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 August 4, 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 period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
Noo
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). Yes
o
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 September 1, 2007
|
|
76,048,246
|
CLASS
B COMMON STOCK as of September 1, 2007
|
|
4,010,929
|
DILLARD’S,
INC.
PART
I. FINANCIAL INFORMATION
|
|
Page
Number
|
|
|
|
Item
1.
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3
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4
|
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5
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6
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Item
2.
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11
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Item
3.
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22
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|
Item
4.
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22
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|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
|
|
23
|
|
|
|
|
|
Item
1A.
|
|
|
|
23
|
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|
|
|
Item
2.
|
|
|
|
23
|
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|
|
|
|
Item
3.
|
|
|
|
24
|
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|
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|
tem
4.
|
|
|
|
24
|
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|
|
|
|
Item
5
|
|
|
|
24
|
|
|
|
|
|
Item
6.
|
|
Exhibits.
|
|
25
|
|
|
|
|
|
SIGNATURES
|
|
25
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
(Unaudited)
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
August
4,
|
|
|
February
3,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
91,926
|
|
|
$ |
193,994
|
|
|
$ |
145,351
|
|
Accounts
receivable, net
|
|
|
10,193
|
|
|
|
10,508
|
|
|
|
12,236
|
|
Merchandise
inventories
|
|
|
1,803,953
|
|
|
|
1,772,150
|
|
|
|
1,870,045
|
|
Other
current assets
|
|
|
41,912
|
|
|
|
71,194
|
|
|
|
41,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,947,984
|
|
|
|
2,047,846
|
|
|
|
2,069,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,255,055
|
|
|
|
3,157,906
|
|
|
|
3,182,951
|
|
Goodwill
|
|
|
34,511
|
|
|
|
34,511
|
|
|
|
34,511
|
|
Other
assets
|
|
|
175,884
|
|
|
|
167,752
|
|
|
|
169,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
5,413,434
|
|
|
$ |
5,408,015
|
|
|
$ |
5,456,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable and accrued expenses
|
|
$ |
774,216
|
|
|
$ |
797,806
|
|
|
$ |
913,116
|
|
Current
portion of capital lease obligations
|
|
|
2,940
|
|
|
|
3,679
|
|
|
|
5,252
|
|
Current
portion of long-term debt
|
|
|
96,415
|
|
|
|
100,635
|
|
|
|
100,606
|
|
Other
short-term borrowings
|
|
|
171,200
|
|
|
|
-
|
|
|
|
-
|
|
Federal
and state income taxes
|
|
|
23,453
|
|
|
|
74,995
|
|
|
|
26,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,068,224
|
|
|
|
977,115
|
|
|
|
1,045,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
860,521
|
|
|
|
956,611
|
|
|
|
1,058,636
|
|
Capital
lease obligations
|
|
|
26,908
|
|
|
|
28,328
|
|
|
|
29,561
|
|
Other
liabilities
|
|
|
221,894
|
|
|
|
206,122
|
|
|
|
248,098
|
|
Deferred
income taxes
|
|
|
430,896
|
|
|
|
452,886
|
|
|
|
456,212
|
|
Guaranteed
preferred beneficial interests in the Company's subordinated
debentures
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1,204
|
|
|
|
1,202
|
|
|
|
1,196
|
|
Additional
paid-in capital
|
|
|
779,210
|
|
|
|
772,560
|
|
|
|
759,505
|
|
Accumulated
other comprehensive loss
|
|
|
(20,374 |
) |
|
|
(21,229 |
) |
|
|
(14,574 |
) |
Retained
earnings
|
|
|
2,657,919
|
|
|
|
2,647,388
|
|
|
|
2,485,180
|
|
Less
treasury stock, at cost
|
|
|
(812,968 |
) |
|
|
(812,968 |
) |
|
|
(812,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
2,604,991
|
|
|
|
2,586,953
|
|
|
|
2,418,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
5,413,434
|
|
|
$ |
5,408,015
|
|
|
$ |
5,456,349
|
|
See
notes
to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED
EARNINGS
(Unaudited)
(In
Thousands, Except Per Share Data)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$ |
1,648,533
|
|
|
$ |
1,685,477
|
|
|
$ |
3,411,487
|
|
|
$ |
3,520,786
|
|
Service
charges and other income
|
|
|
40,550
|
|
|
|
47,889
|
|
|
|
77,050
|
|
|
|
89,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,689,083
|
|
|
|
1,733,366
|
|
|
|
3,488,537
|
|
|
|
3,610,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,128,679
|
|
|
|
1,122,273
|
|
|
|
2,254,770
|
|
|
|
2,301,710
|
|
Advertising,
selling, administrative and general expenses
|
|
|
496,460
|
|
|
|
510,636
|
|
|
|
995,835
|
|
|
|
1,005,246
|
|
Depreciation
and amortization
|
|
|
74,863
|
|
|
|
73,995
|
|
|
|
149,795
|
|
|
|
147,385
|
|
Rentals
|
|
|
13,557
|
|
|
|
