UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended May
5, 2007
OR
o
|
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 of incorporation or organization)
|
|
(IRS
Employer 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 time that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark 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 x
|
|
Accelerated
Filer o
|
|
Non-Accelerated
Filer o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule 12-b-2). Yeso
No
x
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 June 2, 2007
|
76,323,046
|
|
|
CLASS
B COMMON STOCK as of June 2, 2007
|
4,010,929
|
|
DILLARD'S,
INC.
|
|
Page
|
PART
I. FINANCIAL INFORMATION
|
Number
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited):
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
Item
2.
|
|
10
|
|
|
|
Item
3.
|
|
19
|
|
|
|
Item
4.
|
|
19
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
|
20
|
|
|
|
Item
1A.
|
|
20
|
|
|
|
Item
2.
|
|
20
|
|
|
|
Item
3.
|
|
21
|
|
|
|
Item
4.
|
|
21
|
|
|
|
Item
5.
|
|
21
|
|
|
|
Item
6.
|
|
21
|
|
|
|
|
21
|
PART
1. FINANCIAL INFORMATION
Item
1. Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
Thousands)
|
|
May
5,
|
|
February
3,
|
|
April
29,
|
|
|
|
2007
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
137,915
|
|
$
|
193,994
|
|
$
|
301,677
|
|
Accounts
receivable
|
|
|
9,932
|
|
|
10,508
|
|
|
11,491
|
|
Merchandise
inventories
|
|
|
2,032,711
|
|
|
1,772,150
|
|
|
2,053,047
|
|
Other
current assets
|
|
|
42,143
|
|
|
71,194
|
|
|
35,880
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,222,701
|
|
|
2,047,846
|
|
|
2,402,095
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,208,810
|
|
|
3,157,906
|
|
|
3,151,940
|
|
Goodwill
|
|
|
34,511
|
|
|
34,511
|
|
|
34,511
|
|
Other
assets
|
|
|
170,959
|
|
|
167,752
|
|
|
175,119
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
5,636,981
|
|
$
|
5,408,015
|
|
$
|
5,763,665
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable and accrued expenses
|
|
$
|
1,013,659
|
|
$
|
797,806
|
|
$
|
1,064,757
|
|
Current
portion of long-term debt
|
|
|
196,399
|
|
|
100,635
|
|
|
198,465
|
|
Current
portion of capital lease obligations
|
|
|
3,027
|
|
|
3,679
|
|
|
5,665
|
|
Federal
and state income taxes
|
|
|
55,696
|
|
|
74,995
|
|
|
71,406
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,268,781
|
|
|
977,115
|
|
|
1,340,293
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
860,693
|
|
|
956,611
|
|
|
1,058,819
|
|
Capital
lease obligations
|
|
|
27,633
|
|
|
28,328
|
|
|
30,600
|
|
Other
liabilities
|
|
|
208,596
|
|
|
206,122
|
|
|
262,754
|
|
Deferred
income taxes
|
|
|
439,951
|
|
|
452,886
|
|
|
473,211
|
|
Guaranteed
preferred beneficial interests in the Company’s subordinated
debentures
|
|
|
200,000
|
|
|
200,000
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1,204
|
|
|
1,202
|
|
|
1,193
|
|
Additional
paid-in capital
|
|
|
777,628
|
|
|
772,560
|
|
|
751,702
|
|
Accumulated
other comprehensive loss
|
|
|
(20,836
|
)
|
|
(21,229
|
)
|
|
(14,574
|
)
|
Retained
earnings
|
|
|
2,686,299
|
|
|
2,647,388
|
|
|
2,472,635
|
|
Less
treasury stock, at cost
|
|
|
(812,968
|
)
|
|
(812,968
|
)
|
|
(812,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
2,631,327
|
|
|
2,586,953
|
|
|
2,397,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
5,636,981
|
|
$
|
5,408,015
|
|
$
|
5,763,665
|
|
See
notes
to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In
Thousands, Except Per Share Data)
|
|
Three
Months Ended
|
|
|
|
May
5,
|
|
April
29,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,762,954
|
|
$
|
1,835,309
|
|
Service
charges and other income
|
|
|
36,500
|
|
|
41,439
|
|
|
|
|
|
|
|
|
|
|
|
|
1,799,454
|
|
|
1,876,748
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,126,091
|
|
|
1,179,437
|
|
Advertising,
selling, administrative and general expenses
|
|
|
499,375
|
|
|
494,610
|
|
Depreciation
and amortization
|
|
|
74,932
|
|
|
73,390
|
|
Rentals
|
|
|
13,198
|
|
|
11,591
|
|
Interest
and debt expense, net
|
|
|
20,736
|
|
|
23,610
|
|
Gain
on sales of assets
|
|
|
--
|
|
|
(1,499
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes and equity in earnings of joint
ventures
|
|
|
65,122
|
|
|
95,609
|
|
Income
Taxes
|
|
|
25,390
|
|
|
35,065
|
|
Equity
in earnings of joint ventures
|
|
|
3,192
|
|
