UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended May 3,
2008
or
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________ to __________.
Commission
file number: 1-6140
DILLARD'S,
INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
|
71-0388071
|
(State or other
jurisdiction 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.
þYes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer þ
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b-2 of the Exchange Act.) ¨Yes þNo
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 May 31, 2008 71,270,160
CLASS B
COMMON STOCK as of May 31,
2008 4,010,929
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Page
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PART
I. FINANCIAL INFORMATION
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Number
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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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21
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Item
4.
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21
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PART
II. OTHER INFORMATION
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Item
1.
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23
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Item
1A.
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23
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Item
2.
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23
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Item
3.
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23
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Item
4.
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23
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Item
5.
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24
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Item
6.
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24
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24
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PART 1. FINANCIAL INFORMATION
Item 1. Financial
Statements
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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(In
Thousands)
|
|
|
|
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|
|
|
|
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|
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May
3,
|
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February
2,
|
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May
5,
|
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2008
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2008
|
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|
2007
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Assets
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(As
restated. See Note 1)
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Current
assets:
|
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|
|
|
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Cash
and cash equivalents
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$ |
84,043 |
|
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$ |
88,912 |
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$ |
137,915 |
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Accounts
receivable
|
|
|
9,034 |
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|
10,880 |
|
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|
9,932 |
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Merchandise
inventories
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2,018,406 |
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1,779,279 |
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2,032,711 |
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Other
current assets
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64,658 |
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66,117 |
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42,143 |
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|
|
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|
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Total
current assets
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2,176,141 |
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1,945,188 |
|
|
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2,222,701 |
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|
|
|
|
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|
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Property
and equipment, net
|
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|
3,182,271 |
|
|
|
3,190,444 |
|
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|
3,197,530 |
|
Goodwill
|
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|
31,912 |
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31,912 |
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34,511 |
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Other
assets
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166,459 |
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170,585 |
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170,959 |
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Total
assets
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$ |
5,556,783 |
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$ |
5,338,129 |
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|
$ |
5,625,701 |
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Liabilities
and stockholders' equity
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Current
liabilities:
|
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|
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|
|
|
|
|
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Trade
accounts payable and accrued expenses
|
|
$ |
957,545 |
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$ |
753,309 |
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$ |
1,013,659 |
|
Current
portion of long-term debt
|
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|
100,712 |
|
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|
196,446 |
|
|
|
196,399 |
|
Current
portion of capital lease obligations
|
|
|
2,295 |
|
|
|
2,613 |
|
|
|
3,027 |
|
Other
short-term borrowings
|
|
|
300,000 |
|
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|
195,000 |
|
|
|
- |
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Federal
and state income taxes
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|
39,471 |
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36,802 |
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55,696 |
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|
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Total
current liabilities
|
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1,400,023 |
|
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1,184,170 |
|
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1,268,781 |
|
|
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|
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|
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Long-term
debt
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|
759,981 |
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760,165 |
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860,693 |
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Capital
lease obligations
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25,339 |
|
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25,739 |
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27,633 |
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Other
liabilities
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219,817 |
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217,403 |
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208,596 |
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Deferred
income taxes
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|
435,633 |
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436,541 |
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435,835 |
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Guaranteed
preferred beneficial interests in the
|
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Company’s
subordinated debentures
|
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200,000 |
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|
200,000 |
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200,000 |
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Stockholders’
equity:
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Common
stock
|
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|
1,206 |
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1,205 |
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1,204 |
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Additional
paid-in capital
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|
780,757 |
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778,987 |
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777,628 |
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Accumulated
other comprehensive loss
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(21,786 |
) |
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|
(22,211 |
) |
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(20,836 |
) |
Retained
earnings
|
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|
2,680,373 |
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2,680,690 |
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2,679,135 |
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Less
treasury stock, at cost
|
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(924,560 |
) |
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|
(924,560 |
) |
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(812,968 |
) |
|
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|
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|
|
|
|
|
|
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Total
stockholders' equity
|
|
|
2,515,990 |
|
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|
2,514,111 |
|
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|
2,624,163 |
|
|
|
|
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|
|
|
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|
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Total
liabilities and stockholders' equity
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|
$ |
5,556,783 |
|
|
$ |
5,338,129 |
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|
$ |
5,625,701 |
|
See notes
to condensed consolidated financial statements.
