Dillard's, Inc. 10-Q 10-28-2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended October
28, 2006.
OR
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from __________ to __________.
Commission
file number 1-6140
DILLARD'S,
INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
71-0388071
|
(State
or other jurisdiction
|
(IRS
Employer
|
of
incorporation or organization)
|
Identification
Number)
|
1600
CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201
(Address
of principal executive office)
(Zip
Code)
(501)
376-5200
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (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 T No£
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). Check
one:
Large
Accelerated Filer T
|
Accelerated
Filer £
|
Non-Accelerated
Filer £
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule 12-b-2). Yes£
No T
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
|
|
|
CLASS
A COMMON STOCK as of December 4, 2006
|
76,091,073
|
|
|
CLASS
B COMMON STOCK as of December 4, 2006
|
4,010,929
|
|
DILLARD’S,
INC.
|
|
Page
Number
|
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|
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3
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4
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5
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6
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12
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22
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|
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22
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|
|
|
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|
|
|
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23
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23
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|
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23
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|
|
|
|
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24
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24
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24
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24
|
|
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|
|
SIGNATURES |
25
|
CONSOLIDATED
BALANCE SHEETS
(Amounts
in Thousands)
|
|
October
28,
2006
|
|
January
28,
2006
|
|
October
29,
2005
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
95,039
|
|
$
|
299,840
|
|
$
|
73,518
|
|
Accounts
receivable, net
|
|
|
10,733
|
|
|
12,523
|
|
|
9,698
|
|
Merchandise
inventories
|
|
|
2,392,557
|
|
|
1,802,695
|
|
|
2,411,654
|
|
Other
current assets
|
|
|
40,339
|
|
|
35,421
|
|
|
66,819
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,538,668
|
|
|
2,150,479
|
|
|
2,561,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
|
3,190,747
|
|
|
3,158,903
|
|
|
3,224,235
|
|
Goodwill
|
|
|
34,511
|
|
|
34,511
|
|
|
35,495
|
|
Other
Assets
|
|
|
170,059
|
|
|
173,026
|
|
|
142,893
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
5,933,985
|
|
$
|
5,516,919
|
|
$
|
5,964,312
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable and accrued expenses
|
|
$
|
1,373,358
|
|
$
|
858,082
|
|
$
|
1,423,694
|
|
Current
portion of capital lease obligations
|
|
|
4,414
|
|
|
5,929
|
|
|
5,030
|
|
Current
portion of long-term debt
|
|
|
200,620
|
|
|
198,479
|
|
|
98,698
|
|
Federal
and state income taxes
|
|
|
19,333
|
|
|
84,902
|
|
|
80,965
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,597,725
|
|
|
1,147,392
|
|
|
1,608,387
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt
|
|
|
956,775
|
|
|
1,058,946
|
|
|
1,159,096
|
|
Capital
Lease Obligations
|
|
|
29,006
|
|
|
31,806
|
|
|
16,743
|
|
Other
Liabilities
|
|
|
251,050
|
|
|
259,111
|
|
|
251,237
|
|
Deferred
Income Taxes
|
|
|
467,389
|
|
|
479,123
|
|
|
486,789
|
|
Guaranteed
Preferred Beneficial Interests in the Company's Subordinated
Debentures
|
|
|
200,000
|
|
|
200,000
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1,198
|
|
|
1,193
|
|
|
1,189
|
|
Additional
paid-in capital
|
|
|
762,782
|
|
|
749,068
|
|
|
744,768
|
|
Accumulated
other comprehensive loss
|
|
|
(14,574
|
)
|
|
(14,574
|
)
|
|
(13,333
|
)
|
Retained
earnings
|
|
|
2,495,603
|
|
|
2,414,491
|
|
|
2,319,073
|
|
Less
treasury stock, at cost
|
|
|
(812,969
|
)
|
|
(809,637
|
)
|
|
(809,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
2,432,040
|
|
|
2,340,541
|
|
|
2,242,060
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
5,933,985
|
|
$
|
5,516,919
|
|
$
|
5,964,312
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Amounts
in Thousands, Except Per Share Data)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Net
Sales
|
|
$
|
1,721,521
|
|
$
|
1,727,106
|
|
$
|
5,246,740
|
|
$
|
5,221,983
|
|
Service
Charges, Interest and Other Income
|
|
|
41,092
|
|
|
34,119
|
|
|
143,463
|
|
|
106,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,762,613
|
|
|
1,761,225
|
|
|
5,390,203
|
|
|
5,328,432
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,118,313
|
|
|
1,147,109
|
|
|
3,420,023
|
|
|
3,461,406
|
|
Advertising,
selling, administrative and general expenses
|
|
|
513,182
|
|
|
506,966
|
|
|
1,518,428
|
|
|
1,488,992
|
|
Depreciation
and amortization
|
|
|
73,557
|
|
|
75,814
|
|
|
220,942
|
|
|
226,234
|
|
Rentals
|
|
|
12,842
|
|
|
9,779
|
|
|
36,033
|
|
|
30,384
|
|
Interest
and debt expense
|
|
|
23,435
|
|
|
25,746
|
|
|
71,632
|
|
|
79,188
|
|
Asset
impairment and store closing charges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Costs and Expenses
|
|
|
1,741,329
|
|
|
1,765,414
|
|
|
5,267,058
|
|
|
5,292,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
|
21,284
|
|
|
(4,189
|
)
|
|
123,145
|
|
|
35,847
|
|
Income
Taxes (Benefit)
|
|
|
7,675
|
|
|
(1,510
|
)
|
|
32,490
|
|
|
12,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
|
13,609
|
|
|
(2,679
|
)
|
|
90,655
|
|
|
23,022
|
|
Retained
Earnings at Beginning of Period
|
|
|
2,485,180
|
|
|
2,325,061
|
|
|
2,414,491
|
|
|
2,305,993
|
|
Cash
Dividends Declared
|
|
|
(3,186
|
)
|
|
(3,309
|
)
|
|
(9,543
|
)
|
|
(9,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings at End of Period
|
|
$
|
2,495,603
|
|
$
|
2,319,073
|
|
$
|
2,495,603
|
|
$
|
2,319,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
(0.03
|
)
|
$
|
1.14
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.17
|
|
$
|
(0.03
|
)
|
$
|
1.13
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared Per Common Share
|
|
$
|
0.04
|
|
$
|
0.04
|
|
$
|
0.12
|
|
$
|
0.12
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in Thousands)
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
Net
income
|
|
$
|
90,655
|
|
$
|
23,022
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and deferred financing
|
|
|
222,468
|
|
|
229,017
|
|
Share-based
compensation
|
|
|
942
|
|
|
-
|
|
Excess
tax benefits from share-based compensation
|
|
|
(1,233
|
)
|
|
-
|
|
Asset
impairment and store closing charges
|
|
|
-
|
|
|
6,381
|
|
Gain
on sale of property and equipment
|
|
|
(2,590
|
)
|
|
(3,354
|
)
|
Gain
on sale of joint venture
|
|
|
(13,810
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
(Increase) in accounts receivable
|
|
|
1,790
|
|
|
(47
|
)
|
Increase
in merchandise inventories and other current assets
|
|
|
(594,780
|
)
|
|
(688,306
|
)
|
(Increase)
decrease in other assets
|
|
|
(4,739
|
)
|
|
36,163
|
|
Increase
in trade accounts payable and accrued expenses, other liabilities
and
income taxes
|
|
|
411,475
|
|
|
520,879
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
110,178
|
|
|
123,755
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(258,905
|
)
|
|
(327,720
|
)
|
Proceeds
from sale of joint venture
|
|
|
19,990
|
|
|
-
|
|
Proceeds
from hurricane insurance
|
|
|
25,317
|
|
|
-
|
|
Proceeds
from sale of property and equipment
|
|
|
3,062
|
|
|
46,577
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(210,536
|
)
|
|
(281,143
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Principal
payments of long-term debt and capital lease obligations
|
|
|
(104,345
|
)
|
|
(159,994
|
)
|
Proceeds
from issuance of common stock
|
|
|
11,544
|
|
|
3,462
|
|
Excess
tax benefits from share-based compensation
|
|
|
1,233
|
|
|
-
|
|
Cash
dividends paid
|
|
|
(9,543
|
)
|
|
(9,942
|
)
|
Purchase
of treasury stock
|
|
|
(3,332
|
)
|
|
(100,868
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(104,443
|
)
|
|
(267,342
|
)
|
|
|
|
|
|
|
|
|
Decrease
in Cash and Cash Equivalents
|
|
|
(204,801
|
)
|
|
(424,730
|
)
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
299,840
|
|
|
498,248
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
95,039
|
|
$
|
73,518
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
$
|
-
|
|
$
|
1,689
|
|
Capital
lease transactions
|
|
|
-
|
|
|
229
|
|
Accrued
capital expenditures
|
|
|
17,704
|
|
|
15,061
|
|
See
notes
to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1.
|
Basis
of Presentation
|
The
accompanying unaudited consolidated financial statements of Dillard's, Inc.