11,600
|
|
|
|
26,755
|
|
|
|
23,191
|
|
Interest
and debt expense, net
|
|
|
22,741
|
|
|
|
24,587
|
|
|
|
43,477
|
|
|
|
48,197
|
|
Gain
on disposal of assets
|
|
|
(583 |
) |
|
|
(13,838 |
) |
|
|
(583 |
) |
|
|
(15,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes and equity in earnings of
joint ventures
|
|
|
(46,634 |
) |
|
|
4,113
|
|
|
|
18,488
|
|
|
|
99,722
|
|
Income
taxes (benefit)
|
|
|
(17,350 |
) |
|
|
(10,250 |
) |
|
|
8,040
|
|
|
|
24,815
|
|
Equity
in earnings of joint ventures
|
|
|
4,118
|
|
|
|
1,364
|
|
|
|
7,310
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
|
(25,166 |
) |
|
|
15,727
|
|
|
|
17,758
|
|
|
|
77,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of
period
|
|
|
2,686,299
|
|
|
|
2,472,635
|
|
|
|
2,647,388
|
|
|
|
2,414,491
|
|
Cash
dividends declared
|
|
|
(3,214 |
) |
|
|
(3,182 |
) |
|
|
(6,424 |
) |
|
|
(6,357 |
) |
Cumulative
effect of accounting change related to adoption of
FIN 48
|
|
|
-
|
|
|
|
-
|
|
|
|
(803 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings at End of Period
|
|
$ |
2,657,919
|
|
|
$ |
2,485,180
|
|
|
$ |
2,657,919
|
|
|
$ |
2,485,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.31 |
) |
|
$ |
0.20
|
|
|
$ |
0.22
|
|
|
$ |
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.31 |
) |
|
$ |
0.20
|
|
|
$ |
0.22
|
|
|
$ |
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared Per Common Share
|
|
$ |
0.04
|
|
|
$ |
0.04
|
|
|
$ |
0.08
|
|
|
$ |
0.08
|
|
See
notes
to condensed consolidated financial statements.
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
17,758
|
|
|
$ |
77,046
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and deferred financing
|
|
|
150,782
|
|
|
|
148,436
|
|
Share-based
compensation
|
|
|
47
|
|
|
|
766
|
|
Excess
tax benefits from share-based compensation
|
|
|
(577 |
) |
|
|
(680 |
) |
Loss
(gain) on disposal of property and equipment
|
|
|
2,469
|
|
|
|
(1,527 |
) |
Gain
on sale of joint venture
|
|
|
-
|
|
|
|
(13,810 |
) |
Gain
from hurricane insurance proceeds
|
|
|
(7,123 |
) |
|
|
-
|
|
Proceeds
from hurricane insurance
|
|
|
5,881
|
|
|
|
-
|
|
Asset
impairment and store closing charges
|
|
|
688
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
315
|
|
|
|
286
|
|
Increase
in merchandise inventories and other current assets
|
|
|
(24,221 |
) |
|
|
(73,653 |
) |
Increase
in other assets
|
|
|
(8,670 |
) |
|
|
(28,568 |
) |
Decrease
in trade accounts payable and accrued expenses, other liabilities
and
income taxes
|
|
|
(101,246 |
) |
|
|
(37,085 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
36,103
|
|
|
|
71,211
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(228,607 |
) |
|
|
(170,965 |
) |
Proceeds
from hurricane insurance
|
|
|
16,101
|
|
|
|
25,317
|
|
Proceeds
from sale of property and equipment
|
|
|
5,874
|
|
|
|
1,562
|
|
Proceeds
from sale of joint venture
|
|
|
-
|
|
|
|
19,990
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(206,632 |
) |
|
|
(124,096 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt and capital lease obligations
|
|
|
(102,470 |
) |
|
|
(101,105 |
) |
Increase
in short-term borrowings
|
|
|
171,200
|
|
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
6,028
|
|
|
|
8,995
|
|
Excess
tax benefits from share-based compensation
|
|
|
577
|
|
|
|
680
|
|
Cash
dividends paid
|
|
|
(6,424 |
) |
|
|
(6,357 |
) |
Purchase
of treasury stock
|
|
|
-
|
|
|
|
(3,332 |
) |
Payment
of line of credit fees and expenses
|
|
|
(450 |
) |
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
68,461
|
|
|
|
(101,604 |
) |
|
|
|
|
|
|
|
|
|
Decrease
in Cash and Cash Equivalents
|
|
|
(102,068 |
) |
|
|
(154,489 |
) |
Cash
and Cash Equivalents, Beginning of Period
|
|
|
193,994
|
|
|
|
299,840
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
91,926
|
|
|
$ |
145,351
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Accrued
capital expenditures
|
|
$ |
12,570
|
|
|
$ |
23,852
|
|
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 and six months ended August
4, 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 reclassifications were made to the prior periods’ condensed
consolidated statements of operations to conform to the 2007
presentation: (1) leased department income of $2.3 million and $4.4
million for the three and six months ended July 29, 2006, respectively, was
reclassified from net sales to service charges and other income, (2) gain
on
sales of assets was reclassified from service charges and other income to
its
own line item and (3) equity in earnings of joint ventures was reclassified
from
service charges and other income to its own line item below income
taxes. In the condensed consolidated statement of cash flows, line of
credit fee payments of $485,000 were reclassified in the prior period from
an
increase in other assets in operating activities to a separate line in financing
activities.