|
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CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
|
|
(Unaudited)
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|
(In
Thousands, Except Per Share Data)
|
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|
|
|
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|
Three
Months Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
2008
|
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|
2007
|
|
|
|
|
|
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Net
sales
|
|
$ |
1,675,554 |
|
|
$ |
1,762,954 |
|
Service
charges and other income
|
|
|
38,044 |
|
|
|
36,500 |
|
|
|
|
|
|
|
|
|
|
|
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|
1,713,598 |
|
|
|
1,799,454 |
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,118,302 |
|
|
|
1,126,091 |
|
Advertising,
selling, administrative and general expenses
|
|
|
480,921 |
|
|
|
498,687 |
|
Depreciation
and amortization
|
|
|
72,075 |
|
|
|
74,932 |
|
Rentals
|
|
|
15,677 |
|
|
|
13,198 |
|
Interest
and debt expense, net
|
|
|
22,113 |
|
|
|
20,736 |
|
Gain
on disposal of assets
|
|
|
(99 |
) |
|
|
–– |
|
Asset
impairment and store closing charges
|
|
|
925 |
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and equity in earnings of joint
ventures
|
|
|
3,684 |
|
|
|
65,122 |
|
Income
taxes
|
|
|
1,610 |
|
|
|
25,390 |
|
Equity
in earnings of joint ventures
|
|
|
619 |
|
|
|
3,192 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,693 |
|
|
|
42,924 |
|
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
|
|
2,680,690 |
|
|
|
2,640,224 |
|
Cash
dividends declared
|
|
|
(3,010 |
) |
|
|
(3,210 |
) |
Cumulative
effect of accounting change related to adoption of FIN 48
|
|
|
- |
|
|
|
(803 |
) |
|
|
|
|
|
|
|
|
|
Retained
earnings at end of period (as restated)
|
|
$ |
2,680,373 |
|
|
$ |
2,679,135 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.04 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.04 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
3,
|
|
|
May
5,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,693 |
|
|
$ |
42,924 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and deferred financing
|
|
|
72,536 |
|
|
|
75,410 |
|
Share-based
compensation
|
|
|
15 |
|
|
|
31 |
|
Excess
tax benefits from share-based compensation
|
|
|
–– |
|
|
|
(433 |
) |
(Gain)
loss on disposal of property and equipment
|
|
|
(99 |
) |
|
|
16 |
|
Asset
impairment and store closing charges
|
|
|
925 |
|
|
|
688 |
|
Gain
from hurricane insurance proceeds
|
|
|
–– |
|
|
|
(4,072 |
) |
Proceeds
from hurricane insurance
|
|
|
–– |
|
|
|
5,881 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
1,846 |
|
|
|
576 |
|
Increase
in merchandise inventories and other current assets
|
|
|
(246,925 |
) |
|
|
(253,210 |
) |
Decrease
(increase) in other assets
|
|
|
3,665 |
|
|
|
(3,235 |
) |
Increase
in trade accounts payable and accrued expenses, other liabilities
and income taxes
|
|
|
201,877 |
|
|
|
172,472 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
36,533 |
|
|
|
37,048 |
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(46,759 |
) |
|
|
(109,106 |
) |
Proceeds
from hurricane insurance
|
|
|
–– |
|
|
|
16,101 |
|
Proceeds
from sale of property and equipment
|
|
|
2 |
|
|
|
–– |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(46,757 |
) |
|
|
(93,005 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt and capital lease obligations
|
|
|
(96,635 |
) |
|
|
(1,501 |
) |
Proceeds
from issuance of common stock
|
|
|
–– |
|
|
|
4,606 |
|
Payment
of line of credit fees and expenses
|
|
|
–– |
|
|
|
(450 |
) |
Excess
tax benefits from share-based compensation
|
|
|
–– |
|
|
|
433 |
|
Cash
dividends paid
|
|
|
(3,010 |
) |
|
|
(3,210 |
) |
Increase
in short-term borrowings
|
|
|
105,000 |
|
|
|
–– |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
5,355 |
|
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(4,869 |
) |
|
|
(56,079 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
88,912 |
|
|
|
193,994 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
84,043 |
|
|
$ |
137,915 |
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Accrued
capital expenditures
|
|
$ |
17,020 |
|
|
$ |
2,635 |
|
Stock
bonus awards
|
|
|
1,756 |
|
|
|
1,418 |
|
See notes
to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 3, 2008 are not necessarily indicative of
the results that may be expected for the fiscal year ending January 31, 2009 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 2,
2008 filed with the Securities and Exchange Commission on April 2,
2008.
Reclassifications – Asset
impairment and store closing charges of $0.7 million were reclassed from
advertising, selling, administrative and general expenses to their own line item
in the Company’s prior period condensed consolidated statement of income to
conform to the 2008 presentation.
Restatement – As previously
reported in Note 2 of the Company’s annual report on Form 10-K for the fiscal
year ended February 2, 2008 filed with the Securities and Exchange Commission on
April 2, 2008, property and equipment, deferred income taxes and retained
earnings were restated on the Company’s Condensed Consolidated Balance Sheet as
of February 3, 2007. The Company identified an error in
accounting for its share of the equity in earnings of CDI Contractors LLC
(“CDI”), a 50%-owned, equity method joint venture investment of the Company that
is also a general contractor that constructs stores for the
Company. The Company discovered that CDI had recorded profit on the
Company’s construction projects in excess of what CDI had previously reported
and which, therefore, was not properly eliminated.