(the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and
with the instructions to Form 10-Q and Article 10 of Regulation S-X, each as
promulgated under the Securities Exchange Act of 1934, as amended. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation
have
been included. Operating results for the three and nine months ended October
28,
2006 are not necessarily indicative of the results that may be expected for
the
fiscal year ending February 3, 2007 due to the seasonal nature of the business.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the
fiscal year ended January 28, 2006 filed with the Securities and Exchange
Commission on April 3, 2006.
Note
2.
|
Stock-Based
Compensation
|
The
Company has various stock option plans that provide for the granting of options
to purchase shares of Class A Common Stock to certain key employees of the
Company. Exercise and vesting terms for options granted under the plans are
determined at each grant date. Prior to January 29, 2006, the Company accounted
for those plans pursuant to Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees,
(“Opinion No. 25”) using the intrinsic value method, as permitted by SFAS No.
123, Accounting
for Stock Based Compensation
(“SFAS
No. 123”) as amended by SFAS No. 148, Accounting
for Stock Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123.
No
compensation expense has been recorded in the consolidated financial statements
for the three and nine months ended October 29, 2005 as all options were granted
at not less than fair market value on the date of grant. Effective January
29,
2006, the Company adopted Statement No. 123-R, Share-Based
Payment
(“SFAS
No. 123-R”), using the modified-prospective transition method. Under this
transition method, all forms of share-based payments to employees, including
employee stock options, granted prior to but not yet vested as of January 29,
2006 are treated as compensation and recognized in the income statement based
on
their estimated fair values under the original provisions of SFAS No. 123,
and
all share-based payments granted on or subsequent to January 29, 2006 are
treated as compensation and recognized in the income statement based on their
estimated fair values in accordance with the provisions of SFAS No. 123-R.
Results for prior periods have not been restated.
Upon
adoption of SFAS No. 123-R, the Company elected to continue to value its
share-based payment transactions using a Black-Scholes option pricing model,
which was previously used by the Company for purposes of preparing the pro
forma
disclosures under SFAS No. 123. Under the provisions of SFAS No. 123-R,
stock-based compensation expense recognized during the period is based on the
portion of the share-based payment awards that are ultimately expected to vest.
Accordingly, stock-based compensation expense recognized in the first, second
and third quarters of 2006 have been reduced for estimated forfeitures. SFAS
No.
123-R requires forfeitures to be estimated at the time of grant and revised,
if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Compensation expense for stock option awards granted on or after
January 29, 2006 will be expensed using a straight-line single option method,
which is the same attribution method that was used by the Company for purposes
of its pro forma disclosures under SFAS No. 123.
As
a
result of adopting SFAS No. 123-R, the Company recognized additional
compensation expense for the three and nine months ended October 28, 2006 of
$176,000 and $942,000, respectively. At October 28, 2006, there was $154,000
of
total unrecognized compensation expense related to non-vested stock options
which is expected to be recognized over a period of 1.8 years. Beginning in
the first quarter of 2006 in accordance with SFAS No. 123-R, the Company has
presented excess tax benefits from the exercise of stock-based compensation
awards as a financing activity in the consolidated statement of cash
flows.
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS No. 123-R
to options granted under the Company’s stock option plans in all periods
presented. For purposes of this pro forma disclosure, the value of options
is
estimated using the Black-Scholes option-pricing model and amortized to expense
over the options’ vesting periods.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Net
Income (Loss):
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
13,609
|
|
$
|
(2,679
|
)
|
$
|
90,655
|
|
$
|
23,022
|
|
Add:
Stock based employee compensation expense included in reported net
income,
net of related tax effects
|
|
|
110
|
|
|
-
|
|
|
590
|
|
|
-
|
|
Deduct:
Total stock based employee compensation expense determined under
fair
value based method, net of tax
|
|
|
(110
|
)
|
|
(340
|
)
|
|
(590
|
)
|
|
(1,097
|
)
|
Pro
forma
|
|
$
|
13,609
|
|
$
|
(3,019
|
)
|
$
|
90,655
|
|
$
|
21,925
|
|
Basic
Earnings (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.17
|
|
$
|
(0.03
|
)
|
$
|
1.14
|
|
$
|
0.28
|
|
Pro
forma
|
|
|
0.17
|
|
|
(0.04
|
)
|
|
1.14
|
|
|
0.27
|
|
Diluted
Earnings (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.17
|
|
$
|
(0.03
|
)
|
$
|
1.13
|
|
$
|
0.28
|
|
Pro
forma
|
|
|
0.17
|
|
|
(0.04
|
)
|
|
1.13
|
|
|
0.27
|
|
The
fair
value of each option grant is estimated on the date of each grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Risk-free
interest rate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.00
|
%
|
Expected
option life (years)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2.0
|
|
Expected
volatility
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
37.6
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.66
|
%
|
There
were no stock options granted during the nine months ended October 28, 2006.
The
weighted average fair value of options granted during the nine months ended
October 29, 2005 was $5.81. The fair values generated by the Black-Scholes
model
may not be indicative of the future benefit, if any, that may be received by
the
option holder.
Stock
option transactions for the three months ended October 28, 2006 are summarized
as follows:
|
|
Three
Months Ended
October
28, 2006
|
|
Fixed
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding,
beginning of period
|
|
|
7,277,759
|
|
$
|
25.85
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(192,079
|
)
|
|
25.11
|
|
|
-
|
|
Forfeited
|
|
|
(92,863
|
)
|
|
24.01
|
|
|
-
|
|
Outstanding,
end of period
|
|
|
6,992,817
|
|
$
|
25.82
|
|
|
6.09
years
|
|
Options
exercisable at period end
|
|
|
6,649,492
|
|
$
|
25.91
|
|
|
5.09
years
|
|
The
intrinsic value of stock options exercised during the nine months ended October
28, 2006 was $3.5 million. The intrinsic value of outstanding stock options
at
October 28, 2006 was $32.5 million. At October 28, 2006, the intrinsic value
of
exercisable options was $30.3 million.
The
following table summarizes information about non-vested stock
options:
|
|
Three
Months Ended
October
28, 2006
|
|
|
|
Shares
|
|
Grant
Date Fair Value
|
|
Non-vested,
beginning of period
|
|
|
345,675
|
|
|
25.50
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(2,350
|
)
|
|
24.01
|
|
Non-vested,
end of period
|
|
|
343,325
|
|
|
25.53
|
|
The
following table summarizes information about stock options outstanding at
October 28, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
|
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (Yrs.)
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$10.44
- $25.30
|
|
|
771,765
|
|
|
0.95
|
|
$
|
24.14
|
|
|
428,440
|
|
$
|
24.24
|
|
$25.74
- $25.74
|
|
|
4,000,000
|
|
|
9.24
|
|
|
25.74
|
|
|
4,000,000
|
|
|
25.74
|
|
$25.95
- $30.47
|
|
|
2,221,052
|
|
|
2.19
|
|
|
26.53
|
|
|
2,221,052
|
|
|
26.53
|
|
|
|
|
6,992,817
|
|
|
6.09
|
|
$
|
25.82
|
|
|
6,649,492
|
|
$
|
25.91
|
|
Note
3.
|
Asset
Impairment and Store Closing
Charges
|
During
the nine months ended October 29, 2005, the Company recorded pre-tax expense
of
$6.4 million for asset impairment and store closing costs. The expense includes
a $6.0 million write-down to fair value for two stores that were closed during
the third quarter of 2005 and a $0.4 million future lease obligation on a store
closed during the first quarter of 2005.
There
were no asset impairment and store closing charges recorded during the three
months ended October 29, 2005 or the three and nine months ended October 28,
2006.
The
following is a summary of the activity in the reserve established for asset
impairment and store closing charges for the nine months ended October 28,
2006:
(in
thousands)
|
|
Balance,
January
28,
2006
|
|
Charges
|
|
Cash
Payments
|
|
Balance
October
28,
2006
|
|
Rent,
property taxes and utilities
|
|
$
|
4,909
|
|
$
|
-
|
|
$
|
976
|
|
$
|
3,933
|
|
The
store
closing reserves are included in trade accounts payable and accrued expenses
and
other liabilities.