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 and six months ended August 4, 2007 and July 29,
2006,
respectively.
Stock
option transactions for the three months ended August 4, 2007 are summarized
as
follows:
|
|
|
|
|
Weighted-Average
|
|
Fixed
Options
|
|
Shares
|
|
|
Exercise
Price
|
|
Outstanding,
beginning of period
|
|
|
5,769,994
|
|
|
$ |
25.93
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(35,000 |
) |
|
|
25.74
|
|
Forfeited
|
|
|
(2,800 |
) |
|
|
24.01
|
|
Outstanding,
end of period
|
|
|
5,732,194
|
|
|
$ |
25.93
|
|
Options
exercisable at period end
|
|
|
5,712,194
|
|
|
$ |
25.94
|
|
The
following table summarizes information about stock options outstanding at
August
4, 2007:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
Range
of
|
|
|
Options
|
|
|
Remaining
|
|
|
Weighted-Average
|
|
|
Options
|
|
|
Weighted-Average
|
|
Exercise
Prices
|
|
|
Outstanding
|
|
|
Contractual
Life (Yrs.)
|
|
|
Exercise
Price
|
|
|
Exercisable
|
|
|
Exercise
Price
|
|
$24.01
- $24.73 |
|
|
|
146,867
|
|
|
|
1.64
|
|
|
$ |
24.36
|
|
|
|
126,867
|
|
|
$ |
24.41
|
|
$25.74
- $25.74 |
|
|
|
3,945,000
|
|
|
|
8.47
|
|
|
|
25.74
|
|
|
|
3,945,000
|
|
|
|
25.74
|
|
$25.95
- $30.47 |
|
|
|
1,640,327
|
|
|
|
1.96
|
|
|
|
26.52
|
|
|
|
1,640,327
|
|
|
|
26.52
|
|
|
|
|
|
|
5,732,194
|
|
|
|
6.44
|
|
|
$ |
25.93
|
|
|
|
5,712,194
|
|
|
$ |
25.94
|
|
The
intrinsic value of outstanding stock options at August 4, 2007 was $52.0
million. At August 4, 2007, the intrinsic value of exercisable
options was $51.8 million. The intrinsic value of stock options
exercised during the three months ended August 4, 2007 was $0.3
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 six months ended August 4, 2007:
(in
thousands)
|
Balance
February 3, 2007
|
Charges
|
Cash Payments
|
Balance
August 4, 2007
|
Rent,
property taxes and utilities
|
$3,406
|
$-
|
$553
|
$2,853
|
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
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(25,166 |
) |
|
$ |
15,727
|
|
|
$ |
17,758
|
|
|
$ |
77,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
80,342
|
|
|
|
79,418
|
|
|
|
80,270
|
|
|
|
79,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
$ |
(0.31 |
) |
|
$ |
0.20
|
|
|
$ |
0.22
|
|
|
$ |
0.97
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(25,166 |
) |
|
$ |
15,727
|
|
|
$ |
17,758
|
|
|
$ |
77,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
80,342
|
|
|
|
79,418
|
|
|
|
80,270
|
|
|
|
79,372
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
|
738
|
|
|
|
1,394
|
|
|
|
397
|
|
Total
weighted-average equivalent shares
|
|
|
80,342
|
|
|
|
80,156
|
|
|
|
81,664
|
|
|
|
79,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share
|
|
$ |
(0.31 |
) |
|
$ |
0.20
|
|
|
$ |
0.22
|
|
|
$ |
0.97
|
|
Total
stock options outstanding were 5,732,194 and 7,277,759 at August 4, 2007
and
July 29, 2006, respectively. Of these, options to purchase 254,422
shares of Class A common stock at prices ranging from $29.69 to $30.47 per
share
were outstanding at July 29, 2006 but were not included in the computation
of
diluted earnings per share because they would be antidilutive. No
stock options were included in the three months ended August 4,
2007 computation of diluted earnings per share because
they would be antidilutive due to the net loss.
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
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(25,166 |
) |
|
$ |
15,727
|
|
|
$ |
17,758
|
|
|
$ |
77,046
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of minimum pension liability adjustment, net of taxes
|
|
|
462
|
|
|
|
-
|
|
|
|
855
|
|
|
|
-
|
|
Total
comprehensive (loss) income
|
|
$ |
(24,704 |
) |
|
$ |
15,727
|
|
|
$ |
18,613
|
|
|
$ |
77,046
|
|
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. As of August 4, 2007,
the Company had paid $11.5 million of this settlement. 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
August
4, 2007, letters of credit totaling $79.0 million were issued under the
Company’s $1.2 billion line of credit facility.