The following table reflects the effects
of the restatement on the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statement
of Retained Earnings as of
May 5, 2007 (in thousands):
|
|
As Previously
Reported
|
|
|
Restatement
Adjustments
|
|
|
As
Restated
|
|
Property and equipment, net
|
|
$ |
3,208,810 |
|
|
$ |
(11,280 |
) |
|
$ |
3,197,530 |
|
Total assets
|
|
|
5,636,981 |
|
|
|
(11,280 |
) |
|
|
5,625,701 |
|
Deferred income
taxes
|
|
|
439,951 |
|
|
|
(4,116 |
) |
|
|
435,835 |
|
Retained earnings
|
|
|
2,686,299 |
|
|
|
(7,164 |
) |
|
|
2,679,135 |
|
Total stockholders’
equity
|
|
|
2,631,327 |
|
|
|
(7,164 |
) |
|
|
2,624,163 |
|
Total liabilities
and stockholders’ equity
|
|
|
5,636,981 |
|
|
|
(11,280 |
) |
|
|
5,625,701 |
|
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 3, 2008 and May 5,
2007.
Stock
option transactions for the three months ended May 3, 2008 are summarized as
follows:
|
|
|
|
|
Weighted-Average
|
|
Fixed
Options
|
|
Shares
|
|
|
Exercise
Price
|
|
Outstanding,
beginning of period
|
|
|
5,376,375 |
|
|
$ |
25.92 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(40,000 |
) |
|
|
25.74 |
|
Outstanding,
end of period
|
|
|
5,336,375 |
|
|
$ |
25.92 |
|
Options
exercisable at period end
|
|
|
5,316,375 |
|
|
$ |
25.92 |
|
At May 3,
2008, the intrinsic value of outstanding stock options and exercisable stock
options was $0.
Note
3.
|
Asset
Impairment and Store Closing
Charges
|
During
the quarter ended May 3, 2008, the Company recorded a pretax charge of $0.9
million for asset impairment and store closing costs. The charge
consists of a write-off of equipment and an accrual for future rent on a
distribution center that was closed during the quarter.
During
the quarter ended May 5, 2007, the Company recorded a pretax charge of $0.7
million for asset impairment and store closing costs. The charge
consists of a write-down of property and equipment for a store that had been
closed.
Following
is a summary of the activity in the reserve established for store closing
charges for the quarter ended May 3, 2008:
(in
thousands)
|
|
Balance,
Beginning
of
Quarter
|
|
|
Charges
|
|
|
Cash Payments
|
|
|
Balance,
End
of Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals,
property taxes and utilities
|
|
$ |
4,355 |
|
|
$ |
1,159 |
|
|
$ |
959 |
|
|
$ |
4,555 |
|
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
3,
|
|
|
May
5,
|
|
|
|
2008
|
|
|
2007
|
|
Basic:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,693 |
|
|
$ |
42,924 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
75,200 |
|
|
|
80,197 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.04 |
|
|
$ |
0.54 |
|
|
|
Three
Months Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
2008
|
|
|
2007
|
|
Diluted:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,693 |
|
|
$ |
42,924 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
75,200 |
|
|
|
80,197 |
|
Stock
options
|
|
|
- |
|
|
|
1,360 |
|
Total
weighted average equivalent shares
|
|
|
75,200 |
|
|
|
81,557 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.04 |
|
|
$ |
0.53 |
|
Total
stock options outstanding were 5,336,375 and 5,769,994 at May 3, 2008 and May 5,
2007, respectively. Of these, options to purchase 5,336,375 shares of
Class A common stock at prices ranging from $24.01 to $30.47 per share were
outstanding at May 3, 2008 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
|
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
3,
|
|
|
May
5,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,693 |
|
|
$ |
42,924 |
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
Amortization
of minimum pension liability adjustment, net of taxes
|
|
|
425 |
|
|
|
393 |
|
Total
comprehensive income
|
|
$ |
3,118 |
|
|
$ |
43,317 |
|
Note
6.
|
Commitments
and Contingencies
|
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 3,
2008, letters of credit totaling $67.5 million were issued under the Company’s
$1.2 billion line of credit facility.
The
Company has a nonqualified defined benefit plan for its 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 3, 2008. The Company expects to
make contributions to the pension plan of approximately $3.1 million for the
remainder of fiscal 2008.
The
components of net periodic benefit costs are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
May
3, 2008
|
|
|
May
5, 2007
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
626 |
|
|
$ |
517 |
|
Interest
cost
|
|
|
1,764 |
|
|
|
1,500 |
|
Net
actuarial loss
|
|
|
513 |
|
|
|
518 |
|
Amortization
of prior service cost
|
|
|
157 |
|
|
|
157 |
|
Net
periodic benefit costs
|
|
$ |
3,060 |
|
|
$ |
2,692 |
|
Note
8.
|
Recently
Issued Accounting Standards
|
In March 2008, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 161, Disclosures about
Derivative Instruments and Hedging Activities—an Amendment of FASB
Statement No. 133 (“SFAS 161”). SFAS 161 requires entities to provide enhanced
disclosures related to how an entity uses derivative instruments, how
derivatives are accounted for under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities and how derivative instruments and the
related hedged items impact an entity’s financial
statements. The
provisions of SFAS
161 are effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. We expect that the adoption of SFAS 161
will not have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”). SFAS 141(R)'s objective is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after December 31,
2008. We expect that the adoption of SFAS 141(R) will not have a
material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS
160”). SFAS 160's objective is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will be
effective for fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008. We expect
that the adoption of SFAS 160 will not have a material impact on our
consolidated financial statements.
