certain circumstances accelerated methods, typically over the shorter of estimated asset lives or related lease terms. The Company amortizes leasehold improvements over the shorter of the estimated asset life or expected lease term that would include cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the date the assets are placed in service, to be reasonably assured. 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 typically determined by the Company’s historical experience with the type of asset purchased.

Intangibles

Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.” Leasehold intangibles, which represent the excess of fair value over the carrying value (assets) or the excess of carrying value over fair value (liabilities) of acquired leases, are amortized on a straight-line basis over the remaining terms of the lease agreements. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears to be reasonably assured. The lease intangibles are included in other current assets and accrued liabilities for the current portions and other assets and other noncurrent liabilities for the noncurrent portions. Customer relationships, which represent the value of customer relationships obtained in acquisitions or purchased, are amortized on a straight-line basis over their estimated useful life and are included in other assets. The carrying value of intangible assets is reviewed by the Company’s management to assess the recoverability of the assets when facts and circumstances indicate that the carrying value may not be recoverable.

Rent Expense

The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Developer incentives are recognized as a reduction to occupancy costs over the lease term. The lease term commences on the date when the Company gains control of the property.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 our 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 policies:

 

Ÿ

Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to SG&A expenses in the period that the advertising expense is incurred.

 

Ÿ

Markdown allowances — Represent partial reimbursement of markdowns taken and/or to support the gross margins earned in connection with the sale of 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.

 

Ÿ

Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expenses in the period that the payroll cost is incurred.

Pension and Postretirement Obligations

The Company utilizes significant assumptions, along with the actual employee census data, 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 and long-term rate of return on plan assets (in the case of the Pension Plan).

Stock Based Compensation

The Company accounts for stock based compensation under the guidelines of ASC 718, “Compensation—Stock Compensation.” ASC 718 requires the Company to account for stock based compensation by using the grant date fair value of share awards and the estimated number of shares that will ultimately be issued in conjunction with each award.

Self-Insurance Reserves

The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical claims experience, demographic and severity factors and actuarial assumptions.

The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with estimated health and dental care trends are used to estimate the loss development factors to project the future development of incurred claims.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).

New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force),” which requires presentation in the financial statements of an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted this guidance beginning in the first quarter of fiscal year 2015 when it was required. The adoption of this update did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.

In January 2013, the FASB issued Accounting Standards Update No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force),” which requires measurement of obligations within the scope of this guidance to be the sum of the amount agreed to pay on the basis of arrangement among co-obligors and any additional amounts expected to pay on behalf of co-obligors, in addition to disclosure of the nature and amount of the obligation. The Company adopted this guidance beginning in the first quarter of fiscal year 2015 when it was required. The adoption of this update did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.

(2)    Intangibles

Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.”

 

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Amortizing intangibles are comprised of the following:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Amortizing intangible assets:
Favorable lease intangibles		$	9,571			$	9,960
Accumulated amortization — favorable lease intangibles			(5,711	)			(5,431	)
Credit card and customer list intangibles			18,746				18,746
Accumulated amortization — credit card and customer list intangibles			(17,579	)			(16,413	)
Other intangibles			5,277				5,277
Accumulated amortization — other intangibles			(5,109	)			(4,717	)
Net amortizing intangible assets		$	5,195			$	7,422
Amortizing intangible liabilities:
Unfavorable lease intangibles		$	(23,825	)		$	(23,825	)
Accumulated amortization — unfavorable lease intangibles			11,205				9,869
Net amortizing intangible liabilities		$	(12,620	)		$	(13,956	)

The Company recorded net amortization expense related to amortizing intangibles of $0.7 million, $0.6 million and $0.3 million in fiscal years 2015, 2014 and 2013, respectively.

(3)    Asset Impairment and Exit Costs

In fiscal year 2015, the Company recorded $7.2 million in impairment charges primarily to adjust a retail location’s net book value to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. The Company also recorded $3.1 million in charges for real estate holding costs primarily due to $1.7 million in dark rent for one retail location, and a $0.5 million early termination fee for another retail location. The Company recorded $0.7 million in exit costs associated with the closing of eight retail locations.

In fiscal year 2014, the Company recorded $5.0 million in impairment charges primarily to adjust two retail locations’ net book value to fair values. The Company also recorded $1.1 million in charges for real estate holding costs primarily due to a $0.7 million early termination fee for one retail location and $0.3 million to relocate two retail locations.

In fiscal year 2013, the Company recorded $0.7 million in rent adjustments due to space reductions at two stores. These adjustments were partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book values to fair value, and a $0.2 million charge for exit costs primarily associated with the closing of two stores.

As of January 31, 2015 and February 1, 2014, the remaining reserve balance for post-closing real estate lease obligations was $2.1 million and $0.7 million, respectively. These balances are presented within accrued liabilities and other noncurrent liabilities on the consolidated balance sheets. The Company does not anticipate incurring significant additional exit costs in connection with the store closings. The following is a summary of post-closing real estate lease obligations activity:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Balance, beginning of year		$	686			$	1,422
Charges and adjustments			2,977				1,210
Utilization / payments			(1,520	)			(1,946	)
Balance, end of year		$	2,143			$	686

 

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(4)    Accumulated Other Comprehensive Loss

As of January 31, 2015 and February 1, 2014, the accumulated other comprehensive loss for defined benefit plans was $162.4 million and $136.3 million, respectively. These amounts are net of income taxes of $97.7 million and $82.3 million at January 31, 2015 and February 1, 2014, respectively.

In fiscal year 2015 and 2014, the Company reclassified $6.7 million and $8.2 million of amortization of defined benefit plan liabilities, net of $4.0 million and $4.9 million in income taxes, from accumulated comprehensive income to selling, general and administrative expenses on the consolidated statements of income, respectively.

(5)    Accounts Receivable, Net

Accounts receivable, net consists of:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Accounts receivable from vendors		$	37,276			$	34,902
Credit card accounts receivable			19,768				16,759
Other receivables			3,531				3,679
Accounts receivable, net		$	60,575			$	55,340

(6)    Property and Equipment, net

Details of property and equipment, net are as follows:

 

		Estimated		January 31,				February 1,
		Lives		2015				2014
		(in years)		(in thousands)
Land				$	46,116			$	47,255
Buildings		primarily 15-31.5			1,266,995				1,198,149
Furniture, fixtures and equipment		3-20			1,389,533				1,286,992
Property under capital leases		5-20			101,579				80,075
Construction in progress					56,346				32,735
					2,860,569				2,645,206
Less accumulated depreciation and amortization					(1,586,423	)			(1,487,140	)
Property and equipment, net				$	1,274,146			$	1,158,066

The Company recorded depreciation and amortization related to property and equipment of $154.2 million, $136.5 million, and $122.3 million in fiscal years 2015, 2014, and 2013, respectively. Accumulated amortization of assets under capital lease was $66.8 million and $61.1 million as of January 31, 2015 and February 1, 2014, respectively.