During
the three and nine months ended October 28, 2006, the Company repurchased $1.7
million of its outstanding, unsecured notes prior to their maturity dates.
The
notes bore interest at 6.3% and had a maturity date of February 2008.
During
the three and nine months ended October 29, 2005, the Company paid off $50.0
million in mortgage notes due August 2011. These notes bore interest at 7.25%
and were collateralized by certain corporate buildings, land and land
improvements.
Also
during the nine months ended October 29, 2005, the Company repurchased $15.4
million of its outstanding, unsecured notes prior to their maturity dates.
Interest rates on the repurchased securities ranged from 7.8% to 7.9% while
the
maturity dates ranged from 2023 to 2027. A pre-tax loss of $0.5 million recorded
within interest expense resulted from the repurchase of the unsecured notes
during the nine months ended October 29, 2005. The Company did not repurchase
any of its unsecured notes during the three months ended October 29,
2005.
Note
5.
|
Earnings
Per Share Data
|
The
following table sets forth the computation of basic and diluted earnings per
share (“EPS”) for the periods indicated (in thousands, except per share
data).
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
13,609
|
|
$
|
(2,679
|
)
|
$
|
90,655
|
|
$
|
23,022
|
|
Weighted
average shares of common stock outstanding
|
|
|
79,633
|
|
|
80,991
|
|
|
79,504
|
|
|
82,301
|
|
Basic
Earnings (Loss) Per Share
|
|
$
|
0.17
|
|
$
|
(0.03
|
)
|
$
|
1.14
|
|
$
|
0.28
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
13,609
|
|
$
|
(2,679
|
)
|
$
|
90,655
|
|
$
|
23,022
|
|
Weighted
average shares of common stock outstanding
|
|
|
79,633
|
|
|
80,991
|
|
|
79,504
|
|
|
82,301
|
|
Stock
options
|
|
|
1,279
|
|
|
-
|
|
|
690
|
|
|
191
|
|
Total
weighted average equivalent shares
|
|
|
80,912
|
|
|
80,991
|
|
|
80,194
|
|
|
82,492
|
|
Diluted
Earnings (Loss) Per Share
|
|
$
|
0.17
|
|
$
|
(0.03
|
)
|
$
|
1.13
|
|
$
|
0.28
|
|
No
stock
options were included in the three months ended October 29, 2005 computation
of
diluted earnings per share because they would be antidilutive due to the net
loss.
Note
6.
|
Comprehensive
Income (Loss) and Accumulated Other Comprehensive
Loss
|
Accumulated
other comprehensive income (loss) consists only of the minimum pension
liability, which is calculated annually in the fourth quarter. Comprehensive
income (loss) is the same as reported net income (loss) for the three and nine
months ended October 28, 2006 and October 29, 2005.
Note
7.
|
Commitments
and Contingencies
|
On
July
29, 2002, a Class Action Complaint (followed on December 13, 2004 by a Second
Amended Class Action Complaint) was filed in the United States District Court
for the Southern District of Ohio against the Company, the Mercantile Stores
Pension Plan (the “Plan”) and the Mercantile Stores Pension Committee (the
“Committee”) on behalf of a putative class of former Plan participants. The
complaint alleged that certain actions by the Plan and the Committee violated
the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), as a
result of amendments made to the Plan that allegedly were either improper and/or
ineffective and as a result of certain payments made to certain beneficiaries
of
the Plan that allegedly were improperly calculated and/or discriminatory on
account of age. The Second Amended Complaint did not specify any liquidated
amount of damages sought and sought recalculation of certain benefits paid
to
putative class members.
During
the nine months ended October 28, 2006, the Company signed a memorandum of
understanding for $35.0 million to settle the case and, accordingly, accrued
an
additional $21.7 million ($13.6 million after-tax or $0.17 per diluted share)
regarding the case in trade accounts payable and accrued expenses. The
settlement is still pending court approval. The litigation continues between
the
Company and the Plan’s actuarial firm over the Company’s cross claim against the
actuarial firm seeking reimbursement for the $35.0 million tentative settlement
and additional damages. The accrued liability does not include any potential
reimbursement amount from the actuarial firm.
Various
legal proceedings in the form of lawsuits and claims, which occur in the normal
course of business, are pending against the Company and its subsidiaries. In
the
opinion of management, disposition of these matters is not expected to
materially affect the Company’s financial position, cash flows or results of
operations.
At
October 28, 2006, the Company was a co-guarantor of a $204 million loan
commitment with a joint venture of which the Company was a guarantor of up
to
50% of the loan balance with the joint venture partner guaranteeing the
remaining 50% of the loan balance. A mall recently completed in Bonita Springs,
Florida provided collateral for the loan. The loan had an outstanding balance
of
$189.4 million as of October 28, 2006. In November 2006, the joint venture
obtained permanent financing for the mall, and the Company’s guaranty was
released.
At
October 28, 2006, letters of credit totaling $75.4 million were issued under
the
Company’s $1.2 billion line of credit facility.
The
Company has a nonqualified defined benefit plan for certain officers. The plan
is noncontributory and provides benefits based on years of service and
compensation during employment. Pension expense is determined using various
actuarial cost methods to estimate the total benefits ultimately payable to
officers and allocates this cost to service periods. The pension plan is
unfunded. The actuarial assumptions used to calculate pension costs are reviewed
annually. The Company made participant distributions of $0.9 million and $2.6
million during the three and nine months ended October 28, 2006. The Company
expects to make participant distributions of approximately $2.4 million for
the
remainder of fiscal 2006.
The
components of net periodic benefit costs are as follows (in
thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
545
|
|
$
|
498
|
|
$
|
1,636
|
|
$
|
1,495
|
|
Interest
cost
|
|
|
1,349
|
|
|
1,189
|
|
|
4,047
|
|
|
3,567
|
|
Net
actuarial gain
|
|
|
504
|
|
|
393
|
|
|
1,512
|
|
|
1,178
|
|
Amortization
of prior service cost
|
|
|
157
|
|
|
157
|
|
|
470
|
|
|
470
|
|
Net
periodic benefit costs
|
|
$
|
2,555
|
|
$
|
2,237
|
|
$
|
7,665
|
|
$
|
6,710
|
|
Note
9.
|
Recently
Issued Accounting
Standards
|
In
February 2006, the Financial
Accounting Standards Board (FASB)
issued
SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133
and 140
(“SFAS
No. 155”). SFAS No. 155 provides entities with relief from having to separately
determine the fair value of an embedded derivative that would otherwise be
required to be bifurcated from its host contract in accordance with SFAS No.
133. It also allows an entity to make an irrevocable election to measure such
a
hybrid financial instrument at fair value in its entirety, with changes in
fair
value recognized in earnings. SFAS
No.
155 is effective for all financial instruments acquired, issued, or subject
to a
remeasurement (new basis) event occurring after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The adoption of SFAS
No.
155 is not expected to have a material effect on the Company’s financial
position, results of operations or cash flows.
In
June
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109
(“FIN
48”), which seeks to reduce the diversity in practice associated with the
accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. FIN 48 is effective for
fiscal years beginning after December 15, 2006, and the Company will adopt
the
new requirements in its fiscal first quarter of 2007. The cumulative effects,
if
any, of adopting FIN 48 will be recorded as an adjustment to retained earnings
as of the beginning of the period of adoption. The Company is currently
assessing the impact of FIN 48 on its consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure about such fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
The Company is currently assessing the impact of SFAS No. 157 on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(“SFAS
No. 158”). SFAS
No.
158 requires an employer to recognize the overfunded or underfunded status
of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability, respectively, in its balance sheet and to recognize changes
in that funded status as unrealized gain or loss through accumulated other
comprehensive income when the changes occur. SFAS No. 158 also requires an
employer to measure its defined benefit plan assets and obligations as of the
date of the employer’s fiscal year-end (with limited exceptions). SFAS No. 158
is effective for fiscal years ending after December 15, 2006. The Company is
currently assessing the impact of SFAS No. 158
on its
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (“SAB”) 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(“SAB
108”). SAB 108 provides guidance on the consideration of the effects of prior
year unadjusted errors in quantifying current year misstatements for the purpose
of a materiality assessment. The guidance in SAB 108 is effective for fiscal
years ending after November 15, 2006. The Company is currently assessing the
impact of SAB 108 on its consolidated financial statements.