|
775
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
42,924
|
|
|
61,319
|
|
|
|
|
|
|
|
|
|
Retained
Earnings at Beginning of Period
|
|
|
2,647,388
|
|
|
2,414,491
|
|
Cash
Dividends Declared
|
|
|
(3,210
|
)
|
|
(3,175
|
)
|
Cumulative
effect of accounting change related to adoption of FIN 48
|
|
|
(803
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
Retained
Earnings at End of Period
|
|
$
|
2,686,299
|
|
$
|
2,472,635
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.54
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.53
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared Per Common Share
|
|
$
|
0.04
|
|
$
|
0.04
|
|
See
notes
to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
Thousands)
|
|
Three
Months Ended
|
|
|
|
May
5,
|
|
April
29,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
Net
income
|
|
$
|
42,924
|
|
$
|
61,319
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and deferred financing
|
|
|
75,410
|
|
|
74,169
|
|
Share-based
compensation
|
|
|
31
|
|
|
532
|
|
Excess
tax benefits from share-based compensation
|
|
|
(433
|
)
|
|
(35
|
)
|
Gain
on sale of property and equipment
|
|
|
--
|
|
|
(1,499
|
)
|
Loss
on disposal of property and equipment
|
|
|
16
|
|
|
--
|
|
Asset
impairment and store closing charges
|
|
|
688
|
|
|
--
|
|
Gain
from hurricane insurance proceeds
|
|
|
(4,072
|
)
|
|
--
|
|
Proceeds
from hurricane insurance
|
|
|
5,881
|
|
|
--
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
576
|
|
|
1,032
|
|
Increase
in merchandise inventories and other current assets
|
|
|
(253,210
|
)
|
|
(255,396
|
)
|
Increase
in other assets
|
|
|
(3,235
|
)
|
|
(2,872
|
)
|
Increase
in trade accounts payable and accrued expenses, other liabilities
and
income taxes
|
|
|
172,472
|
|
|
201,360
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
37,048
|
|
|
78,610
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(109,106
|
)
|
|
(76,888
|
)
|
Proceeds
from hurricane insurance
|
|
|
16,101
|
|
|
4,585
|
|
Proceeds
from sale of property and equipment
|
|
|
--
|
|
|
1,545
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(93,005
|
)
|
|
(70,758
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Principal
payments on long-term debt and capital lease obligations
|
|
|
(1,501
|
)
|
|
(1,611
|
)
|
Proceeds
from issuance of common stock
|
|
|
4,606
|
|
|
2,068
|
|
Payment
of line of credit fees and expenses
|
|
|
(450
|
)
|
|
--
|
|
Excess
tax benefits from share-based compensation
|
|
|
433
|
|
|
35
|
|
Cash
dividends paid
|
|
|
(3,210
|
)
|
|
(3,175
|
)
|
Purchase
of treasury stock
|
|
|
--
|
|
|
(3,332
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(122
|
)
|
|
(6,015
|
)
|
|
|
|
|
|
|
|
|
(Decrease)
Increase in Cash and Cash Equivalents
|
|
|
(56,079
|
)
|
|
1,837
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
193,994
|
|
|
299,840
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
137,915
|
|
$
|
301,677
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Accrued
capital expenditures
|
|
$
|
2,635
|
|
$
|
12,936
|
|
Cumulative
adjustment to retained earnings for adoption of FIN 48
|
|
|
803
|
|
|
--
|
|
See
notes
to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1.
|
Basis
of Presentation
|
The
accompanying unaudited condensed 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 months ended
May 5, 2007 are not necessarily indicative of the results that may be expected
for the fiscal year ending February 2, 2008 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 February 3, 2007 filed with the Securities
and
Exchange Commission on April 4, 2007.
Reclassifications
-
The
following reclasses were made to the prior period’s condensed consolidated
statement of income to conform to the 2007 presentation: (1) leased department
income of $2.1 million for the quarter ended April 29, 2006 was reclassed
from
net sales to service charges and other income, (2) gain on sales of assets
was
reclassed from service charges and other income to its own line item and
(3)
equity in earnings of joint ventures was reclassed from service charges and
other income to its own line item below income taxes.
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. There were no stock options granted during
the
three months ended May 5, 2007 and the three months ended April 29, 2006,
respectively.