Note
7. Benefit
Plans
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 is allocated 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 and $1.8
million during the three and six months ended August 4, 2007,
respectively. The Company expects to make a contribution to the
pension plan of approximately $2.2 million for the remainder of fiscal
2007.
The
components of net periodic benefit costs are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
517
|
|
|
$ |
545
|
|
|
$ |
1,034
|
|
|
$ |
1,091
|
|
Interest
cost
|
|
|
1,501
|
|
|
|
1,349
|
|
|
|
3,001
|
|
|
|
2,698
|
|
Net
actuarial gain
|
|
|
517
|
|
|
|
504
|
|
|
|
1,035
|
|
|
|
1,008
|
|
Amortization
of prior service cost
|
|
|
157
|
|
|
|
157
|
|
|
|
314
|
|
|
|
313
|
|
Net
periodic benefit costs
|
|
$ |
2,692
|
|
|
$ |
2,555
|
|
|
$ |
5,384
|
|
|
$ |
5,110
|
|
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
August
4, 2007, the Company maintained a $1.2 billion revolving credit facility
(“credit agreement”) with JPMorgan Chase Bank (“JPMorgan”) as agent for various
banks. The credit agreement 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 $1.0 billion at August 4,
2007). At August 4, 2007, borrowings of $171.2 million were
outstanding and letters of credit totaling $79.0 million were issued under
this
credit agreement leaving unutilized availability under the facility of $795
million. 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.
Note
10. Share Repurchase Program
During
the six months ended August 4, 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 six months ended July 29, 2006, the Company repurchased 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 August 4, 2007.
Note
11. Other Revenue
During
the three months ended July 29, 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 gain
on
disposal of assets.
Note
12. Income Taxes
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 total amount of unrecognized tax benefits as of
August 4, 2007 was $27.9 million, of which $17.8 million would, if recognized,
affect the effective tax rate. The total amount of accrued interest
and penalties as of August 4, 2007 was $14.8 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 40.8% and (187.1%)
for the
three months ended August 4, 2007 and July 29, 2006,
respectively. During the three months ended August 4, 2007, income
taxes included the net increase in FIN 48 liabilities of approximately $0.6
million and included recognition of tax benefits of approximately $0.3 million
for the change in a capital loss valuation allowance due to capital gain
income
and approximately $1.3 million for a reduction in state tax liabilities due
to a
restructuring that occurred during this period. During the three
months ended July 29, 2006, income taxes included recognition of tax benefits
of
approximately $5.8 million for the change in a capital loss valuation allowance
due to capital gain income and $6.5 million due to the release of tax reserves
resulting from resolution of various federal and state income tax
issues.
The
federal and state income tax rates were approximately 31.2% and 24.4% for
the
six months ended August 4, 2007 and July 29, 2006,
respectively. During the six months ended August 4, 2007, income
taxes included the net increase in FIN 48 liabilities of approximately $0.8
million and included recognition of tax benefits of approximately $0.3 million
for the change in a capital loss valuation allowance due to capital gain
income
and approximately $1.3 million for a reduction in state tax liabilities due
to a
restructuring that occurred during this period. During the six months
ended July 29, 2006, income taxes included recognition of tax benefits of
approximately $5.8 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
resulting from resolution of various federal and state income tax
issues.
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 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.
Net
income for the three and six months ended August 4, 2007 includes a pretax
gain
of $3.1 million ($1.9 million after-tax or $0.02 per diluted share) and $7.1
million ($4.5 million after-tax or $0.05 per diluted share), respectively,
related to insurance proceeds received for inventory and property damages
incurred during the 2005 hurricane season. Net income for the three
months ended August 4, 2007 includes a pretax loss of $2.5 million ($1.6
million
after tax or $0.02 per diluted share) related to the loss on disposal of
a
building in Longmont, Colorado.
Net
income for the three and six months ended July 29, 2006 includes the
following:
|
·
|
A
pretax gain of $13.5 million ($8.5 million after-tax or $0.11 per
diluted
share) was recognized relating to the sale of our interest in a
mall joint
venture.
|
|
·
|
Settlement
proceeds of $6.5 million ($4.0 million after-tax or $0.05 per diluted
share) were received from the Visa Check/MasterMoney Antitrust
litigation.
|
|
·
|
A
pretax charge of $21.7 million ($13.6 million after-tax or $0.17
per
diluted share) was recognized for a memorandum of understanding
reached in
a litigation case.
|
|
·
|
An
income tax benefit of approximately $5.8 million ($0.07 per diluted
share)
was recognized for the change in a capital loss valuation allowance
due to
capital gain income during the quarter, and $6.5 million ($0.08
per
diluted share) was recognized due to the release of tax
reserves.
|
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 condensed consolidated statement of operations 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.
|
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.
|
|
2007
|
|
|
2006
|
|
(in
millions of dollars)
|
|
Estimated
|
|
|
Actual
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
305
|
|
|
$ |
301
|
|
Rental
expense
|
|
|
58
|
|
|
|
55
|
|
Interest
and debt expense, net
|
|
|
87
|
|
|
|
88
|
|
Capital
expenditures
|
|
|
400
|
|
|
|
321
|
|
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.