Note
10.
|
Revolving
Credit Agreement
|
At
October 28, 2006, the Company maintained a $1.2 billion revolving credit
facility with JPMorgan Chase Bank ("JPMorgan") as agent for various banks.
Borrowings under the credit agreement accrue interest at either JPMorgan's
Base
Rate minus 0.5% or LIBOR plus 1.0% (currently 6.32%) subject to certain
availability thresholds as defined in the credit agreement. At October 28,
2006,
letters of credit totaling $75.4 million were issued under the $1.2 billion
revolving credit agreement. Availability for borrowings and letter of credit
obligations under the credit agreement is limited to 85% of the inventory of
certain Company subsidiaries (approximately $1.38 billion at October 28, 2006)
leaving unutilized availability under the facility of $1.12 billion.
There
are no financial covenant requirements under the credit agreement provided
availability exceeds $100 million. The credit agreement expires on December
12,
2011. The Company pays an annual commitment fee to the banks of 0.25% of the
committed amount less outstanding borrowings and letters of credit.
Note
11.
|
Share
Repurchase Program
|
During
the nine months ended October 28, 2006, the Company repurchased approximately
133,500 shares of Class A common stock for $3.3 million under its $200 million
program, which was authorized by the board of directors in May of 2005 (“2005
plan”). Approximately $111.9 million in share repurchase authorization remained
under this open-ended plan at October 28, 2006. No repurchases were made under
the 2005 plan during the three months ended October 28, 2006.
During
the three months ended October 29, 2005, the Company repurchased approximately
3.6 million shares of Class A Common Stock for $78.4 million under its 2005
plan. During the nine months ended October 29, 2005, the Company repurchased
approximately 3.9 million shares of Class A Common Stock for $84.8 million
under
the 2005 plan.
During
the nine months ended October 29, 2005, the Company repurchased approximately
665,000 shares for $16.1 million which completed the remaining authorized
repurchase of Class A Common Stock under its $200 million program approved
by
the board of directors in May of 2000.
During
the nine months ended October 28, 2006, the Company sold its interest in an
unconsolidated joint venture, Yuma Palms, for $20.0 million. The Company
recorded a pretax gain of $13.5 million related to the sale in service charges,
interest and other income.
Executive
Overview
Dillard’s,
Inc. (the “Company”, “we”, “us”, or “our”) operates 329 retail department stores
in 29 states. Our stores are located in suburban shopping malls and open-air
lifestyle centers and offer a broad selection of fashion apparel and home
furnishings. We offer an appealing and attractive assortment of merchandise
to
our customers at a fair price. We seek to enhance our income by maximizing
the
sale of this merchandise to our customers. We do this by promoting and
advertising our merchandise and by making our stores an attractive and
convenient place for our customers to shop.
Fundamentally,
our business model is to offer the customer a compelling price/value
relationship through the combination of high quality, fashionable products
and
services at a competitive price. We seek to deliver a high level of
profitability and cash flow. Noteworthy items for the quarter ended October
28,
2006 compared to the quarter ended October 29, 2005 include the
following:
|
—
|
Net
income of $13.6 million compared to a net loss of $2.7
million
|
|
—
|
Gross
margin improvement of 140 basis points of
sales
|
|
—
|
Comparable
store inventory decline of 3%
|
|
—
|
Launch
of “Dillard’s - The Style of Your Life” - a comprehensive national
branding campaign
|
Trends
and uncertainties
We
have
identified the following key uncertainties whose fluctuations may have a
material effect on our operating results.
|
—
|
Cash
flow - Cash from operating activities is a primary source of liquidity
that is adversely affected when the industry faces market driven
challenges and new and existing competitors seek areas of growth
to expand
their businesses. If our customers do not purchase our merchandise
offerings in sufficient quantities, we respond by taking markdowns.
If we
have to reduce our prices, the cost of goods sold on our income statement
will correspondingly rise, thus reducing our income.
|
|
—
|
Success
of brand - The
success of our exclusive brand merchandise is dependent upon customer
fashion preferences.
|
|
—
|
Store
growth - Our growth is dependent on a number of factors which could
prevent the opening of new stores, such as identifying suitable markets
and locations.
|
|
—
|
Sourcing
- Store merchandise is dependent upon adequate and stable availability
of
materials and production facilities from which we source our
merchandise.
|
2006
Guidance
A
summary
of guidance on key financial measures for 2006, in conformity with accounting
principles generally accepted in the United States of America (“GAAP”), is shown
below.
(In
millions of dollars)
|
|
2006
Estimated
|
|
2005
Actual
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
300
|
|
$
|
302
|
|
Rental
expense
|
|
|
58
|
|
|
48
|
|
Interest
and debt expense
|
|
|
98
|
|
|
106
|
|
Capital
expenditures
|
|
|
340
|
|
|
456
|
|
General
Net
Sales.
Net
Sales includes sales of comparable stores, non-comparable stores and lease
income on leased departments. Comparable store sales include sales for those
stores which were in operation for a full period in both the current month
and
the corresponding month for the prior year. Non-comparable store sales include
sales in the current fiscal year from stores opened during the previous fiscal
year before they are considered comparable stores, sales from new stores opened
in the current fiscal year and sales in the previous fiscal year for stores
that
were closed in the current fiscal year.
Service
Charges, Interest and Other Income.
Service
charges, interest and other income includes income generated through a long-term
marketing and servicing alliance between GE Consumer Finance (“GE”) and us that
began November 1, 2004 with an initial term of 10 years with an option to renew.
GE owns the accounts and balances generated by Dillard’s private label credit
cards during the term of the alliance and provides all key customer service
functions supported by ongoing credit marketing efforts. Other income relates
to
joint ventures accounted for by the equity method, rental income, shipping
and
handling fees and gains (losses) on the sale of property and equipment and
joint
ventures.
Cost
of sales. Cost
of
sales includes the cost of merchandise sold net of purchase discounts, bank
card
fees, freight to the distribution centers, employee and promotional discounts,
non-specific vendor allowances and direct payroll for salon
personnel.
Advertising,
selling, administrative and general expenses. Advertising,
selling, administrative and general expenses includes buying, occupancy,
selling, distribution, warehousing, store and corporate expenses (including
payroll and employee benefits), insurance, employment taxes, advertising,
management information systems, legal, bad debt costs and other corporate level
expenses. Buying expenses consist of payroll, employee benefits and travel
for
design, buying and merchandising personnel.
Depreciation
and amortization. Depreciation
and amortization includes depreciation and amortization on property and
equipment.
Rentals.
Rentals
includes expenses for store leases and data processing and equipment
rentals.
Interest
and debt expense. Interest
and debt expense includes interest relating to our unsecured notes, mortgage
notes, Guaranteed Beneficial Interests in the Company’s Subordinated Debentures,
gains and losses on note repurchases, amortization of financing costs, call
premiums and interest on capital lease obligations.
Asset
impairment and store closing charges. Asset
impairment and store closing charges consists of write downs to fair value
of
under-performing properties and exit costs associated with the closure of
certain stores. Exit costs include future rent, taxes and common area
maintenance expenses from the time the stores are closed.
Critical
Accounting Policies and Estimates
Our
accounting policies are more fully described in Note 1 of Notes to Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year
ended
January 28, 2006. As disclosed in this note, the preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions about future events that affect the amounts reported in the
consolidated financial statements and accompanying notes. Since future events
and their effects cannot be determined with absolute certainty, actual results
will differ from those estimates. We evaluate our estimates and judgments on
an
ongoing basis and predicate those estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under
the circumstances. Actual results will differ from these estimates and
assumptions under different conditions.
Our
management believes the following critical accounting policies significantly
affect its judgments and estimates used in preparation of the consolidated
financial statements.
Merchandise
inventory. Approximately
98% of the inventories are valued at the lower of cost or market using the
retail last-in, first-out (“LIFO”) inventory method. Under the retail inventory
method (“RIM”), the valuation of inventories at cost and the resulting gross
margins are calculated by applying a calculated cost to retail ratio to the
retail value of inventories. RIM is an averaging method that has been widely
used in the retail industry due to its practicality. Additionally, it is
recognized that the use of RIM will result in valuing inventories at the lower
of cost or market if markdowns are currently taken as a reduction of the retail
value of inventories. Inherent in the RIM calculation are certain significant
management judgments and estimates including, among others, merchandise markon,
markups, and markdowns, which significantly impact the ending inventory
valuation at cost as well as the resulting gross margins. Management believes
that our RIM provides an inventory valuation which results in a carrying value
at the lower of cost or market. The remaining 2% of the inventories are valued
by the specific identified cost method.