Stock
option transactions for the three months ended May 5, 2007 are summarized
as
follows:
|
|
|
|
Fixed
Options
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Outstanding,
beginning of period
|
|
|
5,915,269
|
|
$
|
25.88
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(144,575
|
)
|
|
24.01
|
|
Forfeited
|
|
|
(700
|
)
|
|
24.01
|
|
Outstanding,
end of period
|
|
|
5,769,994
|
|
$
|
25.93
|
|
Options
exercisable at period end
|
|
|
5,729,994
|
|
$
|
25.94
|
|
The
following table summarizes information about stock options outstanding at
May 5,
2007:
|
|
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
|
|
$24.01
- $24.73
|
|
|
149,667
|
|
|
1.86
|
|
$
|
24.35
|
|
|
109,667
|
|
$
|
24.47
|
|
$25.74
- $25.74
|
|
|
3,980,000
|
|
|
8.72
|
|
|
25.74
|
|
|
3,980,000
|
|
|
25.74
|
|
$25.95
- $30.47
|
|
|
1,640,327
|
|
|
2.21
|
|
|
26.52
|
|
|
1,640,327
|
|
|
26.52
|
|
|
|
|
5,769,994
|
|
|
6.69
|
|
$
|
25.93
|
|
|
5,729,994
|
|
$
|
25.94
|
|
The
intrinsic value of outstanding stock options at May 5, 2007 was $41.9 million.
At May 5, 2007, the intrinsic value of exercisable options was $41.6 million.
The intrinsic value of stock options exercised during the three months ended
May
5, 2007 was $1.3 million.
Note
3.
|
Reserve
for Store Closing Charges
|
Following
is a summary of the activity in the reserve established for store closing
charges for the three months ended May 5, 2007:
(in
thousands)
|
|
Balance,
Beginning of Quarter
|
|
Charges
|
|
Cash
Payments
|
|
Balance,
End of Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Rent,
property taxes and utilities
|
|
$
|
3,406
|
|
$
|
--
|
|
$
|
258
|
|
$
|
3,148
|
|
Reserve
amounts are included in trade accounts payable and accrued expenses and other
liabilities.
Note
4.
|
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
|
|
|
|
May
5,
|
|
April
29,
|
|
|
|
2007
|
|
2006
|
|
Basic:
|
|
|
|
|
|
Net
income
|
|
$
|
42,924
|
|
$
|
61,319
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
80,197
|
|
|
79,327
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.54
|
|
$
|
0.77
|
|
|
|
Three
Months Ended
|
|
|
|
May
5,
|
|
April
29,
|
|
|
|
2007
|
|
2006
|
|
Diluted:
|
|
|
|
|
|
Net
income
|
|
$
|
42,924
|
|
$
|
61,319
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
80,197
|
|
|
79,327
|
|
Stock
options
|
|
|
1,360
|
|
|
55
|
|
Total
weighted average equivalent shares
|
|
|
81,557
|
|
|
79,382
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.53
|
|
$
|
0.77
|
|
Total
stock options outstanding were 5,769,994 and 7,491,943 at May 5, 2007 and
April
29, 2006, respectively. Of these, options to purchase 6,550,876 shares of
Class
A common stock at prices ranging from $25.74 to $29.99 per share were
outstanding at April 29, 2006 but were not included in the computation of
diluted earnings per share because they would be antidilutive. No options
outstanding were excluded in the computation of diluted earnings per share
for
the quarter ended May 5, 2007 as none were antidilutive.
Note
5.
|
Comprehensive
Income and Accumulated Other Comprehensive
Loss
|
Accumulated
other comprehensive loss only consists of the minimum pension liability,
which
is calculated annually in the fourth quarter. The following table shows the
computation of comprehensive income (in thousands):
|
|
Three
Months Ended
|
|
|
|
May
5,
|
|
April
29,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
42,924
|
|
$
|
61,319
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of taxes
|
|
|
-
|
|
|
-
|
|
Amortization
of minimum pension liability adjustment, net of taxes
|
|
|
393
|
|
|
-
|
|
Total
comprehensive income
|
|
$
|
43,317
|
|
$
|
61,319
|
|
Note
6.
|
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 year ended February 3, 2007, the Company signed a memorandum of
understanding and accrued $35.0 million to settle the case. The settlement
became final in early April 2007. 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 settlement and additional damages.
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
May 5,
2007, letters of credit totaling $72.3 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 contributions of $0.9 million during the quarter
ended May 5, 2007. The Company expects to make a contribution to the pension
plan of approximately $3.1 million for the remainder of fiscal
2007.
The
components of net periodic benefit costs are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
May
5, 2007
|
|
April
29, 2006
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
Service
cost
|
|
$
|
517
|
|
$
|
545
|
|
Interest
cost
|
|
|
1,500
|
|
|
1,349
|
|
Net
actuarial gain
|
|
|
518
|
|
|
504
|
|
Amortization
of prior service cost
|
|
|
157
|
|
|
157
|
|
Net
periodic benefit costs
|
|
$
|
2,692
|
|
$
|
2,555
|
|
Note
8.
|
Recently
Issued Accounting
Standards
|
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115
(“SFAS
159”). This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS
159
is effective at the beginning of an entity’s first fiscal year that begins after
November 15, 2007. We expect that the adoption of SFAS 159 will not have a
material impact 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 expect that
the
adoption of SFAS 157 will not have a material impact on our consolidated
financial statements.
Note
9.
|
Revolving
Credit Agreement
|
At
May 5,
2007, the Company maintained a $1.2 billion revolving credit facility (“credit
agreement”) with JPMorgan Chase Bank (“JPMorgan”) as agent for various banks.