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 was effective February 3, 2008, and we
have elected not to measure any financial instruments or certain other items at
fair value.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”).
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
concluded in those other accounting pronouncements that fair value is the
relevant measurement attribute. This statement was effective for financial
assets and liabilities in financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of this portion of the
statement did not have a material impact on our consolidated financial
statements.
In
February 2008, the FASB issued FSP SFAS 157-2, Effective Date for FASB Statement
No. 157. This FSP permits the delayed application of SFAS 157
for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15,
2008. We have chosen to adopt SFAS 157 in accordance with the
guidance of FSP SFAS 157-2 as stated above.
Note
9.
|
Revolving
Credit Agreement
|
At May 3,
2008, the Company maintained a $1.2 billion revolving credit facility (“credit
agreement”) with JPMorgan Chase Bank (“JPMorgan”) as agent for various banks,
secured by the inventory of Dillard’s, Inc. operating
subsidiaries. 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 3.70%) subject to
certain availability thresholds as defined in the credit
agreement. Limited to 85% of the inventory of certain Company
subsidiaries, availability for borrowings and letter of credit obligations under
the credit agreement was approximately $1.2 billion at May 3,
2008. Borrowings of $300 million were outstanding and letters of
credit totaling $67.5 million were issued under this credit agreement leaving
unutilized availability under the facility of $818 million at May 3,
2008. 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
|
The
Company was authorized by its board of directors in November 2007 to repurchase
up to $200 million of its Class A Common Stock under an open-ended
plan. No shares were repurchased during the quarter ended May 3, 2008
under this plan leaving $200 million in share repurchase authorization remaining
at May 3, 2008. No shares were repurchased during the quarter ended
May 5, 2007 under previous plans.
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”) clarifies the accounting for
uncertainty in income tax recognized in an entity’s financial statements in
accordance with SFAS No. 109. The Company classifies accrued interest
and penalties relating to income tax in the financial statements as income tax
expense. The total amount of unrecognized tax benefits as of May 3,
2008 was $25.4 million, of which $17.0 million would, if recognized, affect the
effective tax rate. The total amount of accrued interest and
penalties as of May 3, 2008 was $9.1 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. The Company has taken positions in certain taxing
jurisdictions for which it is reasonably possible that the total amounts of
unrecognized tax benefits may decrease within the next twelve
months. The possible decrease could result from the finalization of
the Company’s federal and various state income tax audits. The
Company’s federal income tax audit uncertainties primarily relate to research
and development credits, while various state income tax audit uncertainties
primarily relate to income from intangibles. The estimated range of
the reasonably possible uncertain tax benefit decrease in the next twelve months
is between $1 million and $5 million.
The
federal and state income tax rates were approximately 37.4% and 37.2% for the
three months ended May 3, 2008 and May 5, 2007, respectively. During
the three months ended May 3, 2008, income taxes included the net increase in
FIN 48 liabilities of approximately $0.2 million and included the net
recognition of tax benefits of approximately $0.2 million due to tax
credits.
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”) operated 324 Dillard’s locations and
seven clearance centers spanning 29 states as of May 3, 2008. Our
stores are located in fashion-oriented shopping malls and open-air 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.
Our
performance in the opening quarter of 2008 was disappointing. Weak
economic conditions made it extremely difficult to achieve more profitable sales
levels, and our gross margin performance was impacted negatively as we worked to
control inventory levels.
In an
effort to strengthen our position, we have announced plans to close
under-performing stores, reduce capital expenditures, reduce expenses and
continue to change our merchandise mix to enhance our appeal to aspirational,
upscale and contemporary shoppers.
Accordingly,
we cut advertising, selling, administrative and general expenses by $17.8
million during the quarter and have announced ten more store closures for 2008
to date. Management believes expense saving measures implemented in
this first quarter could result in savings of approximately $50 million for the
2008 fiscal year. We will continue to evaluate our store base for
additional closures and will seek additional expense saving measures throughout
the year.
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.
|
|
·
|
Pricing
– If our customers do not purchase our merchandise offerings in sufficient
quantities, we respond by taking markdowns. If we have to
reduce our prices, the cost of goods sold on our income statement will
correspondingly rise, thus reducing our
income.
|
|
·
|
Success
of brand – The success of
our exclusive brand merchandise is dependent upon customer fashion
preferences.
|
|
·
|
Store
growth – Our growth is dependent on a number of factors which could
prevent the opening of new stores, such as identifying suitable markets
and locations.
|
|
·
|
Sourcing –
Store merchandise is dependent upon adequate and stable availability of
materials and production facilities from which the Company sources its
merchandise.
|
2008
Guidance
A summary
of guidance on key financial measures for 2008, 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)
|
|
2008
|
|
|
2007
|
|
|
|
Estimated
|
|
|
Actual
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
290 |
|
|
$ |
299 |
|
Rental
expense
|
|
|
62 |
|
|
|
60 |
|
Interest
and debt expense, net
|
|
|
92 |
|
|
|
92 |
|
Capital
expenditures
|
|
|
204 |
|
|
|
396 |
|
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 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 other 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.