Revenue
recognition. We
recognize revenue upon the sale of merchandise to our customers, net of
anticipated returns. The provision for sales returns is based upon historical
evidence of our return rate. We recorded an allowance for sales returns of
$7.7
million and $7.5 million as of October 28, 2006 and October 29, 2005,
respectively. Adjustments to earnings resulting from revisions to estimates
on
our sales return provision has been insignificant for the three and nine months
ended October 28, 2006 and October 29, 2005.
Merchandise
vendor allowances. We
receive concessions from our merchandise vendors through a variety of programs
and arrangements, including co-operative advertising, payroll reimbursements
and
markdown reimbursement programs. Co-operative advertising allowances are
reported as a reduction of advertising expense in the period in which the
advertising occurred. Payroll reimbursements are reported as a reduction of
payroll expense in the period in which the reimbursement occurred. All other
merchandise vendor allowances are recognized as a reduction of cost purchases
when received. Accordingly, a reduction or increase in vendor concessions has
an
inverse impact on cost of sales and/or selling and administrative expenses.
The
amounts recognized as a reduction in cost of sales have not varied significantly
during the three and nine months ended October 28, 2006 and October 29,
2005.
Insurance
accruals.
Our
consolidated balance sheets include liabilities with respect to self-insured
workers’ compensation (with a self-insured retention of $4 million per claim)
and general liability (with a self-insured retention of $1 million per claim)
claims. We estimate the required liability of such claims, utilizing an
actuarial method, based upon various assumptions, which include, but are not
limited to, our historical loss experience, projected loss development factors,
actual payroll and other data. The required liability is also subject to
adjustment in the future based upon the changes in claims experience, including
changes in the number of incidents (frequency) and changes in the ultimate
cost
per incident (severity).
Adjustments to earnings resulting from changes in historical loss trends have
been insignificant for the three and nine months ended October 28, 2006 and
October 29, 2005.
Finite-lived
assets.
Our
judgment regarding the existence of impairment indicators is based on market
and
operational performance. We assess the impairment of long-lived
assets,
primarily fixed assets, annually and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered
important which could trigger an impairment review include the
following:
|
—
|
Significant
changes in the manner of our use of assets or the strategy for the
overall
business;
|
|
—
|
Significant
negative industry or economic trends;
or
|
We
perform an analysis of the anticipated undiscounted future net cash flows of
the
related finite-lived assets. If the carrying value of the related asset exceeds
the undiscounted cash flows, the carrying value is reduced to its fair value.
Various factors including future sales growth and profit margins are included
in
this analysis. We currently have 15 stores that based on current cash flow
projections are not impaired but do have recovery periods that extend a number
of years. To the extent these future projections or our strategies change,
the
conclusion regarding impairment may differ from the current estimates.
Goodwill.
We
evaluate goodwill annually and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable from its estimated
future cash flows. To the extent these future projections or our strategies
change, the conclusion regarding impairment may differ from the current
estimates.
Estimates
of fair value are primarily determined using projected discounted cash flows
and
are based on our best estimate of future revenue and operating costs and general
market conditions. These estimates are subject to review and approval by senior
management. This approach uses significant assumptions, including projected
future cash flows, the discount rate reflecting the risk inherent in future
cash
flows, and a terminal growth rate.
Income
taxes. Temporary
differences arising from differing treatment of income and expense items for
tax
and financial reporting purposes result in deferred tax assets and liabilities
that are recorded on the balance sheet. These balances, as well as income tax
expense, are determined through management’s estimations, interpretation of tax
law for multiple jurisdictions and tax planning. If our actual results differ
from estimated results due to changes in tax laws, new store locations or tax
planning, our effective tax rate and tax balances could be affected. As such,
these estimates may require adjustment in the future as additional facts become
known or as circumstances change.
Our
income tax returns are periodically audited by various state and local
jurisdictions. Additionally, the Internal Revenue Service audits our federal
income tax return annually. We reserve for tax contingencies when it is probable
that a liability has been incurred and the contingent amount is reasonably
estimable. These reserves are based upon our best estimation of the potential
exposures associated with the timing and amount of deductions as well as various
tax filing positions. Due to the complexity of these examination issues, for
which reserves have been recorded, it may be several years before the final
resolution is achieved.
Discount
rate.
The
discount rate that we utilize for determining future pension obligations is
based on the Citigroup High Grade Corporate Yield Curve on its annual
measurement date and is matched to the future expected cash flows of the benefit
plans by annual periods. The discount rate had increased to 5.60% as of January
28, 2006 from 5.50% as of January 29, 2005. A further 50 basis point change
in
the discount rate would generate an experience gain or loss of approximately
$9
million.
Seasonality
and Inflation
Our
business, like many other retailers, is subject to seasonal influences, with
the
major portion of sales and income typically realized during the last quarter
of
each fiscal year due to the holiday season. Because of the seasonality of our
business, results from any quarter are not necessarily indicative of the results
that may be achieved for a full fiscal year.
We
do not
believe that inflation has had a material effect on our results during the
periods presented; however, there can be no assurance that our business will
not
be affected by such factors in the future.
Results
of Operations
The
following table sets forth the results of operations, expressed as a percentage
of net sales, for the periods indicated:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
28,
2006
|
|
October
29,
2005
|
|
October
28,
2006
|
|
October
29,
2005
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
65.0
|
|
|
66.4
|
|
|
65.2
|
|
|
66.3
|
|
Gross
profit
|
|
|
35.0
|
|
|
33.6
|
|
|
34.8
|
|
|
33.7
|
|
Advertising,
selling, administrative and general expenses
|
|
|
29.8
|
|
|
29.4
|
|
|
28.9
|
|
|
28.5
|
|
Depreciation
and amortization
|
|
|
4.3
|
|
|
4.4
|
|
|
4.2
|
|
|
4.3
|
|
Rentals
|
|
|
0.7
|
|
|
0.6
|
|
|
0.7
|
|
|
0.6
|
|
Interest
and debt expense
|
|
|
1.4
|
|
|
1.5
|
|
|
1.4
|
|
|
1.5
|
|
Asset
impairment and store closing charges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Total
operating expenses
|
|
|
36.2
|
|
|
35.9
|
|
|
35.2
|
|
|
35.0
|
|
Service
charges, interest and other income
|
|
|
2.4
|
|
|
2.0
|
|
|
2.7
|
|
|
2.0
|
|
Income
(loss) before income taxes
|
|
|
1.2
|
|
|
(0.3
|
)
|
|
2.3
|
|
|
0.7
|
|
Income
taxes (benefit)
|
|
|
0.4
|
|
|
(0.1
|
)
|
|
0.6
|
|
|
0.3
|
|
Net
income (loss)
|
|
|
0.8
|
%
|
|
(0.2
|
)%
|
|
1.7
|
%
|
|
0.4
|
%
|
Net
Sales
The
percent change by category in our sales for the three and nine months ended
October 28, 2006 compared to the three and nine months ended October 29, 2005
is
as follows:
|
|
%
Change
|
|
|
|
Three
Months
|
|
Nine
Months
|
|
Cosmetics
|
|
|
-0.4
|
%
|
|
0.6
|
%
|
Ladies’
Apparel
|
|
|
-2.2
|
%
|
|
-2.7
|
%
|
Lingerie
and Accessories
|
|
|
4.7
|
%
|
|
5.7
|
%
|
Juniors’
Clothing
|
|
|
-6.3
|
%
|
|
-2.6
|
%
|
Children’s
Clothing
|
|
|
-9.3
|
%
|
|
-7.9
|
%
|
Men’s
Clothing
|
|
|
4.1
|
%
|
|
3.6
|
%
|
Shoes
|
|
|
2.8
|
%
|
|
3.4
|
%
|
Decorative
Home Merchandise
|
|
|
-6.8
|
%
|
|
-1.2
|
%
|
Furniture
|
|
|
-2.8
|
%
|
|
5.4
|
%
|
The
percent change by region in our total sales for the three and nine months ended
October 28, 2006 compared to the three and nine months ended October 29, 2005
is
as follows:
|
|
%
Change
|
|
|
|
Three
Months
|
|
Nine
Months
|
|
Eastern
|
|
|
0.1
|
%
|
|
0.9
|
%
|
Central
|
|
|
-0.4
|
%
|
|
-0.5
|
%
|
Western
|
|
|
-0.9
|
%
|
|
2.8
|
%
|
Total
net
sales were unchanged on a percentage basis for the three months ended October
28, 2006 compared to the three months ended October 29, 2005. Comparable store
net sales declined 2% for the three months ended October 28, 2006 compared
to
the three months ended October 29, 2005. Sales were strongest in lingerie and
accessories, where performance exceeded our total trend for the period. Sales
were weakest in children’s apparel and decorative home merchandise, which were
significantly below trend for the period.