During the quarter ended May 5, 2007, the Company extended the credit
agreement’s expiration date by one year. The credit agreement now expires
December 12, 2012. 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.
Availability for borrowings and letter of credit obligations under the credit
agreement is limited to 85% of the inventory of certain Company subsidiaries
(approximately $1.2 billion at May 5, 2007). At May 5, 2007, letters of credit
totaling $72.3 million were issued under this credit agreement leaving
unutilized availability under the facility of $1.1 billion. There are no
financial covenant requirements under the credit agreement provided availability
exceeds $100 million. The Company pays an annual commitment fee to the banks
of
0.25% of the committed amount less outstanding borrowings and letters of
credit.
The
Company had no outstanding borrowings as of May 5, 2007 other than the
utilization for unfunded letters of credit.
Note
10.
|
Share
Repurchase Program
|
During
the three months ended May 5, 2007, no shares were repurchased under the
Company’s 2005 stock repurchase program (“2005 plan”) which was approved by the
Board of Directors in May 2005 and authorized the repurchase of up to $200
million of the Company’s Class A Common Stock.
During
the three months ended April 29, 2006, the Company repurchased approximately
133,500 shares of Class A Common Stock for $3.3 million under the 2005 plan.
Approximately $111.9 million in share repurchase authorization remained under
this open-ended plan at May 5, 2007.
The
Financial Accounting Standards Board issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109
(“FIN
48”) effective for fiscal years beginning after December 15, 2006. The Company
adopted the new requirement as of February 4, 2007 with the cumulative effects
recorded as an adjustment to retained earnings as of the beginning of the
period. The Company classifies interest and penalties relating to income
tax in
the financial statements as income tax expense. The total amount of unrecognized
tax benefits as of the date of adoption was $27.6 million of which $17.8
million
would, if recognized, affect the effective tax rate. The total amount of
accrued
interest and penalty as of the date of adoption was $13.7 million.
The
Company is currently being examined by the Internal Revenue Service for the
fiscal tax years 2003 through 2005. The Company is also under examination
by
various state and local taxing jurisdictions for various fiscal years.
The
tax
years that remain subject to examination for major tax jurisdictions are
fiscal
tax years 2003 and forward, with the exception of fiscal 1997 through 2002
amended state and local tax returns related to the reporting of federal audit
adjustments. With
the
exception of amounts that are under examination by income tax authorities,
for
which an estimate cannot be made due to uncertainties, the Company does not
believe it is reasonably possible that its unrecognized tax benefits will
significantly change within the next twelve months.
The
federal and state income tax rates were approximately 37.2% and 36.4% for
the
three months ended May 5, 2007 and April 29, 2006, including the impact of
changes in FIN 48 liabilities and tax contingency estimates, respectively.
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
EXECUTIVE
OVERVIEW
Dillard’s,
Inc. (the “Company”, “we”, “us” or “our”) operates 328 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. The Company seeks to deliver a high level
of
profitability and cash flow.
2007
Guidance
A
summary
of guidance on key financial measures for 2007, in conformity with accounting
principles generally accepted in the United States of America (“GAAP”), is shown
below. See “forward-looking information” below.
(in
millions of dollars)
|
|
2007
|
|
2006
|
|
|
|
Estimated
|
|
Actual*
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
305
|
|
$
|
301
|
|
Rental
expense
|
|
|
57
|
|
|
55
|
|
Interest
and debt expense, net
|
|
|
85
|
|
|
88
|
|
Capital
expenditures
|
|
|
360
|
|
|
321
|
|
*53
weeks
General
Net
sales. Net
sales
include sales of comparable and non-comparable stores. 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 and other income. Service
charges and other income include income generated through the long-term
marketing and servicing alliance between the Company and GE Consumer Finance
(“GE”). Other income relates to rental income, shipping and handling fees and
net lease income on leased departments.
Cost
of sales. Cost
of
sales includes the cost of merchandise sold (net of purchase discounts),
bankcard 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 include buying, occupancy, selling,
distribution, warehousing, store and corporate expenses (including payroll
and
employee benefits), insurance, employment taxes, advertising, management
information systems, legal, 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 expenses include depreciation and amortization on property
and
equipment.
Rentals. Rentals
include expenses for store leases and data processing and equipment
rentals.
Interest
and debt expense, net. Interest
and debt expense includes interest, net of interest income, relating to the
Company’s unsecured notes, mortgage notes, the 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 consist 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.
Equity
in earnings of joint ventures.
Equity
in earnings of joint ventures includes the Company’s portion of the income or
loss of the Company’s unconsolidated joint ventures.
Critical
Accounting Policies and Estimates
The
Company’s accounting policies are more fully described in Note 1 of Notes to
Consolidated Financial Statements in the Company’s Annual Report on Form 10-K
for the fiscal year ended February 3, 2007. As disclosed in this note, the
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“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. The Company evaluates its
estimates and judgments on an ongoing basis and predicates 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 under different assumptions or conditions.