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. Equity in earnings of joint ventures
for the quarter ended October 28, 2006 was $2.2 million.
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 $7.5 million and
$8.2 million as of August 4, 2007 and July 29, 2006,
respectively. Adjustments to earnings resulting from revisions to
estimates on our sales return provision have been insignificant for the three
and six months ended August 4, 2007 and July 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 $58.5 million
and $63.8 million from GE during the six months ended August 4, 2007 and
July
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 during the three and six months ended August 4,
2007
and July 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 August 4, 2007 and July 29, 2006,
insurance accruals of $56.3 million and $52.9 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 three and six months
ended August 4, 2007 and July 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 total amount of unrecognized tax benefits as of August
4, 2007 was $27.9 million, of which $17.8 million would, if recognized, affect
the effective tax rate. The total amount of accrued interest and
penalties as of August 4, 2007 was $14.8 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
|
|
|
Six
Months Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Service
charges and other income
|
|
|
2.5
|
|
|
|
2.8
|
|
|
|
2.2
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.5
|
|
|
|
102.8
|
|
|
|
102.2
|
|
|
|
102.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
68.5
|
|
|
|
66.6
|
|
|
|
66.1
|
|
|
|
65.4
|
|
Advertising,
selling, administrative and general expenses
|
|
|
30.1
|
|
|
|
30.3
|
|
|
|
29.2
|
|
|
|
28.5
|
|
Depreciation
and amortization
|
|
|
4.5
|
|
|
|
4.4
|
|
|
|
4.4
|
|
|
|
4.2
|
|
Rentals
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.7
|
|
Interest
and debt expense, net
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
1.2
|
|
|
|
1.4
|
|
Gain
on disposal of assets
|
|
|
0.0
|
|
|
|
(0.8 |
) |
|
|
0.0
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes and equity in earnings of joint
ventures
|
|
|
(2.8 |
) |
|
|
0.2
|
|
|
|
0.5
|
|
|
|
2.8
|
|
Income
taxes (benefit)
|
|
|
(1.0 |
) |
|
|
(0.6 |
) |
|
|
0.2
|
|
|
|
0.7
|
|
Equity
in earnings of joint ventures
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(1.5 |
)% |
|
|
0.9 |
% |
|
|
0.5 |
% |
|
|
2.2 |
% |
Net
Sales
The
percent change by category in the Company’s sales for the three and six months
ended August 4, 2007 compared to the three and six months ended July 29,
2006 is as follows:
|
|
%Change
|
|
|
|
07-06
|
|
|
|
Three
Months
|
|
|
Six
Months
|
|
Cosmetics
|
|
|
-4.3 |
% |
|
|
-3.0 |
% |
Ladies’
apparel and accessories
|
|
|
-0.2 |
% |
|
|
-1.6 |
% |
Juniors’
and children’s apparel
|
|
|
-6.8 |
% |
|
|
-8.1 |
% |
Men’s
apparel and accessories
|
|
|
-1.5 |
% |
|
|
-4.3 |
% |
Shoes
|
|
|
1.6 |
% |
|
|
1.2 |
% |
Home
and other
|
|
|
-8.6 |
% |
|
|
-8.5 |
% |
The
percent change by region in the Company’s total sales for the three and six
months ended August 4, 2007 compared to the three and six months ended July
29,
2006 is as follows:
|
|
%
Change
|
|
|
|
07-06
|
|
|
|
Three
Months
|
|
|
Six
Months
|
|
Eastern
|
|
|
-4.2 |
% |
|
|
-3.9 |
% |
Central
|
|
|
-0.6 |
% |
|
|
-2.8 |
% |
Western
|
|
|
-1.9 |
% |
|
|
-2.2 |
% |
Net
sales
decreased 2% on a total basis and 3% on a comparable store basis for the
three
months ended August 4, 2007 compared to the three months ended July 29,
2006. Net sales decreased 3% on a total basis and 4% on a comparable
store basis for the six months ended August 4, 2007 compared to the six months
ended July 29, 2006. During both of the three and six-month periods,
sales were strongest in shoes while all other product categories experienced
declines, with significant declines noted in the home and other and juniors’ and
children’s apparel categories.
During
the three months ended August 4, 2007, net sales in the Central region were
slightly better than the Company’s total performance trend for the
period. Sales were consistent with trend in the Western region and
below trend in the Eastern region. During the six months ended August
4, 2007, net sales in the Western region were slightly better than the Company’s
total performance trend for the period while sales were slightly below trend
in
the Eastern region.
Storewide
sales penetration of exclusive brand merchandise for the six months ended
August
4, 2007 was 23.8% compared to 23.4% during the six months ended July 29,
2006.