Gain on disposal of
assets. Gain on disposal of assets includes the net gain or
loss on the sale or disposal of property and equipment and joint
ventures.
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 2, 2008. As disclosed in this
note, the preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions about future events that affect the
amounts reported in the consolidated financial statements and accompanying
notes. 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. Since future events and their effects cannot be
determined with absolute certainty, actual results will differ from those
estimates.
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. A 1% change in markdowns would have impacted net income by
approximately $3 million for the quarter ended May 3, 2008.
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 $8.6 million and $8.0 million for the quarters ended May 3, 2008 and
May 5, 2007, respectively. Adjustments to earnings resulting from
revisions to estimates on our sales return provision have been insignificant for
the quarters ended May 3, 2008 and May 5, 2007.
The
Company’s share of income earned under the long-term marketing and servicing
alliance with GE involving the Dillard’s branded proprietary credit cards is
included as a component of service charges and other income. The
Company received income of approximately $26.4 million and $27.8 million from GE
during the quarters ended May 3, 2008 and May 5, 2007,
respectively. Further pursuant to this agreement, the Company has no
continuing involvement other than to honor the proprietary credit cards in its
stores. Although not obligated to a specific level of marketing
commitment, the Company participates in the marketing of the proprietary credit
cards and accepts payments on the proprietary 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 revenues, 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 3, 2008 and May 5,
2007.
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 3,
2008 and May 5, 2007, insurance accruals of $55.4 million and $55.4 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 3,
2008 and May 5, 2007.
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,
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 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.
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes clarifies the accounting for uncertainty in
income tax recognized in an entity’s financial statements in accordance with
SFAS No. 109. 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 May 3, 2008 was $25.4 million,
of which $17.0 million would, if recognized, affect the effective tax
rate. The total amount of accrued interest and penalties as of May 3,
2008 was $9.1 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. The Company has taken
positions in certain taxing jurisdictions for which it is reasonably possible
that the total amounts of unrecognized tax benefits may decrease within the next
twelve months. The possible decrease could result from the
finalization of the Company’s federal and various state income tax
audits. The Company’s federal income tax audit uncertainties
primarily relate to research and development credits, while various state income
tax audit uncertainties primarily relate to income from
intangibles. The estimated range of the reasonably possible uncertain
tax benefit decrease in the next twelve months is between $1 million and $5
million.
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
6.3% as of February 2, 2008 from 5.9% as of February 3, 2007. We
believe that these assumptions have been appropriate and that, based on these
assumptions, the pension liability of $114 million was appropriately stated as
of February 2, 2008; 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 $8.0
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 3,
|
|
|
May 5,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
Service charges and other
income
|
|
|
2.2 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
102.2 |
|
|
|
102.1 |
|
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
|
66.7 |
|
|
|
63.9 |
|
Advertising, selling,
administrative
and general
expenses
|
|
|
28.7 |
|
|
|
28.3 |
|
Depreciation and
amortization
|
|
|
4.3 |
|
|
|
4.3 |
|
Rentals
|
|
|
0.9 |
|
|
|
0.7 |
|
Interest and debt expense,
net
|
|
|
1.3 |
|
|
|
1.2 |
|
Gain on disposal of assets
|
|
|
- |
|
|
|
- |
|
Asset impairment and store closing
charges
|
|
|
0.1 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in earnings of
joint
ventures
|
|
|
0.2 |
|
|
|
3.7 |
|
Income
taxes
|
|
|
- |
|
|
|
1.5 |
|
Equity in earnings of joint
ventures
|
|
|
- |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
0.2
|
% |
|
|
2.4
|
% |
Net
Sales
The
percent change by category in the Company’s sales for the three months ended May
3, 2008 compared to the three months ended May 5, 2007 is as
follows:
|
|
%
Change
|
|
|
|
|
08-07 |
|
Cosmetics
|
|
|
-2.9 |
% |
Ladies’
apparel and accessories
|
|
|
-2.8 |
% |
Juniors’
and children’s apparel
|
|
|
-7.9 |
% |
Men’s
apparel and accessories
|
|
|
-4.7 |
% |
Shoes
|
|
|
-5.5 |
% |
Home
and furniture
|
|
|
-12.4 |
% |
The
percent change by region in the Company’s total sales for the three months ended
May 3, 2008 compared to the three months ended May 5, 2007 is as
follows:
|
|
%
Change
|
|
|
|
|
08-07 |
|
Eastern
|
|
|
-6.0 |
% |
Central
|
|
|
-3.7 |
% |
Western
|
|
|
-4.4 |
% |
Net sales
decreased 5% in total stores and decreased 6% in comparable stores during the
quarter ended May 3, 2008 compared to the quarter ended May 5,
2007. All sales categories experienced declines with a significant
decline noted in the home and furniture category.