Management
of the Company believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in preparation
of the condensed consolidated financial statements.
Merchandise
inventory. Approximately
98% of the inventories are valued at 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 is 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
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 the Company’s 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 at lower of cost or
market using the specific identified cost method.
Revenue
recognition. The
Company recognizes revenue upon the sale of merchandise to its customers,
net of
anticipated returns. The provision for sales returns is based on historical
evidence of our return rate. We recorded an allowance for sales returns of
$8.0
million and $9.5 million for the quarters ended May 5, 2007 and April 29,
2006,
respectively. Adjustments to earnings resulting from revisions to estimates
on
our sales return provision has been insignificant for the quarters ended
May 5,
2007 and April 29, 2006.
The
Company’s share of income earned under the long-term marketing and servicing
alliance with GE is included as a component of service charges and other
income.
The Company received income of approximately $27.8 million and $31.8 million
from GE during the quarters ended May 5, 2007 and April 29, 2006, respectively.
Further pursuant to this agreement, the Company has no continuing involvement
other than to honor the GE credit cards in its stores. Although not obligated
to
a specific level of marketing commitment, the Company participates in the
marketing of the GE credit cards and accepts payments on the GE credit cards
in
its stores as a convenience to customers who prefer to pay in person rather
than
by mailing their payments to GE.
Merchandise
vendor allowances. The
Company receives concessions from its merchandise vendors through a variety
of
programs and arrangements, including cooperative advertising, payroll
reimbursements and margin maintenance programs.
Cooperative
advertising allowances are reported as a reduction of advertising expense
in the
period in which the advertising occurred. If vendor advertising allowances
were
substantially reduced or eliminated, the Company would likely consider other
methods of advertising as well as the volume and frequency of our product
advertising, which could increase or decrease our expenditures. Similarly,
we
are not able to assess the impact of vendor advertising allowances on creating
additional revenue as such allowances do not directly generate revenue for
our
stores.
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 for the quarters
ended
May 5, 2007 and April 29, 2006.
Insurance
accruals. The
Company’s condensed 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. The Company estimates 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). As of May 5, 2007 and
April 29, 2006, insurance accruals of $55.4 million and $51.1 million,
respectively, were recorded in trade accounts payable and accrued expenses
and
other liabilities. Adjustments
to earnings resulting from changes in historical loss trends have been
insignificant for the quarters ended May 5, 2007 and April 29, 2006.
Finite-lived
assets.
The
Company’s 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 we consider
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
|
The
Company performs an analysis annually as of the last day of the fourth quarter
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. To the extent these future projections or the Company’s
strategies change, the conclusion regarding impairment may differ from the
current estimates.
Goodwill. The
Company evaluates goodwill annually as of the last day of the fourth quarter
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 the Company’s actual results
differ from estimated results due to changes in tax laws, new store locations
or
tax planning, the Company’s 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.
The
Financial Accounting Standards Board issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109
(“FIN
48”) effective for fiscal years beginning after December 15, 2006. The Company
adopted the new requirement as of February 4, 2007 with the cumulative effects
recorded as an adjustment to retained earnings as of the beginning of the
period. The
Company classifies interest and penalties relating to income tax in the
financial statements as income tax expense. The total amount of unrecognized
tax
benefits as of the date of adoption was $27.6 million of which $17.8 million
would, if recognized, affect the effective tax rate. The total amount of
accrued
interest and penalty as of the date of adoption was $13.7 million.
The
Company is currently being examined by the Internal Revenue Service for the
fiscal tax years 2003 through 2005. The Company is also under examination
by
various state and local taxing jurisdictions for various fiscal years.
The
tax
years that remain subject to examination for major tax jurisdictions are
fiscal
tax years 2003 and forward, with the exception of fiscal 1997 through 2002
amended state and local tax returns related to the reporting of federal audit
adjustments. With
the
exception of amounts that are under examination by income tax authorities,
for
which an estimate cannot be made due to uncertainties, the Company does not
believe it is reasonably possible that its unrecognized tax benefits will
significantly change within the next twelve months.