(7)    Gain on Property and Equipment

During fiscal year 2015, the Company recognized a $4.0 million gain associated with the sale of a former store location and a parcel of land the Company owned, $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods, offset by losses primarily due to the abandonment of property.

 

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During fiscal year 2014, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building, offset by losses primarily due to the abandonment of property.

During fiscal year 2013, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods.

(8)    Accrued Liabilities

Accrued liabilities are comprised of the following:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Salaries, wages and employee benefits		$	48,012			$	45,752
Gift card liability			46,833				42,721
Advertising			15,374				26,421
Accrued capital expenditures			32,993				25,584
Sales returns allowance			24,417				23,293
Taxes, other than income			23,807				20,405
Rent			7,646				7,306
Interest			7,466				7,285
Self insurance reserves			7,062				6,126
Belk reward card loyalty program			7,342				4,546
Store closing reserves			1,015				686
Other			32,117				29,533
Accrued Liabilities		$	254,084			$	239,658

(9)    Borrowings

Long-term debt and capital lease obligations consist of the following:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Senior notes		$	375,000			$	375,000
Capital lease agreements through November 2029			52,727				18,757
			427,727				393,757
Less current installments			(108,736	)			(8,084	)
Long-term debt and capital lease obligations, excluding current installments		$	318,991			$	385,673

As of January 31, 2015, the annual maturities of long-term debt and capital lease obligations over the next five years are $108.7 million, $4.2 million, $128.3 million, $2.8 million, and $2.7 million, respectively. The Company made interest payments of $27.0 million, $27.1 million and $30.5 million, net of $1.2 million, $2.0 million and $1.7 million which was capitalized into property and equipment during fiscal years 2015, 2014 and 2013, respectively.

On October 22, 2014, the Company refinanced its credit facility. Under the new credit facility, the Company increased the revolving line of credit to $500.0 million maturing in October 2019. The new credit facility allows

 

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for up to $100.0 million of outstanding letters of credit. The new credit facility contains restrictive covenants including leverage and fixed charge coverage ratios. The Company’s calculated leverage ratio dictates the LIBOR spread that will be charged on outstanding borrowings in the subsequent quarter. The leverage ratio is calculated by dividing adjusted debt, which is the sum of the Company’s outstanding debt and rent expense multiplied by a factor of eight, by pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. The maximum leverage ratio of 4:1 remains the same as under the previous facility. At the Company’s discretion, amounts outstanding under the credit facility bear interest based on either (1) current LIBOR plus the applicable spread which ranges from 0.875% to 1.75%, or (2) the greater of the prime rate, the federal funds rate plus 0.50% or the one-month LIBOR plus 1.0% (the “Base Rate”), plus the applicable spread which ranges from 0.0% to 0.75%. The current applicable spread of 1.125% is based upon the calculated leverage ratio of 1.96 as of January 31, 2015. Previous dividend, share repurchase, and acquisition limitations were removed and changed under the new credit facility to pro forma covenant compliance. Pro forma covenant compliance would be reflective of the covenant calculations after giving effect for the applicable transaction. The Company was in compliance with all covenants at the end of fiscal year 2015 and does not anticipate non-compliance with any debt covenants for the next 12 months and foreseeable future. As of January 31, 2015, the Company had $14.0 million of standby letters of credit outstanding under the credit facility and availability under the credit facility was $486.0 million.

The senior notes have restrictive covenants that are similar to the Company’s credit facility, and had the following terms as of January 31, 2015:

 

Amount (in millions)				Type of Rate		Rate		Maturity Date
$	100.0			Fixed		5.31%			July 2015
	125.0			Fixed		6.20%			August 2017
	50.0			Fixed		5.70%			November 2020
	100.0			Fixed		5.21%			January 2022
$	375.0

In July 2014, the $100.0 million, 5.31% fixed rate senior note became due within twelve months and was reclassified from long-term to short-term debt on the consolidated balance sheet as of August 2, 2014.

On January 30, 2013, the Company paid the $17.8 million, 20-year variable rate state bond facility, which bore interest at 0.20%, and would have matured in October 2025. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.1 million related to the state bond facility and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income. Associated with this bond was an $18.0 million standby letter of credit outstanding under the credit facility, which was canceled upon payment of the $17.8 million state bond facility.

On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note and $20.0 million of its 5.05% fixed rate senior note. The $80.0 million floating rate senior note had an associated interest rate swap, with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments.

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, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. These ratios are calculated exclusive of non-cash charges, such as fixed asset, goodwill and other intangible asset impairments.

The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. As of January 31, 2015, the Company did not have any interest rate swaps outstanding. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. Previous swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt.

 

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(10)    Retirement Obligations and Other Noncurrent Liabilities

Retirement obligations and other noncurrent liabilities are comprised of the following:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Pension liability		$	57,371			$	17,814
Deferred compensation plans			33,867				33,904
Post-retirement benefits			18,206				17,548
Supplemental executive retirement plans			29,987				25,911
Deferred gain on sale/leaseback			12,925				15,554
Unfavorable lease liability			12,620				13,956
Deferred rent			29,710				31,223
Self-insurance reserves			12,583				14,468
Developer incentive liability			15,197				16,869
Income tax reserves			23,528				21,389
Other noncurrent liabilities			10,564				8,707
Retirement obligations and other noncurrent liabilities		$	256,558			$	217,343

(11)    Leases

The Company leases some of its stores, warehouse facilities and equipment. The majority of these leases have initial terms that will expire over the next 15 years. The leases usually contain renewal options at the lessee’s discretion and provide for payment by the lessee of real estate taxes and other expenses and, in certain instances, contingent rentals determined on the basis of a percentage of sales in excess of stipulated minimums.

Future minimum lease payments under non-cancelable leases, net of future minimum sublease rental income under non-cancelable subleases, as of January 31, 2015 were as follows:

 

Fiscal Year		Capital				Operating
		(in thousands)
2016			10,359				74,538
2017			5,573				67,960
2018			4,470				62,324
2019			3,863				52,366
2020			3,667				47,459
After 2020			35,636				217,426
Total			63,568				522,073
Less sublease rental income			—				(2,773	)
Net rentals			63,568			$	519,300
Less imputed interest			(10,841	)
Present value of minimum lease payments			52,727
Less current portion			(8,736	)
Noncurrent portion of the present value of minimum lease payments		$	43,991

Sublease rental income primarily relates to the portion of the Company’s headquarters building that was sold and leased back by the Company during fiscal year 2008, a portion of which was subsequently subleased by the Company to other third parties.