During
the three months ended October 28, 2006, sales
were strongest in the Eastern and Central regions where performance was
consistent with our total trend for the quarter. The Western region’s sales were
slightly below trend for the same three month period.
Net
sales
were unchanged on a percentage basis for the nine months ended October 28,
2006
compared to the same period in 2005 in both total and comparable stores.
Dillard’s
remains committed to providing a differentiated shopping experience by
positioning its merchandise mix toward a more upscale and contemporary tone
to
continue to attract customers who are seeking exciting statements in
fashion.
Cost
of Sales
Cost
of
sales, as a percentage of net sales, decreased to 65.0% for the three months
ended October 28, 2006, from 66.4% for the three months ended October 29, 2005.
This decrease of 140 basis points in cost of sales is attributable to lower
levels of markdowns and decreased purchases resulting in lower inventory levels
as we executed a disciplined approach to merchandising and inventory control
during the quarter. Improved gross margins were noted in all categories during
the quarter except cosmetics and decorative home merchandise.
Cost
of
sales, as a percentage of net sales, for the nine months ended October 28,
2006
and October 29, 2005 was 65.2% and 66.3%, respectively. The decrease of 110
basis points in cost of sales is attributable to lower levels of markdown
activity which decreased cost of sales by 1.7% while lower levels of markups
partially offset this decrease in cost of sales by 0.6%. Improved gross margins
were noted in all product categories for the period except cosmetics and men’s
clothing which were unchanged and decorative home merchandise which declined
significantly from the same period in 2005.
Merchandise
inventory decreased 1% at October 28, 2006 compared to October 29, 2005 on
a
total store basis. Merchandise inventory in comparable stores decreased 3%
at
October 28, 2006 compared to October 29, 2005.
Advertising,
Selling, Administrative and General Expenses
Advertising,
Selling, Administrative and General (“SG&A”) expenses, as a percentage of
net sales, increased to 29.8% for the three months ended October 28, 2006
compared to 29.4% for the three months ended October 29, 2005. SG&A expenses
increased $6.2 million for
the
three months ended October 28, 2006 compared with the three months ended October
29, 2005. The increase in SG&A expenses was driven by increases in payroll
($4.7 million), utilities ($2.3 million), supplies ($1.9 million), services
purchased ($1.9 million) and insurance ($1.1 million) partially offset by
savings in advertising costs ($3.4 million) and store pre-opening expenses
($1.4
million). Other SG&A expense areas netted to a $0.9 million
decrease.
The
comparable relationship between SG&A expenses and net sales for the nine
months ended October 28, 2006 and October 29, 2005, respectively, was 28.9%
and
28.5%. SG&A expenses increased $29.4 million for the nine months ended
October 28, 2006 compared with the comparable period in 2005. The increase
in
SG&A expense was driven by a pretax charge of $21.7 million for a
preliminary settlement agreement reached during the second quarter in a lawsuit
filed on behalf of a putative class of former Mercantile Stores Pension Plan
participants. Increases in payroll ($15.5 million) and utilities ($9.2 million)
partially offset by savings in advertising costs ($18.9 million) also
contributed to the increase. Other SG&A expense areas netted to a $1.9
million increase.
Depreciation
and Amortization Expense
Depreciation
and amortization expense as a percentage of net sales was 4.3% and 4.4% for
the
three months ended October 28, 2006 and October 29, 2005, respectively.
Depreciation and amortization expense as a percentage of net sales was 4.2%
for
the nine months ended October 28, 2006 compared to 4.3% for the similar period
in 2005. Depreciation expenses decreased $2.3 million and $5.3 million for
the
three and nine months ended October 28, 2006 compared to the same periods in
2005.
Rentals
Rentals,
as a percentage of net sales was 0.7% for the three months and nine months
ended
October 28, 2006 compared to 0.6% for the same three and nine months in 2005.
Rentals increased $3.1 million and $5.6 million for the three and nine months
ended October 28, 2006 compared to the same periods in 2005. The increase in
rentals is due to higher data processing and equipment rentals.
Interest
and Debt Expense
Interest
and debt expense was $23.4 million for the three months ended October 28, 2006
compared with $25.7 million for the similar period in 2005. This reduction
of
$2.3 million was primarily the result of lower debt levels during the quarter
compared with 2005 debt levels. Average debt outstanding declined approximately
$125 million during the third quarter of fiscal 2006 compared to 2005. The
debt
reduction was due to normal maturities and repurchases of various outstanding
notes.
Interest
and debt expense was $71.6 million for the nine months ended October 28, 2006
compared with $79.2 million for the similar period in 2005. The decline in
interest and debt expense in 2006 was due to reduced debt levels related to
normal maturities and repurchases of various outstanding notes.
Asset
Impairment and Store Closing Charges
During
the nine months ended October 29, 2005, we recorded pretax expense of $6.4
million for asset impairment and store closing charges. The expense includes
a
$6.0 million write-down to fair value for two stores that were closed during
the
third quarter of 2005 and a $0.4 million future lease obligation on a store
closed during the first quarter of 2005.
There
were no asset impairment and store closing charges recorded during the three
months ended October 29, 2005 or the three and nine months ended October 28,
2006.
Service
Charges, Interest and Other Income
Service
charges, interest and other income for the three months ended October 28, 2006
increased to $41.1 million or 2.4% of net sales compared to $34.1 million or
2.0% of net sales for the three months ended October 29, 2005. Income from
the
marketing and servicing alliance with GE increased $3.7 million to $30.5 million
for the three months ended October 28, 2006.
Service
charges, interest and other income for the nine months ended October 28, 2006
increased to $143.5 million or 2.7% of net sales compared to $106.4 million
or
2.0% of net sales for the nine months ended October 29, 2005. Income from the
marketing and servicing alliance increased $17.2 million to $94.1 million for
the nine months ended October 28, 2006 from $76.9 million for the nine months
ended October 29, 2005. During the nine months ended October 28, 2006, we also
sold our interest in the Yuma Palms joint venture for $20.0 million. We recorded
a pretax gain of $13.5 million related to the sale in service charges, interest
and other income.
Also
included in other income were gains on the sale of property and equipment of
$2.6 million and $3.4 million for the nine months ended October 28, 2006 and
October 29, 2005, respectively.
Income
Taxes
The
federal and state income tax rates were approximately 36.1% and 36.0% for the
three months ended October 28, 2006 and October 29, 2005, respectively. During
the three months ended October 28, 2006, income taxes included recognition
of
tax benefits of approximately $0.3 million for the change in a capital loss
valuation allowance due to capital gain income.
The
federal and state income tax rates for the nine months ended October 28, 2006
and October 29, 2005 were approximately 26.4% and 35.8%, respectively. During
the nine months ended October 28, 2006, income taxes included recognition of
tax
benefits of approximately $6.1 million for the change in a capital loss
valuation allowance due to capital gain income and $7.5 million due to the
release of tax reserves. These changes resulted from resolution of various
federal and state income tax issues.
Our
income tax rate for the remainder of fiscal 2006 is dependent upon results
of
operations and may change if the results for fiscal 2006 are different from
current expectations. We currently estimate that our effective rate for the
remainder of fiscal 2006 will approximate 37.4%.
Financial
Condition
Financial
Position Summary
(in
thousands of dollars)
|
|
October
28, 2006
|
|
January
28, 2006
|
|
$
Change
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$
|
95,039
|
|
$
|
299,840
|
|
|
(204,801
|
)
|
|
-68.3
|
|
Current
portion of long-term debt
|
|
|
200,620
|
|
|
198,479
|
|
|
2,141
|
|
|
1.1
|
|
Long-term
debt
|
|
|
956,775
|
|
|
1,058,946
|
|
|
(102,171
|
)
|
|
-9.6
|
|
Guaranteed
Preferred Beneficial Interests
|
|
|
200,000
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,432,040
|
|
|
2,340,541
|
|
|
91,499
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.59
|
|
|
1.87
|
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
35.8
|
%
|
|
38.4
|
%
|
|
|
|
|
|
|
(in
thousands of dollars)
|
|
October
28, 2006
|
|
October
29, 2005
|
|
$
Change
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$
|
95,039
|
|
$
|
73,518
|
|
|
21,521
|
|
|
29.3
|
|
Current
portion of long-term debt
|
|
|
200,620
|
|
|
98,698
|
|
|
101,922
|
|
|
103.3
|
|
Long-term
debt
|
|
|
956,775
|
|
|
1,159,096
|
|
|
(202,321
|
)
|
|
-17.5
|
|
Guaranteed
Preferred Beneficial Interests
|
|
|
200,000
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,432,040
|
|
|
2,242,060
|
|
|
189,980
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.59
|
|
|
1.59
|
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
35.8
|
%
|
|
39.4
|
%
|
|
|
|
|
|
|
Net
cash
flows from operations for the nine months ended October 28, 2006 plus the
beginning cash on hand were adequate to fund our operations for the period.