Discount
rate. The
discount rate that the Company utilizes 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 5.90%
as of
February 3, 2007 from 5.60% as of January 28, 2006. We believe that these
assumptions have been appropriate and that, based on these assumptions, the
pension liability of $105 million was appropriately stated as of February
3,
2007; however, actual results may differ materially from those estimated
and
could have a material impact on our consolidated financial statements. A
further
50 basis point change in the discount rate would generate an experience gain
or
loss of approximately $6.3 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
|
|
|
|
May
5,
|
|
April
29,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Service
charges and other income
|
|
|
2.1
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
102.1
|
|
|
102.3
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
63.9
|
|
|
64.3
|
|
Advertising,
selling, administrative and general expenses
|
|
|
28.3
|
|
|
27.0
|
|
Depreciation
and amortization
|
|
|
4.3
|
|
|
4.0
|
|
Rentals
|
|
|
0.7
|
|
|
0.6
|
|
Interest
and debt expense, net
|
|
|
1.2
|
|
|
1.3
|
|
Gain
on sales of assets
|
|
|
-
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes and equity in earnings of joint
ventures
|
|
|
3.7
|
|
|
5.2
|
|
Income
taxes
|
|
|
1.5
|
|
|
1.9
|
|
Equity
in earnings of joint ventures
|
|
|
0.2
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2.4
|
%
|
|
3.3
|
%
|
Net
Sales
The
percent change by category in the Company’s sales for the three months ended May
5, 2007 compared to the three months ended April 29, 2006 is as
follows:
|
|
%
Change
|
|
|
|
07-06
|
|
Cosmetics
|
|
|
-2.0
|
%
|
Ladies’
apparel and accessories
|
|
|
-3.0
|
%
|
Juniors’
and children’s apparel
|
|
|
-9.0
|
%
|
Men’s
apparel and accessories
|
|
|
-6.7
|
%
|
Shoes
|
|
|
0.8
|
%
|
Home
and other
|
|
|
-8.5
|
%
|
The
percent change by region in the Company’s total sales for the three months ended
May 5, 2007 compared to the three months ended April 29, 2006 is as
follows:
|
|
%
Change
|
|
|
|
07-06
|
|
Eastern
|
|
|
-3.2
|
%
|
Central
|
|
|
-5.1
|
%
|
Western
|
|
|
-2.5
|
%
|
Net
sales
decreased 4% on a total basis and 5% on a comparable store basis for the
three
months ended May 5, 2007 compared to the three months ended April 29, 2006.
Net
sales of shoes significantly outperformed the average company performance
trend
for the period while sales of junior’s and children’s apparel declined
significantly more than trend during the period.
During
the three months ended May 5, 2007, sales
were strongest in the Company’s Western region, where performance exceeded the
Company’s total trend for the period. Net sales were slightly above trend in the
Eastern region and slightly below trend in the Central region.
Service
Charges and Other Income
(in
millions of dollars)
|
|
|
Three
Months Ended
|
|
|
|
|
|
May
5, 2007
|
|
April
29, 2006
|
|
Dollar
Change
|
|
Percent
Change
|
|
Leased
department income
|
|
$
|
2.6
|
|
$
|
2.1
|
|
$
|
0.5
|
|
|
23.8
|
%
|
Income
from GE marketing and servicing alliance
|
|
|
27.8
|
|
|
31.8
|
|
|
(4.0
|
)
|
|
(12.6
|
)
|
Other
|
|
|
6.1
|
|
|
7.5
|
|
|
(1.4
|
)
|
|
(18.7
|
)
|
Total
|
|
$
|
36.5
|
|
$
|
41.4
|
|
$
|
(4.9
|
)
|
|
(11.8
|
)%
|
Service
charges and other income for the quarter ended May 5, 2007 decreased to $36.5
million or 2.1% of net sales compared to $41.4 million or 2.3% of net sales
for
the three months ended April 29, 2006. This change was primarily a result
of a
$4.0 million decrease in the income from the marketing and servicing alliance
with GE compared to the prior year.
Cost
of Sales
Cost
of
sales decreased to 63.9% of net sales during the first quarter of 2007 compared
with 64.3% for the first quarter of 2006 resulting in gross margin improvement
of 40 basis points of sales. The improvement was primarily driven by a $4.1
million hurricane recovery gain related to recovery of merchandise losses
incurred during the fall 2005 hurricane season and decreased markdowns in
comparison to the first quarter of 2006. Gross margins improved during the
first
quarter of 2007 compared to the same period in the prior year in men’s apparel
and accessories, ladies’ apparel and accessories and juniors’ and children’s
apparel. Gross margins declined slightly in cosmetics while shoes and home
and
other categories experienced more significant declines.
Inventory
declined 1% as of May 5, 2007 compared to April 29, 2006 on both total and
comparable store bases.
Advertising,
Selling, Administrative and General Expenses
Advertising,
selling, administrative and general expenses ("SG&A expenses") for the
quarter ended May 5, 2007 increased $4.8 million to 28.3% of net sales from
27.0% of net sales during the quarter ended April 29, 2006. The change in
SG&A was driven by increases of services purchased ($4.7 million) and
payroll ($3.2 million) partially offset by a decrease in advertising expenses
($3.6 million).
Depreciation
and Amortization Expense
Depreciation
and amortization expense increased $1.5 million to 4.3% of net sales during
the
three months ended May 5, 2007 compared to 4.0% of net sales during the similar
period of fiscal 2006. The increased depreciation and amortization expense
is
primarily due to Dillard’s continued improvements to its stores as well as the
addition of new stores.