 

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Net rental expense for all operating leases consists of the following:

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
		(in thousands)
Buildings:
Minimum rentals		$	71,888			$	74,811			$	73,940
Contingent rentals			4,045				4,468				4,598
Sublease rental income			(1,673	)			(1,898	)			(2,121	)
Equipment			1,370				2,035				1,768
Total net rental expense		$	75,630			$	79,416			$	78,185

(12)    Income Taxes

Federal and state income tax expense (benefit) was as follows:

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
		(in thousands)
Current:
Federal		$	58,518			$	40,273			$	59,152
State			1,899				1,751				2,503
			60,417				42,024				61,655
Deferred:
Federal			11,972				38,213				35,045
State			6,304				5,107				5,824
Change in valuation allowances			—				—				(390	)
			18,276				43,320				40,479
Income taxes		$	78,693			$	85,344			$	102,134

A reconciliation between income taxes and income tax expense computed using the federal statutory income tax rate of 35% is as follows:

 

		Fiscal Year Ended
		January 31,				February 1,				February 2,
		2015				2014				2013
		(in thousands)
Income tax at the statutory federal rate		$	78,664			$	85,356			$	101,677
State income taxes, net of federal			4,669				3,816				5,261
Increase in cash surrender value of officers’ life insurance			(5,374	)			(4,938	)			(4,552	)
Net increase (decrease) in uncertain tax positions			(30	)			746				1,206
Change in valuation allowances			—				—				(390	)
Other			764				364				(1,068	)
Income taxes		$	78,693			$	85,344			$	102,134

 

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Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consist of:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Deferred tax assets:
Pension liability		$	19,648			$	4,839
Benefit plan costs			33,556				32,405
Store closing and other reserves			22,749				24,675
Inventory capitalization			7,382				7,641
Tax carryovers			12,500				14,428
Prepaid rent			11,691				12,330
Goodwill			30,198				36,343
Intangibles			5,757				5,778
Other			20,028				10,086
Gross deferred tax assets			163,509				148,525
Deferred tax liabilities
Property and equipment			149,266				135,390
Intangibles			3,077				3,366
Inventory			61,550				59,804
Gross deferred tax liabilities			213,893				198,560
Net deferred tax (liabilities) assets		$	(50,384	)		$	(50,035	)

Due to economic conditions prior to fiscal year 2012, the Company believed that it was more likely than not that the benefit from state net operating loss and credit carryforwards, and net deferred tax assets for state income tax purposes, would not be realized, and established a valuation allowance on these deferred tax assets in fiscal year 2009. Based upon operating results over recent years, as well as an assessment of expected future results of operations during the year ended January 28, 2012, it was determined that it is more likely than not that certain deferred tax assets would be utilized. As a result, virtually all of our valuation allowance was released during fiscal year 2012. During the year ended February 2, 2013, it was determined that the remaining valuation allowance would also be realized, and as a result recognized a benefit of $0.4 million. The release of the valuation allowance was determined in accordance with the provisions of ASC 740, “Income Taxes,” which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable.

The analysis performed to assess the realizability of the state deferred tax asset included an evaluation, as of January 31, 2015, of the level of historical pre-tax income for the affected subsidiaries, after adjustment for non-recurring items, in recent years; the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable state laws; and the amount and timing of future taxable income. This analysis indicated it is more likely than not that the deferred tax asset recorded will be realized.

As of January 31, 2015, the Company had net operating loss carryforwards for state income tax purposes of approximately $275 million. The state carryforwards expire at various intervals through fiscal year 2034, but primarily in fiscal years 2024 through 2028. The Company also has state job credits of approximately $1.6 million, which are available to offset future tax liabilities, in the applicable states, if any. These credits

 

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expire between fiscal years 2016 and 2029. In addition, the Company had gross state charitable contribution carryforwards of approximately $13.4 million as of January 31, 2015. These carryforwards expire at various intervals through fiscal year 2020.

The state net operating loss carryforwards from filed returns included uncertain tax positions taken in prior years. State net operating loss carryforwards as shown on the Company’s tax returns are larger than the state net operating losses for which a deferred tax asset is recognized for financial statement purposes.

As of January 31, 2015, the total gross unrecognized tax benefit was $24.2 million. Of this total, $6.7 million represents the amount of unrecognized tax benefits (net of the federal benefit on state issues) that, if recognized, would favorably affect the effective income tax rate in a future period. A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:

 

		January 31,				February 1,
		2015				2014
		(in thousands)
Balance, beginning of year		$	21,906			$	17,761
Additions for tax positions from prior years			1,177				783
Reductions for tax positions from prior years			(613	)			(773	)
Additions for tax positions related to the current year			1,693				4,135
Balance, end of year		$	24,163			$	21,906

The Company reports interest related to unrecognized tax benefits in interest expense, and penalties related to unrecognized tax benefits in income tax expense. Total accrued interest and penalties for unrecognized tax benefits (net of tax benefit) as of January 31, 2015 was $1.4 million, after recognition of a $0.3 million expense during fiscal year 2015. At this time, the Company expects to conclude various state audits that may affect its gross unrecognized tax benefit over the next 12 months, but insufficient evidence exists at this time to estimate any potential impact.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax matters with the IRS through fiscal year 2011 and all material state and local income tax matters for fiscal years through 2010. The statute of limitations for material states under audit for fiscal year 2011 has been extended. It is anticipated that these audits will conclude in fiscal year 2016.

(13)    Pension, SERP and Postretirement Benefits

The Company has a defined benefit pension plan, the Belk Pension Plan, which prior to fiscal year 2010 had been partially frozen and closed to new participants. Pension benefits were suspended for fiscal year 2010, and effective December 31, 2009, the Pension Plan was frozen for those remaining participants whose benefits were not previously frozen.

The Company has a non-qualified defined benefit Supplemental Executive Retirement Plan, (“Old SERP”), which provides retirement and death benefits to certain qualified executives. Old SERP has been closed to new executives and has been replaced by the 2004 Supplemental Executive Retirement Plan (“2004 SERP”), a non-qualified defined contribution plan.

The Company also provides postretirement medical and life insurance benefits to certain employees, and was closed to new participants in 2002. The Company accounts for postretirement benefits by recognizing the cost of these benefits over an employee’s estimated term of service with the Company, in accordance with ASC 715, “Compensation — Retirement Benefits.”

 

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The change in the projected benefit obligation, change in plan assets, funded status, amounts recognized and unrecognized, net periodic benefit cost and actuarial assumptions are as follows:

 

		Pension Benefits								Old SERP Benefits								Postretirement Benefits
		January 31,				February 1,				January 31,				February 1,				January 31,				February 1,
		2015				2014				2015				2014				2015				2014
		(in thousands)
Change in projected benefit obligation:
Benefit obligation at beginning of year		$	547,220			$	566,428			$	12,256			$	12,890			$	19,375			$	23,279
Service cost			—				—				155				163				74				119
Interest cost			23,943				22,762				532				514				825				911
Actuarial (gains) losses			99,359				(12,177	)			4,907				(142	)			1,513				(2,884	)
Benefits paid			(30,233	)			(29,793	)			(1,194	)			(1,169	)			(1,868	)			(2,050	)
Benefit obligation at end of year			640,289				547,220				16,656				12,256				19,919				19,375
Change in plan assets:
Fair value of plan assets at beginning of year			529,406				490,350				—				—				—				—
Actual return on plan assets			83,745				43,849				—				—				—				—
Contributions to plan			—				25,000				1,194				1,169				1,868				2,050
Benefits paid			(30,233	)			(29,793	)			(1,194	)			(1,169	)			(1,868	)			(2,050	)
Fair value of plan assets at end of year			582,918				529,406				—				—				—				—
Funded Status		$	(57,371	)		$	(17,814	)		$	(16,656	)		$	(12,256	)		$	(19,919	)		$	(19,375	)

Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees. Due to the pension plan freeze in the third quarter of fiscal year 2010, the Company began using the average remaining life of the participants in the pension plan rather than the average remaining service life of the Company’s active employees.