Service
Charges and Other Income
(in
millions of dollars)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
August
4,
2007
|
|
|
July
29,
2006
|
|
|
August
4,
2007
|
|
|
July
29,
2006
|
|
|
$
Change
07-06
|
|
|
$
Change
07-06
|
|
Leased
department income
|
|
$ |
2.6
|
|
|
$ |
2.3
|
|
|
$ |
5.2
|
|
|
$ |
4.4
|
|
|
$ |
0.3
|
|
|
$ |
0.8
|
|
Visa
Check/Mastermoney Antitrust settlement proceeds
|
|
|
-
|
|
|
|
6.5
|
|
|
|
-
|
|
|
|
6.5
|
|
|
|
(6.5 |
) |
|
|
(6.5 |
) |
Income
from GE marketing and servicing alliance
|
|
|
30.7
|
|
|
|
31.9
|
|
|
|
58.5
|
|
|
|
63.8
|
|
|
|
(1.2 |
) |
|
|
(5.3 |
) |
Other
|
|
|
7.3
|
|
|
|
7.2
|
|
|
|
13.4
|
|
|
|
14.6
|
|
|
|
0.1
|
|
|
|
(1.2 |
) |
Total
|
|
$ |
40.6
|
|
|
$ |
47.9
|
|
|
$ |
77.1
|
|
|
$ |
89.3
|
|
|
$ |
(7.3 |
) |
|
$ |
(12.2 |
) |
Service
charges and other income decreased to $40.6 million during the three months
ended August 4, 2007 compared to $47.9 million for the three months ended
July
29, 2006. This decrease of $7.3 million was primarily due to proceeds
of $6.5 million recorded during the period in the prior year from the Visa
Check/Mastermoney Antitrust litigation settlement.
Service
charges and other income decreased to $77.1 million during the six months
ended
August 4, 2007 compared to $89.3 million for the six months ended July 29,
2006. This decrease of $12.2 million was due in part to the $6.5
million Visa Check/Mastermoney settlement mentioned above as well as a decrease
of $5.3 million in the income from the marketing and servicing alliance with
GE
compared to the prior year.
Cost
of Sales
Cost
of
sales increased to 68.5% of net sales for the three months ended August 4,
2007
from 66.6% for the three months ended July 29, 2006. The gross
margin decline of 190 basis points of sales was primarily driven by higher
markdowns as the Company worked during the quarter to control inventory levels
in light of sales declines. By merchandise category, a slightly
improved gross margin performance was noted in shoes while the home and other
and the men’s apparel and accessories categories posted the weakest performances
compared to the total decline.
Cost
of
sales increased to 66.1% of net sales for the six months ended August 4,
2007
from 65.4% for the six months ended July 29, 2006. The gross margin
decline of 70 basis points of sales was primarily driven by higher
markdowns. All merchandise categories experienced declines, with the
weakest performances noted in the home and other and shoes
categories.
Inventory
levels decreased 4% on both total and comparable store bases as of August
4,
2007 compared to July 29, 2006.
Advertising,
Selling, Administrative and General Expenses
Advertising,
selling, administrative and general (“SG&A”) expenses for the three months
ended August 4, 2007 decreased $14.2 million to 30.1% of net sales from 30.3%
of
net sales during the three months ended July 29, 2006. The decrease
was driven primarily by a pretax charge of $21.7 million recorded during
the
three months ended July 29, 2006 for a preliminary settlement agreement in
a
lawsuit filed on behalf of a putative class of former Mercantile Stores Pension
Plan participants. Exclusive of the $21.7 million charge in the prior
year, SG&A expenses increased $7.5 million primarily as a result of
increases in payroll ($7.5 million).
SG&A
expenses for the six months ended August 4, 2007 decreased $9.4 million to
29.2%
of net sales from 28.5% of net sales during the six months ended July 29,
2006. Exclusive of the prior year $21.7 million lawsuit settlement
charge mentioned above, SG&A expenses increased $12.3 million primarily as a
result of increases in payroll ($10.1 million) and services purchased ($5.5
million) partially offset by a decrease in advertising expense ($5.5
million).
Depreciation
and Amortization Expense
Depreciation
and amortization expense as a percentage of net sales was 4.5% for the three
months ended August 4, 2007 compared to 4.4% for the similar period of
2006. Depreciation and amortization expense as a percentage of net
sales was 4.4% for the six months ended August 4, 2007 compared to 4.2% for
the
similar period of 2006. Depreciation expense increased $0.9 million
and $2.4 million for the three and six months ended August 4, 2007,
respectively, compared to the similar periods of 2006. This increase
in 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 0.8% of sales for the three and six months ended August 4, 2007 compared
to
0.7% of sales for the three and six months ended July 29,
2006. Rentals increased $2.0 million and $3.6 million for the three
and six months ended August 4, 2007, respectively, compared to the same periods
in 2006. The increase in rentals is mainly due to an increase in
leased equipment including upgrades of point-of-sale terminals at the
stores.