Rentals
Rentals
were 0.7% and 0.6% of sales for the three months ended May 5, 2007 and April
29,
2006, respectively. Rentals increased $1.6 million to $13.2 million for the
three months ended May 5, 2007 compared to $11.6 million for the three months
ended April 29, 2006. The increase in rentals is mainly due to an increase
in
leased equipment.
Interest
and Debt Expense, Net
Interest
and debt expense for the three months ended May 5, 2007 decreased to $20.7
million or 1.2% of net sales compared to $23.6 million or 1.3% of net sales
for
the three months ended April 29, 2006. Average debt outstanding declined
approximately $200 million during the first quarter of fiscal 2007 compared
to
the same period in fiscal 2006. The debt reduction was due to normal maturities
and repurchases of various outstanding notes occurring principally during
the
last nine months of fiscal 2006.
Income
Taxes
The
federal and state income tax rates were approximately 37.2% and 36.4% for
the
three months ended May 5, 2007 and April 29, 2006, including the impact of
changes in FIN 48 liabilities and tax contingency estimates, respectively.
Our
income tax rate for the remainder of fiscal 2007 is dependent upon results
of
operations and may change if the results for fiscal 2007 are different from
current expectations. We currently estimate that our effective rate for the
remainder of fiscal 2007 will approximate 36.7%.
FINANCIAL
CONDITION
Financial
Position Summary
(in
thousands of dollars)
|
|
May
5, 2007
|
|
February
3, 2007
|
|
$
Change
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$
|
137,915
|
|
$
|
193,994
|
|
|
(56,079
|
)
|
|
(28.9
|
)
|
Current
portion of long-term debt
|
|
|
196,399
|
|
|
100,635
|
|
|
95,764
|
|
|
95.2
|
|
Long-term
debt
|
|
|
860,693
|
|
|
956,611
|
|
|
(95,918
|
)
|
|
(10.0
|
)
|
Guaranteed
beneficial interests
|
|
|
200,000
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,631,327
|
|
|
2,586,953
|
|
|
44,374
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.75
|
%
|
|
2.10
|
%
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
32.3
|
%
|
|
32.7
|
%
|
|
|
|
|
|
|
(in
thousands of dollars)
|
|
May
5, 2007
|
|
April
29, 2006
|
|
$
Change
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$
|
137,915
|
|
$
|
301,677
|
|
|
(163,762
|
)
|
|
(54.3
|
)
|
Current
portion of long-term debt
|
|
|
196,399
|
|
|
198,465
|
|
|
(2,066
|
)
|
|
(1.0
|
)
|
Long-term
debt
|
|
|
860,693
|
|
|
1,058,819
|
|
|
(198,126
|
)
|
|
(18.7
|
)
|
Guaranteed
beneficial interests
|
|
|
200,000
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,631,327
|
|
|
2,397,988
|
|
|
233,339
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.75
|
%
|
|
1.79
|
%
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
32.3
|
%
|
|
37.8
|
%
|
|
|
|
|
|
|
Net
cash
flows from operations of $37.0 million for the three months ended May 5,
2007
were adequate to fund the Company’s operations for the period. Cash flows from
operations decreased by $41.6 million from 2006 levels largely due to a decrease
in net income of $18.4 million and a decrease of $28.9 million related to
trade
accounts payable and accrued expenses, other liabilities and income taxes
compared with the prior year. These decreases were partially offset by insurance
proceeds received during the current year of $5.9 million related to
reimbursement for inventory damages incurred during the 2005 hurricane season;
a
gain of $4.1 million was recognized in conjunction with the receipt of these
proceeds.
The
Company entered into a long-term marketing and servicing alliance with GE
Consumer Finance (“GE”) following the sale of the Company’s assets of its
private label credit card business in 2004. The alliance provides for certain
payments to be made by GE to the Company, including revenue sharing and
marketing reimbursements. The cash flows that the Company receives under
this
alliance have been greater than the net cash flows provided by the Company’s
credit business prior to its sale to GE due to quicker cash receipts. The
Company received income of approximately $27.8 million and $31.8 million
from GE
during the quarters ended May 5, 2007 and April 29, 2006, respectively. While
the Company does not expect future cash flows under this alliance to vary
significantly from historical levels, future amounts are difficult to predict.
The amount the Company receives is dependent on the level of sales on GE
accounts, the level of balances carried on the GE accounts by GE customers,
payment rates on GE accounts, finance charge rates and other fees on GE
accounts, the level of credit losses for the GE accounts as well as GE’s funding
costs.
Capital
expenditures were $109.1 million and $76.9 million for the three months ended
May 5, 2007 and April 29, 2006, respectively. These expenditures consist
primarily of the construction of new stores, remodeling of existing stores
and
investments in technology. During the quarter ended May 5, 2007, the Company
opened a new location at Eastland Mall in Evansville, Indiana and one
replacement store at Stones River Mall in Murfreesboro, Tennessee; these
two
stores totaled approximately 215,000 square feet net of replaced square footage.
Also during the quarter, the Company closed one 156,000 square foot location
in
Louisville, Kentucky and announced the closure of a 158,000 square foot location
in Elyria, Ohio which is expected to close during the second quarter of 2007.