Amounts recognized in the consolidated balance sheets consist of the following:

 

		Pension Benefits								Old SERP Benefits								Postretirement Benefits
		January 31,				February 1,				January 31,				February 1,				January 31,				February 1,
		2015				2014				2015				2014				2015				2014
		(in thousands)
Accrued liabilities		$	—			$	—			$	1,145			$	1,144			$	1,713			$	1,827
Deferred income tax assets			94,276				81,086				2,881				1,248				551				(26	)
Retirement Obligations and other noncurrent liabilities			57,371				17,814				15,512				11,112				18,206				17,548
Accumulated other comprehensive income (loss)			(156,563	)			(134,209	)			(5,072	)			(2,306	)			(783	)			192

 

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Obligation and funded status are as follows:

 

		Pension Benefits								Old SERP Plan								Postretirement Benefits
		January 31,				February 1,				January 31,				February 1,				January 31,				February 1,
		2015				2014				2015				2014				2015				2014
		(in thousands)
Projected benefit obligation		$	640,289			$	547,220			$	16,656			$	12,256			$	19,919			$	19,375
Accumulated benefit obligation			640,289				547,220				15,974				11,414				N/A				N/A
Fair value of plan assets			582,918				529,406				—				—				—				—

Activity related to plan assets and benefit obligations recognized in accumulated other comprehensive loss are as follows:

 

		Pension Benefits								Old SERP Benefits								Postretirement Benefits
		January 31,				February 1,				January 31,				February 1,				January 31,				February 1,
		2015				2014				2015				2014				2015				2014
		(in thousands)
Adjustment to minimum liability		$	(28,748	)		$	24,808			$	(3,084	)		$	89			$	(951	)		$	1,298
Amortization of unrecognized items:
Net transition obligation			—				—				—				—				—				—
Net gain/(loss)			6,394				4,055				318				332				(24	)			77
		$	(22,354	)		$	28,863			$	(2,766	)		$	421			$	(975	)		$	1,375

The weighted-average assumptions used to determine benefit obligations at the January 31, 2015 and February 1, 2014 measurement dates were as follows:

 

		Pension Plan								Old SERP Plan								Postretirement Plan
		Measurement Date								Measurement Date								Measurement Date
		January 31,				February 1,				January 31,				February 1,				January 31,				February 1,
		2015				2014				2015				2014				2015				2014
Discount rates			3.5	%			4.5	%			3.5	%			4.5	%			3.5	%			4.5	%
Rates of compensation increase			N/A				N/A				4.0	%			4.0	%			N/A				N/A

The following weighted-average assumptions were used to determine net periodic benefit cost for the fiscal years shown:

 

		Pension Plan												Old SERP Plan												Postretirement Plan
		January 31,				February 1,				February 2,				January 31,				February 1,				February 2,				January 31,				February 1,				February 2,
		2015				2014				2013				2015				2014				2013				2015				2014				2013
Discount rates			4.500	%			4.125	%			4.375	%			4.500	%			4.125	%			4.375	%			4.500	%			4.125	%			4.375	%
Rates of compensation increase			N/A				N/A				N/A				4.000	%			4.000	%			4.000	%			N/A				N/A				N/A
Return on plan assets			6.750	%			6.750	%			7.250	%			N/A				N/A				N/A				N/A				N/A				N/A

The Company developed the discount rate by matching the projected future cash flows of the plan to a modeled yield curve consisting of over 500 Aa-graded, noncallable bonds. Based on this analysis, management selected a 4.5% discount rate, which represented the calculated yield curve rate rounded up to the nearest eighth of a point. The pension plan’s expected return assumption is based on the weighted average aggregate long-term expected returns of various actively managed asset classes corresponding to the plan’s asset allocation. The pension plan assets are allocated approximately 66% to fixed income securities and 33% to equity securities, with the remaining assets allocated to cash and cash equivalents.

 

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For measurement purposes, a 7.2% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for fiscal year 2015; the rate was assumed to decrease to 5.0% gradually over the next six years and remain at that level for fiscal years thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing or decreasing the assumed health care cost trend rates by one percentage point would increase or decrease the accumulated postretirement benefit obligation as of January 31, 2015 by $0.4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended January 31, 2015 by $0.1 million.

The Company maintains policies for the investment of pension plan assets. The policies set forth state objectives and a structure for managing assets, which includes various asset classes and investment management styles that, in the aggregate, are expected to produce a sufficient level of diversification and investment return over time and provide for the availability of funds for benefits as they become due. The policies also provide guidelines for each investment portfolio that control the level of risk assumed in the portfolio and ensure that assets are managed in accordance with stated objectives. The policies set forth criteria to monitor and evaluate the performance results achieved by the investment managers. In addition, managing the relationship between plan assets and benefit obligations within the policy objectives is achieved through periodic asset and liability studies required by the policies.

The asset allocation for the pension plan is as follows:

 

						Percentage of Plan Assets at Measurement Date
		Current Target Allocation				January 31, 2015				February 1, 2014				February 2, 2013
Equity securities and funds			30%-40	%			33	%			44	%			56	%
Fixed income			60%-70	%			66	%			54	%			42	%
Cash and cash equivalents			0%-5	%			1	%			2	%			2	%
Total			100	%			100	%			100	%			100	%

The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of January 31, 2015 and February 1, 2014, the pension plan assets were required to be measured at fair value. These assets included equity securities, private equity funds, fixed income securities, and cash and cash equivalents. These categories can cross various asset allocation strategies as reflected in the preceding table.

 

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Fair values of the pension plan assets were as follows:

 

						Fair Value Measurement at Reporting Date Using																Fair Value Measurement at Reporting Date Using
Description		January 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Outputs (Level 2)				Significant Unobservable Inputs (Level 3)				February 1, 2014				Quoted Prices in  Active Markets for Identical Assets (Level 1)				Significant Other Observable Outputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(in thousands)																(in thousands)
Equity securities
U.S. companies(a)		$	46,495			$	46,495			$	—			$	—			$	59,486			$	59,486			$	—			$	—
U.S. Mutual Funds			88,603				—				88,603				—				109,622				—				109,622				—
International mutual funds			42,478				42,478				—				—				51,362				51,362				—				—
International companies			6,822				6,822				—				—				9,000				9,000				—				—
Private equity			6,943				—				—				6,943				5,436				—				—				5,436
Fixed income securities
Corporate bonds			137,729				—				137,729				—				100,806				—				100,806				—
Government securities			122,380				—				122,380				—				86,016				—				86,016				—
Mutual funds			97,011				—				97,011				—				72,026				—				72,026				—
Mortgage backed securities			16,761				—				16,761				—				17,102				—				17,102				—
Municipals			9,364				—				9,364				—				9,580				—				9,580				—
Cash and cash equivalents			8,332				—				8,332				—				8,970				—				8,970				—
Total assets measured at fair value		$	582,918			$	95,795			$	480,180			$	6,943			$	529,406			$	119,848			$	404,122			$	5,436

 

(a)	The U.S. equity securities consist of $44.1 million of large cap companies and $2.4 million of mid cap companies in in fiscal year 2015. The U.S. equity securities consisted of $59.2 million of large cap companies and $0.3 million of mid cap companies in fiscal year 2014.