During
the quarter ended May 3, 2008, sales were above the average Company trend in the
Central region and slightly below trend in the Western region. Net
sales were below trend in the Eastern region.
Service
Charges and Other Income
|
|
Three
Months Ended
|
|
|
|
|
|
|
May
3, 2008
|
|
|
May
5, 2007
|
|
|
Dollar
Change
|
|
|
Percent
Change
|
|
Leased
department income
|
|
$ |
3.3 |
|
|
$ |
2.6 |
|
|
$ |
0.7 |
|
|
|
26.9 |
% |
Income
from GE marketing and servicing alliance
|
|
|
26.4 |
|
|
|
27.8 |
|
|
|
(1.4 |
) |
|
|
(5.0 |
) |
Other
|
|
|
8.3 |
|
|
|
6.1 |
|
|
|
2.2 |
|
|
|
36.1 |
|
Total
|
|
$ |
38.0 |
|
|
$ |
36.5 |
|
|
$ |
1.5 |
|
|
|
4.1 |
% |
Service
charges and other income for the quarter ended May 3, 2008 increased to $38.0
million or 2.2% of net sales compared to $36.5 million or 2.1% of net sales for
the quarter ended May 5, 2007. The largest single item influencing
this increase was an increase in leased department income.
Cost
of Sales
Cost of
sales as a percentage of net sales increased to 66.7% during the quarter ended
May 3, 2008 compared to 63.9% for the quarter ended May 5, 2007 resulting in
gross margin decline of 280 basis points of sales. Excluding a $4.1
million hurricane recovery gain recorded during the first quarter of fiscal 2007
that related to the losses incurred during the hurricanes of 2005, gross margin
declined 260 basis points of sales. The decline was primarily due to
the Company’s response to weak sales as it worked to control inventory levels
with significantly higher markdown activity compared to the prior year first
quarter. Inventory declined 1% in total stores and 3% in comparable
stores as of May 3, 2008 compared to May 5, 2007.
Gross
margin was up slightly in cosmetics during the first quarter of 2008 compared to
the same period in the prior year. All other merchandise categories
experienced declines in gross margin, with a slight decline in shoes and
significant declines in ladies’ apparel and accessories and juniors’ and
children’s apparel.
Advertising,
Selling, Administrative and General Expenses
Advertising,
selling, administrative and general expenses ("SG&A") declined $17.8 million
during the quarter ended May 3, 2008 compared to the quarter ended May 5, 2007
while SG&A as a percent of sales increased to 28.7% of net sales in the
current quarter from 28.3% of net sales in the prior quarter due to a lack of
sales leverage. The total dollar decrease in SG&A primarily
resulted from savings in payroll ($8.2 million), services purchased ($4.2
million), insurance ($4.1 million), advertising ($3.1 million) and supplies
($2.4 million) that were partially offset by increases in pre-opening expenses
($1.9 million) and utilities ($1.4 million).
Depreciation and Amortization
Expense
Depreciation
and amortization expense decreased to $72.0 million during the quarter ended May
3, 2008 compared to $74.9 million for the quarter ended May 5,
2007. This decrease of $2.9 million was primarily due to the
Company’s shift from purchasing new equipment to leasing new equipment which
began in the second quarter of 2007.
Rentals
Rental
expense increased $2.5 million during the quarter ended May 3, 2008 to $15.7
million compared to $13.2 million for the quarter ended May 5,
2007. The increase in rentals is mainly due to the increase of leased
equipment.
Interest
and Debt Expense, Net
Net
interest and debt expense increased to $22.1 million during the quarter ended
May 3, 2008 from $20.7 million for the quarter ended May 3,
2007. This increase of $1.4 million was primarily a result of lower
short-term investment income. Total weighted average debt outstanding
declined approximately $20.1 million during the quarter ended May 3, 2008
compared to the same period in fiscal 2007.
Asset
Impairment and Store Closing Charges
Asset
impairment and store closing charges increased to $0.9 million during the
quarter ended May 3, 2008 from $0.7 million during the quarter ended May 5,
2007.
During
the quarter ended May 3, 2008, the Company recorded a pretax charge of $0.9
million for asset impairment and store closing costs. The charge
consists of a write-off of equipment and an accrual for future rent on a
distribution center that was closed during the quarter.
During
the quarter ended May 5, 2007, the Company recorded a pretax charge of $0.7
million for asset impairment and store closing costs. The charge
consists of a write-down of property and equipment for a store that had been
closed.
Income
Taxes
The
federal and state income tax rates were approximately 37.4% and 37.2% for the
three months ended May 3, 2008 and May 5, 2007, respectively. During
the three months ended May 3, 2008, income taxes included the net increase in
FIN 48 liabilities of approximately $0.2 million and included the net
recognition of tax benefits of approximately $0.2 million due to tax
credits.