Capital
expenditures for fiscal 2007 are expected to be approximately $360 million
compared to actual expenditures of $321 million during fiscal 2006. The Company
plans to open seven additional locations totaling 1.0 million square feet
and
expand four locations totaling 130,000 square feet net of replaced square
footage. Historically, the Company has financed such capital expenditures
with
cash flow from operations. The Company believes that it will continue to
finance
capital expenditures in this manner during fiscal 2007.
Insurance
proceeds of $16.1 million were received during the quarter ended May 5, 2007
in
settlement with our insurance carriers over property damages incurred during
the
2005 hurricane season. These proceeds will be used for future capital
expenditures to repair and reconstruct damaged stores.
Cash
used
in financing activities for the three months ended May 5, 2007 totaled $0.1
million compared to cash used of $6.0 million for the three months ended
April
29, 2006. Cash flow increased chiefly because no treasury stock was repurchased
during the first quarter of 2007 compared to a repurchase of approximately
133,500 shares of Class A common stock for $3.3 million under the Company’s
existing share repurchase program. Proceeds of $4.6 million from the issuance
of
common stock were also received during the first quarter of 2007 primarily
related to the exercise of stock options, an increase of $2.5 million from
the
same quarter of the prior year.
The
Company had cash on hand of $138 million as of May 5, 2007. During fiscal
2007,
the Company expects to finance its capital expenditures and its 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 its
overall liquidity management strategy and for peak working capital requirements,
the Company has a $1.2 billion credit facility. The Company expects peak
funding
requirements of approximately $275 million during fiscal 2007. At May 5,
2007,
letters of credit totaling $72.3 million were issued under the 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 $1.2 billion at May 5, 2007) leaving unutilized availability
under the facility of $1.1 billion. Depending on conditions in the capital
markets and other factors, the Company will from time to time consider possible
financing transactions, the proceeds of which could be used to refinance
current
indebtedness or other corporate purposes. The Company had no outstanding
borrowings under the facility as of May 5, 2007 other than the utilization
for
unfunded letters of credit.
There
have been no material changes in the information set forth under caption
“Contractual Obligations and Commercial Commitments” in Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations
in the
Company’s Annual Report on Form 10-K for the fiscal year ended February 3,
2007.
Hurricane
Update
One
store
remains closed as a result of Hurricane Katrina. This store is located in
Biloxi, Mississippi and is expected to re-open in early fiscal 2008.
The
Company has 95 stores along the Gulf and Atlantic coasts that are not covered
by
third party insurance but are self-insured for property and merchandise losses
related to “named storms” in fiscal 2007. Therefore, repair and replacement
costs will be borne by the Company for damage to any of these stores from
“named
storms” in fiscal 2007. The Company has created early response teams to assess
and coordinate clean up efforts should some stores be impacted by storms.
The
Company has also redesigned certain store features to lessen the impact of
storms and has equipment available to assist in the efforts to ready the
stores
for normal operations.
OFF-BALANCE-SHEET
ARRANGEMENTS
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 STANDARDS
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
amendment of FASB Statement No. 115
(“SFAS
159”). This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS
159
is effective at the beginning of an entity’s first fiscal year that begins after
November 15, 2007. We expect that the adoption of SFAS 159 will not have a
material impact 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 expect that
the
adoption of SFAS 157 will not have a material impact 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 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 2007 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 February 3, 2007. 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.
Item
3.
Quantitative and Qualitative Disclosure About Market
Risk
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 February 3,
2007.
Item
4. Controls and Procedures
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 May
5, 2007, 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 are 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 May 5, 2007 to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
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 year ended February 3, 2007, the Company signed a memorandum of
understanding and accrued $35.0 million to settle the case. The settlement
became final in early April 2007. 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 settlement and additional damages.
From
time
to time, we are 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 June 12, 2007, 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 February 3, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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
|
|
February
4, 2007 through March 3, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
111,904,853
|
|
March
4, 2007 through April 7, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
111,904,853
|
|
April
8, 2007 through May 5, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
111,904,853
|
|
Total
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
111,904,853
|
|
In
May
2005, the Board of Directors authorized the Company to repurchase up to $200
million of the Company’s Class A Common Stock. The plan has no expiration
date.
Item
3. Defaults upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security
Holders
None
Item
5. Other Information
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:
Three
Months Ended
|
|
Fiscal
Years Ended
|
May
5,
|
|
April
29,
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
January
31,
|
|
February
1,
|
2007
|
|
2006
|
|
2007*
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.42
|
|
4.30
|
|
3.34
|
|
2.01
|
|
2.12
|
|
1.05
|
|
1.88
|
*
53
weeks
Number
|
|
Description
|
|
|
|
|
|
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).
|
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: June
12, 2007
|
|
/s/ James
I. Freeman
|
|
|
James
I. Freeman
|
|
|
Senior
Vice-President & Chief Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
21