The pension plan corporate bonds, government securities, mortgage backed securities, municipal bonds, cash equivalents, and the majority of mutual funds in fiscal years 2015 and 2014, respectively, have been classified as Level 2:

Corporate and municipal bonds, and mortgage backed and government securities — fair values of corporate and municipal bonds, and mortgage backed and government securities are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instruments (maturity and coupon interest rate) considering the counterparty credit rating; external broker bids where available; or by discounting estimated cash flows.

Cash equivalents and mutual funds — fair values of cash equivalents and mutual funds are largely provided by independent pricing services. Where independent pricing services provide fair values, the Company has obtained an understanding of the methods, models and inputs used in pricing, and has procedures in place to validate that amounts provided represent current fair values.

The private equity pension plan investments are considered Level 3 assets as there is not an active market for identical assets from which to determine fair value or current market information about similar assets to use as observable inputs. The fair value of private equity investments is determined using pricing models, which requires significant management judgment.

 

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The following table provides a reconciliation of the fiscal year 2015 and 2014 beginning and ending balances of the pension plan’s private equity funds (Level 3):

 

(in thousands)
Balance as of February 2, 2013		$	5,534
Calls of private equity investments			810
Total gains/(losses) realized/unrealized included in plan earnings			(202	)
Distributions of private equity investments			(706	)
Balance as of February 1, 2014			5,436
Calls of private equity investments			1,844
Total gains/(losses) realized/unrealized included in plan earnings			3,380
Distributions of private equity investments			(3,717	)
Balance as of January 31, 2015		$	6,943

The Company expects to have the following benefit payments related to its pension, Old SERP and postretirement plans in the coming years:

 

Fiscal Year		Pension Plan				Old SERP Plan				Postretirement Plan
		(in thousands)
2016			31,586				1,165				1,743
2017			31,751				1,686				2,085
2018			31,971				1,275				1,995
2019			32,196				1,165				1,909
2020			32,399				1,264				1,885
2021 — 2025			167,586				8,627				7,684

The Company elected to contribute $25.0 million to its Pension Plan in fiscal year 2014. The Company currently exceeds the Pension Protection Act of 2006 guidelines, and expects to be in excess of the guidelines in the near future, therefore, no future contributions are anticipated. The Company expects to contribute $1.2 million to its non-qualified defined benefit SERP Plan in fiscal year 2016, and contributed $1.2 million in fiscal years 2015 and 2014, respectively. The Company expects to contribute $1.7 million to its postretirement plan in fiscal year 2016, and contributed $1.9 million and $2.1 million in fiscal years 2015 and 2014, respectively.

 

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The components of net periodic benefit expense are as follows:

 

		Fiscal Year Ended
		Pension Plan												Old SERP Plan												Postretirement Plan
		January 31,				February 1,				February 2,				January 31,				February 1,				February 2,				January 31,				February 1,				February 2,
		2015				2014				2013				2015				2014				2013				2015				2014				2013
		(in thousands)
Service cost		$	—			$	—			$	—			$	155			$	163			$	153			$	74			$	119			$	116
Interest cost			23,943				22,762				23,418				532				514				557				825				911				1,064
Expected return on assets			(30,118	)			(28,553	)			(28,962	)			—				—				—				—				—				—
Amortization of unrecognized items:
Net transition obligation			—				—				—				—				—				—				—				—				196
Net losses (gains)			10,190				18,525				11,367				508				528				477				(40	)			(692	)			430
Annual benefit expense		$	4,015			$	12,734			$	5,823			$	1,195			$	1,205			$	1,187			$	859			$	338			$	1,806

The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal year 2016 are as follows:

 

		Pension Benefits				Old SERP Plan				Postretirement Benefits
		(in thousands)
Amortization of actuarial loss (gain)		$	11,858			$	969			$	—

(14)    Other Employee Benefits

The Belk Employees’ Health Care Plan provides medical and dental benefits to substantially all full-time employees. This plan for medical and dental benefits is administered through a 501(c)(9) Trust. The Group Life Insurance Plan and The Belk Employees Short Term Disability Insurance Plan provide insurance to substantially all full-time employees and are fully insured through contracts issued by insurance companies. Expense recognized by the Company under these plans amounted to $53.9 million, $55.2 million and $52.4 million in fiscal years 2015, 2014 and 2013, respectively.

The Belk 401(k) Savings Plan, a defined contribution plan, provides benefits for substantially all employees. The cost of the plan was $9.4 million, $8.9 million and $8.8 million in fiscal years 2015, 2014 and 2013, respectively. Employer match contributions are calculated at 100% of the first 4% of employees’ contributions, plus 50% on the next 2% of employees’ contributions, up to a total 5% employer match on eligible compensation.

The Company has a non-qualified 401(k) Restoration Plan for highly compensated employees, as defined by the Employee Retirement Income Security Act (“ERISA”). The cost of the plan to the Company in fiscal years 2015, 2014 and 2013 was $0.5 million, $0.9 million and $1.0 million, respectively. The plan provides a contribution equal to 5% of a participant’s compensation, except for those who are participants in the 2004 SERP plan, in excess of the limit set forth in Code section 401(a)(17), as adjusted. The Company accrues each participant’s return on investment based on an asset investment model of their choice.

The 2004 SERP Plan, a non-qualified defined contribution retirement benefit plan for certain qualified executives, provides a contribution equal to 5% of a participant’s compensation in excess of the limit set forth in Code section 401(a)(17), as adjusted. The contribution and interest costs charged to operations were $1.0 million, $1.2 million, and $1.3 million in fiscal year 2015, 2014, and 2013, respectively.

Certain eligible employees participate in a non-qualified Deferred Compensation Plan (“DCP”). Participants in the DCP have elected to defer a portion of their regular compensation subject to certain limitations proscribed by

 

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the DCP. The Company is required to pay interest on the employees’ deferred compensation at various rates that have historically been between 5% and 15%. Interest cost related to the plan and charged to interest expense was $3.7 million, $3.8 million, and $3.9 million in fiscal years 2015, 2014, and 2013, respectively.

The Company has a Pension Restoration Plan, a non-qualified defined contribution plan. The plan provides benefits for certain officers, whose pension plan benefit accruals were frozen, that would have been otherwise grandfathered in their pension participation based on age and vesting. Effective January 1, 2009, the Company suspended accruals to this plan for one year and subsequently permanently froze future contributions as of December 31, 2009. The Company incurred an expense of $0.1 million in each of the fiscal years 2015, 2014 and 2013, to provide benefits under this plan.