Our
income tax rate for the remainder of fiscal 2008 is dependent upon results of
operations and may change if the results for fiscal 2008 are different from
current expectations. We currently estimate that our effective rate for the
remainder of fiscal 2008 will approximate 37%.
FINANCIAL
CONDITION
Financial Position
Summary
(in thousands of
dollars)
|
|
May
3, 2008
|
|
|
February
2, 2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$ |
84,043 |
|
|
$ |
88,912 |
|
|
|
(4,869 |
) |
|
|
(5.5 |
) |
Other
short-term borrowings
|
|
|
300,000 |
|
|
|
195,000 |
|
|
|
105,000 |
|
|
|
53.8 |
|
Current
portion of long-term debt
|
|
|
100,712 |
|
|
|
196,446 |
|
|
|
(95,734 |
) |
|
|
(48.7 |
) |
Long-term
debt
|
|
|
759,981 |
|
|
|
760,165 |
|
|
|
(184 |
) |
|
|
- |
|
Guaranteed
beneficial interests
|
|
|
200,000 |
|
|
|
200,000 |
|
|
|
- |
|
|
|
- |
|
Stockholders’
equity
|
|
|
2,515,990 |
|
|
|
2,514,111 |
|
|
|
1,879 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.55 |
|
|
|
1.64 |
|
|
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
35.1 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
(in
thousands of dollars)
|
|
May
3, 2008
|
|
|
May
5, 2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Cash
and cash equivalents
|
|
$ |
84,043 |
|
|
$ |
137,915 |
|
|
|
(53,872 |
) |
|
|
(39.1 |
) |
Other
short-term borrowings
|
|
|
300,000 |
|
|
|
- |
|
|
|
300,000 |
|
|
|
- |
|
Current
portion of long-term debt
|
|
|
100,712 |
|
|
|
196,399 |
|
|
|
(95,687 |
) |
|
|
(48.7 |
) |
Long-term
debt
|
|
|
759,981 |
|
|
|
860,693 |
|
|
|
(100,712 |
) |
|
|
(11.7 |
) |
Guaranteed
beneficial interests
|
|
|
200,000 |
|
|
|
200,000 |
|
|
|
- |
|
|
|
- |
|
Stockholders’
equity
|
|
|
2,515,990 |
|
|
|
2,624,163 |
|
|
|
(108,173 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.55 |
|
|
|
1.75 |
|
|
|
|
|
|
|
|
|
Debt
to capitalization
|
|
|
35.1 |
% |
|
|
32.4 |
% |
|
|
|
|
|
|
|
|
Net cash
flows from operations decreased to $36.5 million during the quarter ended May 3,
2008 compared to $37.0 million for the quarter ended May 5,
2007. This decrease of $0.5 million was a result of lower net income,
as adjusted for non-cash items, of $38.5 million. Hurricane insurance
proceeds of $5.9 million received during the prior year relating to recovery
from damages incurred during the hurricanes of 2005 also contributed to the
decrease. These decreases were partially offset by an increase of
$43.9 million related to changes in working capital items.
GE owns
and manages the Company’s private label credit card business under a long-term
marketing and servicing alliance (“alliance”) that expires in fiscal
2014. The alliance provides for certain payments to be made by GE to
the Company, including a revenue sharing and marketing
reimbursement. The Company received income of approximately $26.4
million and $27.8 million from GE during the quarters ended May 3, 2008 and May
5, 2007, 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 $46.8 million and $109.1 million for the quarters ended May 3,
2008 and May 5, 2007, respectively. These expenditures consisted
primarily of the construction of new stores, remodeling of existing stores and
investments in technology. The Company opened the following six
locations during the quarter ended May 3, 2008:
New
Locations
|
City
|
|
Square
Feet
|
|
Market
Street at Heath Brook
|
Ocala,
Florida
|
|
|
126,000 |
|
Shops
at Lake Havasu
|
Lake
Havasu, Arizona
|
|
|
98,000 |
|
Shoppes
at River Crossing
|
Macon,
Georgia
|
|
|
162,000 |
|
Pier
Park
|
Panama
City, Florida
|
|
|
126,000 |
|
Uptown
Village at Cedar Hill
|
Cedar
Hill, Texas
|
|
|
145,000 |
|
Edgewater
Mall*
|
Biloxi,
Mississippi
|
|
|
180,000 |
|
Total
new square footage
|
|
|
|
837,000 |
|
*This
store was previously closed as a result of Hurricane Katrina.
Capital
expenditures for fiscal 2008 are expected to be approximately $204 million
compared to actual expenditures of $396 million during fiscal
2007. The reduction in capital expenditures is a part of the
Company’s plan to control costs in 2008 given the weak economic
environment.