Cash
flows from operations decreased from 2005 levels due to a $109.4 million
decrease related to changes in trade accounts payable and accrued expenses,
other liabilities and income taxes in the current year compared with the prior
year and a $40.9 million decrease related to changes in other assets in the
current year compared with the prior year. These decreases were partially offset
by a $93.5 million increase related to changes in merchandise inventories and
other current assets in the current year compared with the prior
year.
Capital
expenditures were $258.9 million for the nine months ended October 28, 2006
compared to $327.7 million for the nine months ended October 29, 2005. These
expenditures consist primarily of the construction of new stores, remodeling
of
existing stores and investments in technology. During the nine months ended
October 28, 2006, we opened four new stores: Southaven Towne Center in
Southaven, Mississippi; The Summit Sierra in Reno, Nevada; The Mall at Turtle
Creek in Jonesboro, Arkansas and Pinnacle Hills Promenade in Rogers, Arkansas.
These four stores totaled approximately 665,000 square feet. We also opened
two
replacement stores: Town Center at Aurora in Aurora, Colorado and Red Cliffs
Mall in St. George, Utah. The replacement stores totaled approximately 270,000
square feet replacing 248,000 square feet. During the nine months ended October
28, 2006, we also closed five stores totaling approximately 672,000 square
feet.
In November 2006, we opened our new location at Coconut Point in Bonita Springs,
Florida (180,000 square feet) and our new store at Southwest Plaza in Littleton,
Colorado (180,000 square feet replacing 132,000 square feet).
Capital
expenditures for fiscal 2006 are expected to be approximately $340 million
compared to actual expenditures of $456 million for fiscal 2005. This decrease
is due to the planned construction of fewer stores and purchase of less
equipment for fiscal 2006 than in fiscal 2005. Historically, we have financed
such capital expenditures with cash flow from operations. We believe that we
will continue to finance capital expenditures in this manner during fiscal
2006.
During
the nine months ended October 28, 2006, we recorded a gain from the sale of
a
joint venture of $13.5 million with proceeds of $20.0 million. In the same
period, we also recorded a gain on the sale of property and equipment of $2.6
million and received proceeds of $3.1 million compared to a gain on the sale
of
property and equipment of $3.4 million and proceeds of $46.6 million recorded
for the nine months ended October 29, 2005. Relative to the damage caused by
the
2005 hurricanes, we received insurance proceeds of $25.3 million in partial
settlement with our insurance carriers during the nine months ended October
28,
2006.
Cash
used
in financing activities for the nine months ended October 28, 2006 totaled
$104.4 million compared to cash used of $267.3 million for the nine months
ended
October 29, 2005. During the nine months ended October 28, 2006 and October
29,
2005, we repurchased $1.7 million and $15.4 million, respectively, of our
outstanding, unsecured notes prior to their related maturity dates, and we
paid
off $50.0 million of mortgage notes during the nine months ended October 29,
2005 prior to their maturities. During the nine months ended October 28, 2006
and October 29, 2005, we reduced our total level of outstanding debt and capital
lease obligations, including the debt repurchases and repayments of $1.7 million
and $65.4 million, by $104.3 million and $160.0 million,
respectively.
During
the nine months ended October 28, 2006, we repurchased approximately 133,500
shares of Class A common stock for $3.3 million under our $200 million program,
which was authorized by our board of directors in May of 2005 (“2005 plan”).
During the nine months ended October 29, 2005, we repurchased approximately
3.9
million shares of Class A Common Stock for $84.8 million under the 2005 plan.
Approximately $111.9 million in share repurchase authorization remained under
this open-ended plan at October 28, 2006.
During
the nine months ended October 29, 2005, we repurchased approximately 665,000
shares for $16.1 million which completed the remaining authorized repurchase
of
Class A Common Stock under the $200 million program approved by our board of
directors in May of 2000.
We
had
cash on hand of $95.0 million as of October 28, 2006. During fiscal 2006, we
expect to finance our capital expenditures and our working capital requirements
including required debt repayments and stock repurchases, if any, from cash
on
hand and cash flows generated from operations. As part of our overall liquidity
management strategy and for peak working capital requirements, we have a $1.2
billion credit facility. We expect peak funding requirements of approximately
$185 million during the fourth quarter of 2006. At October 28, 2006, letters
of
credit totaling $75.4 million were issued under the $1.2 billion revolving
credit agreement. Availability for borrowings and letter of credit obligations
under the credit agreement is limited to 85% of the inventory of certain of
our
subsidiaries (approximately $1.38 billion at October 28, 2006) leaving
unutilized availability under the facility of $1.12 billion. Depending on
conditions in the capital markets and other factors, we will from time to time
consider possible capital market transactions, the proceeds of which could
be
used to refinance current indebtedness or other corporate purposes.
There
have been no material changes in the information set forth under the caption
“Contractual Obligations and Commercial Commitments” in Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations in
our
Annual Report on Form 10-K for the fiscal year ended January 28,
2006.
Hurricane
Update
Two
stores remain closed as a result of Hurricane Katrina and Hurricane Rita. These
stores are located in the New Orleans area and Biloxi, Mississippi. Details
regarding the re-opening of these stores are still being
determined.
Property
and merchandise losses in the affected stores are covered by insurance.
Insurance proceeds related to the hurricanes of $25.3 million were received
during the nine months ended October 28, 2006. We expect additional insurance
recoveries during the remainder of fiscal 2006 as construction is completed
on
damaged stores and a final settlement is reached with the insurance
carriers.
We
have
approximately 90 stores along the Gulf and Atlantic coasts that will not be
covered by third party insurance but will rather be self-insured for property
and merchandise losses related to “named storms” in fiscal 2006. Therefore,
repair and replacement costs will be borne by us for damage to any of these
stores from “named storms” in fiscal 2006. We have created early response teams
to assess and coordinate cleanup efforts should some stores be impacted by
storms. We have also redesigned certain store features to lessen the impact
of
storms and have equipment available to assist in the efforts to ready the stores
for normal operations.
Off-Balance-Sheet
Arrangements
At
October 28, 2006, we were a co-guarantor of a $204 million loan commitment
with
a joint of which we were a guarantor of up to 50% of the loan balance with
the
joint venture partner guaranteeing the remaining 50% of the loan balance. A
mall
recently completed in Bonita Springs, Florida provided collateral for the loan.
The loan had an outstanding balance of $189.4 million as of October 28, 2006.
In
November 2006, the joint venture obtained permanent financing for the mall,
and
our guaranty was released.
We
do not
have any additional arrangements or relationships with entities that are not
consolidated into the financial statements that are reasonably likely to
materially affect our liquidity or the availability of capital
resources.
New
Accounting Standards
In
February 2006, the Financial
Accounting Standards Board (FASB)
issued
SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133
and 140
(“SFAS
No. 155”). SFAS No. 155 provides entities with relief from having to separately
determine the fair value of an embedded derivative that would otherwise be
required to be bifurcated from its host contract in accordance with SFAS No.
133. It also allows an entity to make an irrevocable election to measure such
a
hybrid financial instrument at fair value in its entirety, with changes in
fair
value recognized in earnings. SFAS
No.
155 is effective for all financial instruments acquired, issued, or subject
to a
remeasurement (new basis) event occurring after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The adoption of SFAS
No.
155 is not expected to have a material effect on our financial position, results
of operations or cash flows.
In
July
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109
(“FIN
48”), which seeks to reduce the diversity in practice associated with the
accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. FIN 48 is effective for
fiscal years beginning after December 15, 2006, and the Company will adopt
the
new requirements in its fiscal first quarter of 2007. The cumulative effects,
if
any, of adopting FIN 48 will be recorded as an adjustment to retained earnings
as of the beginning of the period of adoption. We are currently assessing the
impact of FIN 48 on our consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosure about such fair value measurements. SFAS 157
is
effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of SFAS 157 on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(“SFAS
158”). SFAS 158 requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability, respectively, in its balance sheet and to
recognize changes in that funded status as unrealized gain or loss through
accumulated other comprehensive income when the changes occur. SFAS 158 also
requires an employer to measure its defined benefit plan assets and obligations
as of the date of the employer’s fiscal year-end (with limited exceptions). SFAS
158 is effective for fiscal years ending after December 15, 2006. We are
currently assessing the impact of SFAS 158 on our consolidated financial
statements.