(15)    Stock-Based Compensation

Under the Belk, Inc. 2010 Incentive Stock Plan (the “2010 Incentive Plan”), the Company is authorized to award up to 2.5 million shares of class B common stock for various types of equity incentives to key executives of the Company. The Company recognized compensation expense, net of tax, under the 2010 Incentive Plan of $5.1 million, $6.9 million and $11.0 million for fiscal years 2015, 2014 and 2013, respectively.

Performance Based Stock Award Programs

The Company has a performance based stock award program (the “Long Term Incentive Plan” or “LTI Plan”), under which the Company grants, under its 2010 Incentive Plan, stock awards to certain key executives. Shares awarded under the LTI Plan vary based on Company results versus specified performance targets and generally vest at the end of the performance period. Beginning with fiscal year 2009, the LTI Plan began using a one-year performance period and a two-year service period. One-half of any shares earned during the performance period will be issued after the end of the performance period with the remaining shares issued at the end of the service period.

LTI Plan compensation costs are computed using the fair value of the Company’s stock on the grant date based on a third-party valuation and the estimated expected attainment of performance goals. The unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the LTI Plan was $4.5 million, $2.4 million and $4.9 million for fiscal years 2015, 2014 and 2013, respectively.

The weighted-average grant-date fair value of shares granted under the LTI Plans during fiscal years 2015, 2014 and 2013 was $48.10, $50.00 and $40.80, respectively. The total fair value of stock grants issued under the LTI Plans during fiscal year 2015 was $7.8 million. The fiscal year 2015 performance targets were met, however the plan does not vest until fiscal years 2016 and 2017. The fiscal year 2014 performance targets were met, and the plan vests in fiscal years 2015 and 2016. The fiscal year 2013 performance targets were met, and the plan vested in fiscal years 2014 and 2015.

Activity under the LTI Plan during the year ended January 31, 2015 is as follows:

 

		Shares (in thousands)				Weighted-Average Grant Date Fair Value per Share
Non-vested at February 1, 2014			239			$	44.68
Granted			276				48.10
Changes in Performance Estimates			(6	)			48.10
Vested			(181	)			43.24
Forfeited			(41	)			47.09
Non-vested at January 31, 2015			287			$	48.40

 

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In fiscal year 2011, the Company established a performance-based long term incentive plan (the “Stretch Incentive Plan” or “SIP 11”), under its 2010 Incentive Plan, in which certain key executive officers are eligible to participate. The performance period began on the first day of the third quarter of fiscal year 2011 and ended on the last day of fiscal year 2013. The target award level for all eligible employees was set at one times target total cash compensation. Executives could earn up to a maximum of 150% of the target award for achievement equal to or greater than 110% of the cumulative earnings before interest and taxes goal and 103% of the sales goal. The SIP 11 award was denominated in cash and settled in shares of class B common stock. The SIP 11 performance targets were met and one-half of the SIP 11 award earned was granted and issued during the first quarter of fiscal year 2014. The balance of the award earned was granted and issued during the first quarter of fiscal year 2015. The actual number of shares issued in fiscal year 2014 and 2015 was determined based on the Company’s stock price on the date the shares were granted; 138,631 shares at a share price of $50.00 and 144,099 shares at a share price of $48.10, respectively. The unrecognized compensation cost related to non-vested compensation arrangements granted under the SIP 11 Plan was $0.3 million in fiscal year 2014.

In fiscal year 2014, the Company established a similar performance-based long term incentive plan (“SIP 14”), under its 2010 Incentive Plan, in which certain key executive officers are eligible to participate. The performance period began on the first day of fiscal year 2014 and ends on the last day of fiscal year 2016. One-half of any SIP 14 award earned will be granted and issued after the end of the performance period, which is during the first quarter of fiscal year 2017. The balance of the award earned will be granted and issued during the first quarter of fiscal year 2018. The actual number of shares that will be issued in fiscal year 2017 will be determined based on the Company’s stock price on the date the shares are granted. There were no SIP 14 shares granted or issued, and the SIP 14 performance metrics were not met as of fiscal year 2015. The unrecognized compensation cost related to non-vested compensation arrangements granted under the SIP 14 Plan was $2.4 million in fiscal year 2014.

The Company granted service-based stock awards to certain associates in fiscal year 2013. The service-based awards granted 25,000 shares in fiscal year 2013; 12,500 will be issued in the second quarter of fiscal year 2018, and the remaining 12,500 will be issued at the end of the service period, fiscal year 2019. In fiscal year 2015, the 25,000 plan shares were forfeited. The Company granted a service-based stock award to an associate in fiscal year 2011. The service-based award granted 10,000 shares in fiscal year 2011; 5,000 were issued and vested during the second quarter of fiscal year 2011, and the remaining 5,000 were issued in fiscal year 2014. The weighted-average grant-date fair value of shares granted under the service-based plans during fiscal years 2013 and 2011 was $40.80 and $26.00, respectively. The total fair value of service-based stock grants vested during fiscal year 2011 was $0.3 million. The unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the service-based plan as of February 1, 2014 was $0.6 million.

(16)    Purchase Obligations

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts.

The annual amount and due dates of purchase obligations as of January 31, 2015 are $59.9 million due within one year, $18.9 million due within one to three years, and $6.9 million due within three to five years.

(17)    Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. The diluted EPS calculation includes the effect of contingently issuable stock-based compensation awards with remaining service vesting conditions as being outstanding at the beginning of the period in which all vesting conditions are met.

 

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If all necessary conditions have not been satisfied by the end of the period, the contingently issuable shares included in diluted EPS are based on the number of dilutive shares that would be issuable at the end of the contingency period. Contingently-issuable non-vested share awards are included in the diluted EPS calculation as of the beginning of the period (or as of the date of the contingent share agreement, if later).

The reconciliation of weighted-average basic and diluted shares for fiscal years 2015, 2014 and 2013 is as follows:

 

		January 31,				February 1,				February 2,
		2015				2014				2013
Basic Shares			39,809,730				41,541,176				43,435,314
Dilutive contingently-issuable non-vested share awards			102,312				269,925				272,862
Dilutive contingently-issuable vested share awards			564				1,649				4,087
Diluted Shares			39,912,606				41,812,750				43,712,263

(18)    Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company has equity and fixed income investments related to its company-owned life insurance. The fair value of the investments is the estimated amount that the Company would receive if the policy was terminated, taking into consideration the current creditworthiness of the insurer. The fair value of the company-owned life insurance is considered Level 2, as it is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the change in the fair value of the company-owned life insurance is marked to market through income.

As of January 31, 2015 and February 1, 2014, the Company held company-owned life insurance measured at fair value on a recurring basis of $28.6 million and $27.3 million, respectively. These amounts are presented net of loans that are secured by some of these policies of $164.1 million and $157.9 million at January 31, 2015 and February 1, 2014, respectively. Total gross company-owned life insurance assets were $192.7 million and $185.2 million at January 31, 2015 and February 1, 2014, respectively.