Interest
and Debt Expense, Net
Interest
and debt expense decreased $1.8 million to $22.7 million during the three
months
ended August 4, 2007 from $24.6 million during the three months ended July
29,
2006. Interest and debt expense decreased $4.7 million to $43.5
million during the six months ended August 4, 2007 from $48.2 million during
the
six months ended July 29, 2006. These declines in interest expense
for the three and six months ended August 4, 2007 were a result of lower
debt
levels. Average debt outstanding declined approximately $116 million
during the three and six months ended August 4, 2007 compared to the similar
periods of 2006. The debt reduction was due to normal maturities of
various outstanding notes.
Gain
on Disposal of Assets
Gain
on
disposal of assets decreased $13.3 million and $14.8 million during the three
and six months ended August 4, 2007, respectively, compared to the same periods
of the prior year. During the three months ended July 29, 2006, the
Company sold its interest in the Yuma Palms joint venture for $20.0 million
and
recognized a pretax gain of $13.5 million related to the sale in gain on
disposal of assets.
Income
Taxes
The
federal and state income tax rates were approximately 40.8% and (187.1%)
for the
three months ended August 4, 2007 and July 29, 2006,
respectively. During the three months ended August 4, 2007, income
taxes included the net increase in FIN 48 liabilities of approximately $0.6
million and recognition of tax benefits of approximately $0.3 million for
the
change in a capital loss valuation allowance due to capital gain income and
approximately $1.3 million for a reduction in state tax liabilities due to
a
restructuring that occurred during this period. During the three
months ended July 29, 2006, income taxes included recognition of tax benefits
of
approximately $5.8 million for the change in a capital loss valuation allowance
due to capital gain income and $6.5 million due to the release of tax reserves
resulting from resolution of various federal and state income tax
issues.
The
federal and state income tax rates were approximately 31.2% and 24.4% for
the
six months ended August 4, 2007 and July 29, 2006,
respectively. During the six months ended August 4, 2007, income
taxes included the net increase in FIN 48 liabilities of approximately $0.8
million and recognition of tax benefits of approximately $0.3 million for
the
change in a capital loss valuation allowance due to capital gain income and
approximately $1.3 million for a reduction in state tax liabilities due to
a
restructuring that occurred during this period. During the six months
ended July 29, 2006, income taxes included recognition of tax benefits of
approximately $5.8 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
resulting from resolution of various federal and state income tax
issues.
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 36.2%.
FINANCIAL
CONDITION
Financial
Position Summary
(in
thousands of dollars)
|
|
August
4, 2007
|
|
|
February
3, 2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$ |
91,926
|
|
|
$ |
193,994
|
|
|
|
(102,068 |
) |
|
|
-52.6
|
|
Other
short-term borrowings
|
|
|
171,200
|
|
|
|
-
|
|
|
|
171,200
|
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
96,415
|
|
|
|
100,635
|
|
|
|
(4,220 |
) |
|
|
-4.2
|
|
Long-term
debt
|
|
|
860,521
|
|
|
|
956,611
|
|
|
|
(96,090 |
) |
|
|
-10.0
|
|
Guaranteed
preferred beneficial interests
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,604,991
|
|
|
|
2,586,953
|
|
|
|
18,038
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.82
|
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
33.8 |
% |
|
|
32.7 |
% |
|
|
|
|
|
|
|
|
(in
thousands of dollars)
|
|
August
4, 2007
|
|
|
July
29, 2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$ |
91,926
|
|
|
$ |
145,351
|
|
|
|
(53,425 |
) |
|
|
-36.8
|
|
Other
short-term borrowings
|
|
|
171,200
|
|
|
|
-
|
|
|
|
171,200
|
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
96,415
|
|
|
|
100,606
|
|
|
|
(4,191 |
) |
|
|
-4.2
|
|
Long-term
debt
|
|
|
860,521
|
|
|
|
1,058,636
|
|
|
|
(198,115 |
) |
|
|
-18.7
|
|
Guaranteed
preferred beneficial interests
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,604,991
|
|
|
|
2,418,339
|
|
|
|
186,652
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.82
|
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
33.8 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
Cash
flows from operations decreased from 2006 levels largely due to a decrease
in
net income of $40.3 million (as adjusted for non-cash items) and a decrease
of
$64.2 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 an increase in cash flow of $19.9 million
related to changes in other assets as well as an increase of $49.4 million
related to changes in merchandise inventories and other current assets compared
with the prior year as the Company tried to control inventory levels even
among
softer sales.
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 $30.7 million
and $31.9 million from GE during the three months ended August 4, 2007 and
July
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.
For
the
six months ended July 29, 2006, the Company recorded a gain from the sale
of a
joint venture of 13.5 million with proceeds of $20.0 million.
The
Company received insurance proceeds of $22.0 million and $25.3 million during
the six months ended August 4, 2007 and July 29, 2006, respectively, related
to
reimbursement for inventory and property damages incurred during the 2005
hurricane season. A gain of $7.1 million was recognized during the
six months ended August 4, 2007 related to these proceeds.