In
September 2006, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (“SAB”) 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(“SAB
108”). SAB 108 provides guidance on the consideration of the effects of prior
year unadjusted errors in quantifying current year misstatements for the purpose
of a materiality assessment. The guidance in SAB 108 is effective for fiscal
years ending after November 15, 2006. We are currently assessing the impact
of
SAB 108 on our consolidated financial statements.
Forward-Looking
Information
This
report contains certain “forward-looking statements” within the definition of
federal securities laws. Statements in the Management’s Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this document
include certain “forward-looking statements,” including (without limitation)
statements with respect to anticipated future operating and financial
performance, growth and acquisition opportunities, financing requirements and
other similar forecasts and statements of expectation. Words such as “expects,”
“anticipates,” “plans” and “believes,” and variations of these words and similar
expressions, are intended to identify these forward-looking statements.
Statements made regarding the Company’s merchandise strategies, funding of
cyclical working capital needs, expected participant distributions of defined
benefit plans, disposition of legal proceedings, expected insurance recoveries,
and estimates of depreciation and amortization, rental expense, interest and
debt expense and capital expenditures for fiscal year 2006 are forward-looking
statements. The Company cautions that forward-looking statements, as such term
is defined in the Private Securities Litigation Reform Act of 1995, contained
in
this report are based on estimates, projections, beliefs and assumptions of
management at the time of such statements and are not guarantees of future
performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise.
Forward-looking
statements of the Company involve risks and uncertainties and are subject to
change based on various important factors. Actual future performance, outcomes
and results may differ materially from those expressed or implied in
forward-looking statements made by the Company and its management as a result
of
a number of risks, uncertainties and assumptions, including the matters
described under the caption “Risk Factors” in the Company’s Annual Report on
Form 10-K for the fiscal year ended January 28, 2006. Representative examples
of
those factors (without limitation) include general retail industry conditions
and macro-economic conditions; economic and weather conditions for regions
in
which the Company’s stores are located and the effect of these factors on the
buying patterns of the Company’s customers; the impact of competitive pressures
in the department store industry and other retail channels including specialty,
off-price, discount, internet, and mail-order retailers; changes in consumer
spending patterns and debt levels; adequate and stable availability of materials
and production facilities from which the Company sources its merchandise;
changes in operating expenses, including employee wages, commission structures
and related benefits; possible future acquisitions of store properties from
other department store operators and the continued availability of financing
in
amounts and at the terms necessary to support the Company’s future business;
fluctuations in LIBOR and other base borrowing rates; expected participant
distributions of defined benefit plans; disposition of legal proceedings;
expected insurance recoveries; potential disruption from terrorist activity
and
the effect on ongoing consumer confidence; potential disruption of international
trade and supply chain efficiencies; world conflict and the possible impact
on
consumer spending patterns and other economic and demographic changes of similar
or dissimilar nature.
There
have been no material changes in the information set forth under caption “Item
7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s
Annual Report on Form 10-K for the fiscal year ended January 28,
2006.
The
Company maintains “disclosure controls and procedures”, as such term is defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to ensure that information
required to be disclosed in the Company’s reports, pursuant to the Exchange Act,
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, 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 the required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurances
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures.
As
of
October 28, 2006, the Company carried out an evaluation, with the participation
of Company’s management, including William Dillard, II, Chairman of the Board of
Directors and Chief Executive Officer (principal executive officer), and James
I. Freeman, Senior Vice-President and Chief Financial Officer (principal
financial officer), of the effectiveness of the Company’s “disclosure controls
and procedures” pursuant to Securities Exchange Act Rule 13a-15. Based on their
evaluation, the principal executive officer and principal financial officer
concluded that the Company’s disclosure controls and procedures were effective
at the reasonable assurance level. There were no significant changes in the
Company’s internal controls over financial reporting that occurred during the
quarter ended October 28, 2006 to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
As
discussed in the Company’s prior reports, on July 29, 2002, a Class Action
Complaint (followed on December 13, 2004 by a Second Amended Class Action
Complaint) was filed in the United States District Court for the Southern
District of Ohio against the Company, the Mercantile Stores Pension Plan (the
“Plan”) and the Mercantile Stores Pension Committee (the “Committee”) on behalf
of a putative class of former Plan participants. The complaint alleged that
certain actions by the Plan and the Committee violated the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), as a result of amendments
made to the Plan that allegedly were either improper and/or ineffective and
as a
result of certain payments made to certain beneficiaries of the Plan that
allegedly were improperly calculated and/or discriminatory on account of age.
The Second Amended Complaint did not specify any liquidated amount of damages
sought and sought recalculation of certain benefits paid to putative class
members.
During
the nine months ended October 28, 2006, the Company signed a memorandum of
understanding for $35.0 million to settle the case and, accordingly, accrued
an
additional $21.7 million ($13.6 million after-tax or $0.17 per diluted share)
regarding the case. The settlement is still pending court approval. The
litigation continues between the Company and the Plan’s actuarial firm over the
Company’s cross claim against the actuarial firm seeking reimbursement for the
$35.0 million tentative settlement and additional damages.
From
time
to time, the Company is involved in other litigation relating to claims arising
out of our operations in the normal course of business. Such issues may relate
to litigation with customers, employment related lawsuits, class action
lawsuits, purported class action lawsuits and actions brought by governmental
authorities. As of December 6, 2006, we are not a party to any legal proceedings
that, individually or in the aggregate, are reasonably expected to have a
material adverse effect on our business, results of operations, financial
condition or cash flows. However, the results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one or more of these
matters could have a material adverse effect on our business, results of
operations, financial condition or cash flows.
There
have been no material changes in the information set forth under caption “Item
1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year
ended January 28, 2006.
Issuer
Purchases of Equity Securities
Period
|
(a)
Total Number of Shares Purchased
|
(b)
Average Price Paid per Share
|
(c)Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
|
(d)
Approximate Dollar Value that May Yet Be Purchased Under the Plans
or
Programs
|
July
30, 2006 through August 26, 2006
|
-
|
$-
|
-
|
$111,904,853
|
August
27, 2006 through September 30, 2006
|
-
|
-
|
-
|
111,904,853
|
October
1, 2006 through October 28, 2006
|
-
|
-
|
-
|
111,904,853
|
Total
|
-
|
$-
|
-
|
$111,904,853
|
In
May
2005, the Company announced that the Board of Directors authorized the
repurchase of up to $200 million of its Class A Common Stock. The plan has
no
expiration date.
None.
None.
Ratio
of
Earnings to Fixed Charges:
The
Company has calculated the ratio of earnings to fixed charges pursuant to Item
503 of Regulation S-K of the Securities and Exchange Act as
follows:
Nine
Months Ended
|
|
Fiscal
Year Ended
|
October
28,
2006
|
|
October
29,
2005
|
|
January
28,
2006
|
|
January
29,
2005
|
|
January
31,
2004
|
|
February
1,
2003
|
|
February
2,
2002
|
2.37
|
|
1.33
|
|
2.02
|
|
2.11
|
|
1.07
|
|
1.94
|
|
1.52
|
Number
|
Description
|
|
|
10.1*
|
Third
Amendment to Amended and Restated Credit Agreement between Dillard’s, Inc.
and JPMorgan Chase Bank, N.A. as agent for a syndicate of lenders
(Exhibit
10.1 to Form 8-K dated June 12, 2006 in File No.
1-6140).
|
|
|
10.2*
|
Fourth
Amendment to Amended and Restated Credit Agreement between Dillard’s, Inc.
and JPMorgan Chase Bank, N.A. as agent for a syndicate of lenders
(Exhibit
10.2 to Form 8-K dated June 12, 2006 in File No.
1-6140).
|
|
|
|
Statement
re: Computation of Earnings to Fixed Charges.
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
|
*
Incorporated by reference as indicated.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
DILLARD'S,
INC.
|
|
(Registrant)
|
|
|
|
|
Date:
December
6, 2006
|
/s/
James I. Freeman
|
|
James
I. Freeman
|
|
Senior
Vice-President & Chief Financial Officer
|
|
(on
behalf of the Registrant and as Principal Financial and Accounting
Officer)
|
25