The Company has in the past entered into interest rate swap agreements with financial institutions to manage the exposure to changes in interest rates. When doing so, the fair value of the interest rate swap agreements is the estimated amount that the Company would pay or receive to terminate the swap agreement, taking into account the current credit worthiness of the swap counterparties. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all periods presented. Additionally, the change in the fair value of a swap designated as a cash flow hedge is marked to market through accumulated other comprehensive income.

Certain long-lived assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The fair value measurements related to long-lived assets are determined using expected future cash flow analyses. The Company estimates future cash flows based on historical experience and its expectation of future performance. The analyses use discounted cash flows and take into consideration any anticipated salvage value or sales price for the store. The analyses also assume available

 

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option periods through 20 years unless there is a real estate related event which would either increase or decrease the time period. The Company classifies these measurements as Level 3. In fiscal year 2015, the Company recorded $7.2 million in impairment charges primarily to adjust a retail location’s net book value to fair value.

 

		Property and Equipment
		(in thousands)
Measured as of January 31, 2015:
Carrying amount		$	7,040
Fair value measurement			(149	)
Impairment charge recognized		$	(7,189	)
Measured as of February 1, 2014:
Carrying amount		$	7,182
Fair value measurement			2,222
Impairment charge recognized		$	(4,960	)
Measured as of February 2, 2013:
Carrying amount		$	266
Fair value measurement			—
Impairment charge recognized		$	(266	)

As of January 31, 2015 and February 1, 2014, the fair value of fixed rate long-term debt including the current portion and excluding capitalized leases, was $400.9 million and $393.1 million, respectively. The Company classifies these measurements as Level 2. The fair value of the Company’s fixed rate long-term debt is estimated based on the current rates offered for debt of the same remaining maturities and credit ratings. The total carrying value of long-term debt, including the current portion and excluding capitalized leases, was $375.0 million as of January 31, 2015 and February 1, 2014.

(19)    Stockholders’ Equity

Authorized capital stock of Belk, Inc. includes 200 million shares of Class A common stock, 200 million shares of Class B common stock and 20 million shares of preferred stock, all with par value of $0.01 per share. At January 31, 2015, there were 38,317,436 shares of Class A common stock outstanding, 946,967 shares of Class B common stock outstanding, and no shares of preferred stock outstanding.

Class A shares are convertible into Class B shares on a 1 for 1 basis, in whole or in part, at any time at the option of the holder. Class A and Class B shares are identical in all respects, with the exception that Class A stockholders are entitled to 10 votes per share and Class B stockholders are entitled to one vote per share. There are restrictions on transfers of Class A shares to any person other than a Class A permitted holder. Each Class A share transferred to a non-Class A permitted holder automatically converts into one share of Class B.

On March 26, 2015, the Company declared a regular dividend of $0.80 on each share of Class A and Class B Common Stock outstanding on that date. On March 26, 2014, the Company declared a regular dividend of $0.80 on each share of Class A and Class B Common Stock outstanding on that date.

On March 26, 2014, the Company’s Board of Directors approved a self-tender offer to purchase up to 1,500,000 shares of Class A and 580,000 shares of Class B common stock at a price of $48.10 per share. The tender offer was initiated on April 24, 2014 and completed on May 21, 2014 when the Company accepted for purchase 1,704,754 shares of Class A and 256,257 shares of Class B common stock for $94.3 million.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(20)    Selected Quarterly Financial Data (unaudited)

The following table summarizes the Company’s unaudited quarterly results of operations for fiscal years 2015 and 2014:

 

		Three Months Ended
		January 31,				November 1,				August 2,				May 3,
		2015				2014				2014				2014
		(in thousands, except per share amounts)
Revenues		$	1,388,492			$	859,474			$	906,453			$	955,142
Gross profit(1)			468,090				260,719				301,527				309,024
Net income (loss)			104,367				(8,231	)			30,602				19,324
Basic income (loss) per share			2.66				(0.21	)			0.77				0.47
Diluted income (loss) per share			2.65				(0.21	)			0.77				0.47
		Three Months Ended
		February 1,				November 2,				August 3,				May 4,
		2014				2013				2013				2013
		(in thousands, except per share amounts)
Revenues		$	1,322,083			$	860,743			$	899,458			$	955,834
Gross profit(1)			436,172				271,021				297,593				310,566
Net income			96,261				3,560				30,521				28,191
Basic income per share			2.35				0.09				0.74				0.66
Diluted income per share			2.33				0.09				0.73				0.65

 

(1)	Gross profit represents revenues less cost of goods sold (including occupancy, distribution and buying expenses).

Per share amounts are computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding.

 

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Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A.

Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company’s management conducted an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2015, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992). Based on that assessment, management concluded that, as of February 1, 2014, the Company’s internal control over financial reporting is effective based on the criteria established in the Internal Control-Integrated Framework (1992). The Company intends to implement the new Internal Control-Integrated Framework, issued in May 2013 by COSO, during fiscal year 2016.

Management’s assessment of the effectiveness of the Company’s internal controls over financial reporting as of January 31, 2015, has been audited by KPMG, LLP, an independent registered public accounting firm. Their attestation report is included herein on the effectiveness of the Company’s internal control over financial reporting as of January 31, 2015.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the fourth fiscal quarter ended January 31, 2015 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Belk, Inc.:

We have audited Belk Inc. and subsidiaries’ internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Belk Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Belk, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Belk, Inc. and subsidiaries as of January 31, 2015 and February 1, 2014 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2015, and our report dated April 14, 2015, expressed an unqualified opinion on those consolidated financial statements.

/s/    KPMG LLP

Charlotte, North Carolina

April 14, 2015

 

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Item 9B.

Other Information

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On April 14, 2015, Belk adopted the Belk, Inc. Severance Pay Plan, a broad based severance plan for eligible employees, including the named executive officers, that provides a continuation of compensation under certain circumstances. For the named executive officers, the plan provides for the payment of basic severance if Belk involuntarily terminates the officer without cause, as well as for termination of employment by a named executive officer for good reason during a protection period following a change in control. Employees must agree to a customary release and to customary restrictive covenants in connection with the receipt of severance payments, except that certain restrictive covenants will not be required in connection with the receipt of change in control severance.

Pursuant to the plan, the amount of cash severance is based on a formula that looks at job level and years of service, and is generally enhanced for termination during a change in control protection period. Continued health coverage is provided under basic severance but is not continued for change in control severance. For officers, change in control severance includes a prorated bonus amount for time worked in a post-change in control bonus period. Belk will also pay any retention payments that would otherwise be forfeited by a terminated executive who receives change in control severance and will provide outplacement assistance for executives.

Under the plan, Messrs. Belk would be eligible for 12 months of monthly pay under basic severance and change in control severance. The other named executive officers would be eligible for 12 months of monthly pay under basic severance and for 18 months of monthly pay plus a prorated bonus under change in control severance. The protection period for all named executive officers is 18 months.