Capital
expenditures were $228.6 million for the six months ended August 4, 2007
compared to $171.0 million for the six months ended July 29, 2006. These
expenditures consist primarily of the construction of new stores, remodeling
of
existing stores and investments in technology. During the six months
ended August 4, 2007, the Company opened new locations at Eastland Mall in
Evansville, Indiana and Alamance Crossing in Burlington, North
Carolina. The Company also opened one replacement store at Stones
River Mall in Murfreesboro, Tennessee. These three stores totaled
approximately 341,000 square feet net of replaced square footage. The
Company closed one 156,000 square foot location in Louisville, Kentucky during
the six months ended August 4, 2007 and recently announced the closure of
five
more locations: (1) a 158,000 square foot location in Elyria, Ohio,
(2) a 170,000 square foot location in St. Louis, Missouri, (3) a 170,000
square
foot location in Nashville, Tennessee, (4) a 180,000 square foot location
in
Toledo, Ohio and (5) a 160,000 square foot clearance center in Tulsa,
Oklahoma. These locations are expected to close by the end of the
Company’s fiscal year.
Capital
expenditures for fiscal 2007 are expected to be approximately $400 million
compared to actual expenditures of $321 million during fiscal
2006. The Company plans to open six additional locations totaling
908,000 square feet and expand one location totaling 40,000 square
feet. 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.
The
Company received proceeds of $5.8 million relative to the sale of properties
located in Longmont, Colorado and Richardson, Texas. A net loss of
$2.5 million was recognized in conjunction with these sales.
Cash
provided by financing activities for the six months ended August 4, 2007
totaled
$68.5 million compared to cash used of $101.6 million for the six months
ended
July 29, 2006. During the six months ended August 4, 2007 and July
29, 2006, the Company made principal payments on long-term debt and capital
leases of $102.5 million and $101.1 million, respectively, at their normal
maturities. No debt was repurchased during the six months ended
August 4, 2007 and July 29, 2006.
During
the six months ended July 29, 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. No repurchases occurred during the six months ended August 4,
2007. Approximately $111.9 million in share repurchase authorization
remained under this open-ended plan at August 4, 2007.
The
Company had cash on hand of $91.9 million as of August 4, 2007. 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 $350 million during
fiscal 2007. At August 4, 2007, borrowings of $171.2 million were
outstanding and letters of credit totaling $79.0 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 $1.0 billion
at
August 4, 2007) leaving unutilized availability under the facility of $795
million. 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, cash flows
generated from operations and utilization of the credit
facility. 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.
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 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 approximately 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, and estimates of depreciation
and amortization, rental expense, interest and debt expense and capital
expenditures for fiscal year 2007 are examples of 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
August 4, 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 August 4, 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 September 5, 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.
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
|
May
6, 2007 through June 2, 2007
|
-
|
$-
|
-
|
$111,904,853
|
June
3, 2007 through July 7, 2007
|
-
|
-
|
-
|
111,904,853
|
July
8, 2007 through August 4, 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
The
annual meeting of the stockholders of the Company was held on May 19,
2007. The matters submitted to a vote of the stockholders were as
follows:
|
|
|
|
|
|
Votes
|
|
|
Votes
For
|
|
Votes
Against
|
|
Abstained
|
|
|
|
|
|
|
|
Election
of Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Nominees
|
|
|
|
|
|
|
Robert
C. Connor
|
|
55,486,435
|
|
6,697,678
|
|
0
|
Will
D. Davis
|
|
55,486,113
|
|
6,698,000
|
|
0
|
John
Paul Hammerschmidt
|
|
55,443,156
|
|
6,740,957
|
|
0
|
Peter
Johnson
|
|
56,474,618
|
|
5,709,495
|
|
0
|
|
|
|
|
|
|
|
Class
B Nominees
|
|
|
|
|
|
|
Drue
Corbusier
|
|
4,001,468
|
|
0
|
|
0
|
Alex
Dillard
|
|
4,001,468
|
|
0
|
|
0
|
William
Dillard, II
|
|
4,001,468
|
|
0
|
|
0
|
Mike
Dillard
|
|
4,001,468
|
|
0
|
|
0
|
James
I. Freeman
|
|
4,001,468
|
|
0
|
|
0
|
Warren
A. Stephens
|
|
4,001,468
|
|
0
|
|
0
|
William
H. Sutton
|
|
4,001,468
|
|
0
|
|
0
|
J.
C. Watts
|
|
4,001,468
|
|
0
|
|
0
|
|
|
|
|
|
|
|
Other
Proposals
|
|
|
|
|
|
|
Ratification
of Auditors
|
|
64,537,504
|
|
1,210,014
|
|
438,063
|
Sustainability
Report
|
|
23,872,195
|
|
27,619,107
|
|
8,628,497
|
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:
Six
Months Ended
|
|
Fiscal
Years Ended
|
August
4,
|
|
July
29,
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
January
31,
|
|
February
1,
|
2007
|
|
2006
|
|
2007*
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
1.28
|
|
2.68
|
|
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).
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Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
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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.
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DILLARD'S,
INC.
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(Registrant)
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Date: September
5, 2007
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/s/ James
I. Freeman
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James
I. Freeman
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Senior
Vice-President & Chief Financial Officer
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(Principal
Financial and Accounting Officer)
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