In addition, in connection with the adoption of the Severance Pay Plan, Belk made certain amendments to its annual incentive plan. For the annual incentive plan, the amendments clarify that upon a change in control performance goals will be deemed to be satisfied at the target level for the year and that any payout will be prorated through the date of the change in control. The guidelines for the annual incentive plan clarify the circumstances in which a terminated employee is eligible for a bonus in the year his or her employment terminates and the calculation applicable for determining a prorated bonus in the event of a termination.

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

The information about the Company’s directors and executive officers is included in the sections entitled “Proposal One — Election of Directors,” “Belk Management — Directors” and “Belk Management — Executive Officers” of the Proxy Statement for the Annual Meeting of the Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

The information about the Company’s Audit Committee is included in the section entitled “Belk Management  — Committees of the Board — Audit Committee” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

The information about the Company’s Nominating and Corporate Governance Committee is included in the section entitled “Corporate Governance — Committees of the Board — Nominating and Corporate Governance Committee” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

The information about the Company’s compliance with Section 16 of the Exchange Act of 1934, as amended, is included in the section entitled “Other Information for Stockholders — Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

 

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In March 2004, the Company adopted a Code of Ethics for Senior Executive and Financial Officers (the “Code of Ethics”) that applies to the chief executive officer, chief financial officer and chief accounting officer and persons performing similar functions. The Code of Ethics was filed as an exhibit to its Annual Report on Form 10-K for the fiscal year ended January 31, 2004 and is available on the Company’s website at www.belk.com.

 

Item 11.

Executive Compensation

The information about executive and director compensation is included in the sections entitled “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” and “Corporate Governance — Committees of the Board — Compensation Committee Interlocks and Insider Participation” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information about security ownership is included in the section entitled “Common Stock Ownership of Management and Principal Stockholders” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

Information about the equity compensation plans is included in the section entitled “Equity Compensation Plan Information” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information about transactions with related persons is included in the section entitled Corporate Governance — Related Person Transactions” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

The information about director independence is included in the sections entitled “Belk Management – Corporate Governance — Independence of Directors” and “Belk Management — Committees of the Board” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2015 and is incorporated herein by reference.

 

Item 14.

Principal Accountant Fees and Services

The information set forth under the section entitled “Independent Registered Public Accountant — Summary of Fees to Independent Registered Public Accountant,” and “Independent Registered Public Accountant — Audit Committee Pre-Approval Policies and Procedures” of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 27, 2015, is incorporated herein by reference.

 

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PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

(a) 1. Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income — Years ended January 31, 2015, February 1, 2014, and February 2, 2013.

Consolidated Statements of Comprehensive Income — Years ended January 31, 2015 and February 1, 2014.

Consolidated Balance Sheets — As of January 31, 2015 and February 1, 2014.

Consolidated Statements of Changes in Stockholders’ Equity — Years ended January 31, 2015, February 1, 2014, and February 2, 2013.

Consolidated Statements of Cash Flows — Years ended January 31, 2015, February 1, 2014, and February 2, 2013.

Notes to Consolidated Financial Statements

2. Consolidated Financial Statement Schedules

All schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or the notes thereto.

3. Exhibits

The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the Commission and those incorporated by reference to other filings:

3.1		Form of Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to pages B-24 to B-33 of the Company’s Registration Statement on Form S-4, filed on March 5, 1998 (File No. 333-42935)), as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed on June 5, 2012).
3.2		Form of Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004), as amended by the First Amendment to the Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K, filed on June 5, 2012).
4.1		Articles Fourth, Fifth and Seventh of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to pages B-24 to B-33 of the Company’s Registration Statement on Form S-4, filed on March 5, 1998 (File No. 333-42935)), as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed on June 5, 2012).
4.2		Articles I and IV of the Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004).
10.1*		Belk, Inc. 2010 Incentive Stock Plan (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement, filed on April 21, 2010).
10.2*		Belk, Inc. Revised Executive Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on June 12, 2008).
10.3*		Belk, Inc. 2011-2013 Stretch Incentive Plan (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on form 10-K, filed on April 12, 2011).
10.4*		Belk, Inc. 2004 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004).

 

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10.5*		Belk, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K, filed on April 14, 2005).
10.6*		Belk, Inc. Amended and Restated Annual Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on June 7, 2011).
10.7*		Transition Agreement, dated as of June 23, 2009, by and between Belk, Inc. and H.W. McKay Belk (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on September 9, 2009).
10.8*		Transition Agreement, dated as of November 1, 2012, by and between Belk, Inc. and Brian T. Marley (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K, filed on April 17, 2013).
10.9*		Belk, Inc. 2014-2016 Stretch Incentive Plan (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K, filed on April 17, 2013).
10.10*		Belk, Inc. Severance Pay Plan.
10.11		Note Purchase Agreement, dated as of August 31, 2007, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on September 7, 2007).
10.12		Note Purchase Agreement, dated as of July 12, 2005, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 18, 2005).
10.13		Note Purchase Agreement, dated as of November 23, 2010, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q, filed on December 8, 2010).
10.14		Note Purchase Agreement, dated as of December 14, 2011, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on December 14, 2011).
10.15		Fourth Amended and Restated Credit Agreement, dated as of October 22, 2014, among Belk, Inc. as the Borrower (and the Borrower Parties, as defined); the lenders who are or may become a party to this Agreement, as Lenders, Wells Fargo Bank, National Association, as Administrative Agent for the Lenders, and Bank of America, N.A. and Branch Banking and Trust Company, as Co-Syndication Agents, and PNC Bank, National Association, Regions Bank and U.S. Bank National Association, as Documentation Agents (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on October 28, 2014).
14.1		Belk, Inc. Code of Ethics for Senior Executive and Financial Officers (incorporated by reference to Exhibit 14.1 of the Company’s Annual Report on Form 10-K, filed on April 14, 2004).
21.1		Subsidiaries.
23.1		Consent of KPMG LLP.
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Identifies each management contract or compensatory plan required to be filed.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of April, 2015.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 14, 2015.

 

Signature				Title
/s/    THOMAS M. BELK, JR.         Thomas M. Belk, Jr.				Chairman of the Board, Chief Executive Officer (Principal Executive Officer) and Director
/s/    JOHN R. BELK         John R. Belk				President, Chief Operating Officer and Director
/s/    H. W. MCKAY BELK         H. W. McKay Belk				Director
/s/    ERSKINE B. BOWLES         Erskine B. Bowles				Director
/s/    JERRI L. DEVARD         Jerri L. DeVard				Director
/s/    ELIZABETH VALK LONG         Elizabeth Valk Long				Director
/s/    THOMAS C. NELSON       Thomas C. Nelson				Director
/s/    JOHN R. THOMPSON         John R. Thompson				Director
/s/    JOHN L. TOWNSEND, III         John L. Townsend, III				Director
/s/    ADAM M. ORVOS         Adam M. Orvos				Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/    RODNEY F. SAMPLES         Rodney F. Samples				Vice President and Controller (Principal Accounting Officer)

 

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