The
Company plans to open four additional locations totaling 450,000 square feet,
net of replaced square footage, and expand two locations totaling 115,000 square
feet. The Company closed a clearance center in Jonesboro, Arkansas
totaling 75,000 square feet during the quarter ended May 3, 2008. The
Company has announced the plans to close the following ten under-performing
stores during fiscal 2008:
Locations
to Close
|
City
|
|
Square
Feet
|
|
Turfland
Mall
|
Lexington,
Kentucky
|
|
|
214,000 |
|
Chesterfield
Town Center
|
Richmond,
Virginia
|
|
|
110,000 |
|
Greeley
Mall
|
Greeley,
Colorado
|
|
|
124,000 |
|
McFarland
Mall
|
Tuscaloosa,
Alabama
|
|
|
180,000 |
|
Pine
Ridge Mall
|
Pocatello,
Idaho
|
|
|
120,000 |
|
Towne
Mall
|
Franklin,
Ohio
|
|
|
113,000 |
|
Knoxville
Center
|
Knoxville,
Tennessee
|
|
|
200,000 |
|
Hickory
Hollow Mall
|
Antioch,
Tennessee
|
|
|
115,000 |
|
Rivercenter
|
San
Antonio, Texas
|
|
|
120,000 |
|
Eastland
Mall (clearance center)
|
Charlotte,
North Carolina
|
|
|
162,000 |
|
Total
square footage to close
|
|
|
|
1,458,000 |
|
The
Company will consider the closure of additional facilities in fiscal 2008 where
conditions warrant.
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 were used for capital
expenditures to repair and reconstruct damaged stores during the remainder of
fiscal 2007.
The
Company had cash on hand of $84 million as of May 3, 2008. As part of
its overall liquidity management strategy and for peak working capital
requirements, the Company has a $1.2 billion credit facility. Limited
to 85% of the inventory of certain Company subsidiaries, availability for
borrowings and letter of credit obligations under the credit agreement was
approximately $1.2 billion at May 3, 2008. Borrowings of $300 million
were outstanding and letters of credit totaling $67.5 million were issued under
this credit agreement leaving unutilized availability under the facility of $818
million at May 3, 2008.
Cash
provided by financing activities for the quarter ended May 3, 2008 totaled $5.4
million compared to cash used of $0.1 million for the quarter ended May 5,
2007. This increase of cash flow was primarily a result of an
increase in short-term borrowings of $105.0 million during the current quarter
under the Company’s credit facility. These increases were partially
offset by principal payments of the Company’s long-term debt of $96.6 million at
their normal maturities. No treasury stock was
repurchased during the quarters ended May 3, 2008 or May 5, 2007.
During
fiscal 2008, 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. The Company expects peak funding
requirements of approximately $600 million during fiscal
2008. Depending on conditions in the capital markets and other
factors, the Company will from time to time consider possible other 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 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 2,
2008.
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 March 2008, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 161, Disclosures about
Derivative Instruments and Hedging Activities—an Amendment of FASB
Statement No. 133 (“SFAS 161”). SFAS 161 requires entities to provide enhanced
disclosures related to how an entity uses derivative instruments, how
derivatives are accounted for under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities and how derivative instruments and the
related hedged items impact an entity’s financial
statements. The
provisions of SFAS
161 are effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. The Company expects that the adoption
of SFAS 161 will not have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”). SFAS 141(R)'s objective is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after December 31,
2008. The Company expects that the adoption of SFAS 141(R) will not
have a material impact on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS
160”). SFAS 160's objective is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will be
effective for fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company
expects that the adoption of SFAS 160 will not have a material impact on its
consolidated financial statements.
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 was effective February 3, 2008, and the
Company has elected not to measure any financial instruments or certain other
items at fair value.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”).
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
concluded in those other accounting pronouncements that fair value is the
relevant measurement attribute. This statement was effective for financial
assets and liabilities in financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of this portion of the
statement did not have a material impact on the Company’s consolidated financial
statements.
In
February 2008, the FASB issued FSP SFAS 157-2, Effective Date for FASB Statement
No. 157. This FSP permits the delayed application of SFAS 157
for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15,
2008. The Company has chosen to adopt SFAS 157 in accordance with the
guidance of FSP SFAS 157-2 as stated above.
FORWARD-LOOKING
INFORMATION
This
report contains certain forward-looking statements. The following are or
may constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995: (a) Words such as “may,” “will,”
“could,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,”
“plan,” “estimate,” “continue,” or the negative or other variations thereof, and
(b) statements regarding matters that are not historical facts. Statements
made in this report regarding the Company’s plans to close under-performing
stores, reduce capital expenditures, reduce expenses, make changes to its
merchandise mix, and the Company’s estimates of depreciation and amortization,
rental expense, interest and debt expense, capital expenditures, peak borrowing
requirements and expense savings for fiscal 2008 are some examples of forward
looking statements. The Company cautions that forward-looking statements
contained in this report are based on estimates, projections, beliefs and
assumptions of management and information available to 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 in forward-looking
statements made by the Company and its management as a result of a number of
risks, uncertainties and assumptions. Representative examples of those
factors include (without limitation) 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, including the effect of changes in prices
and availability of oil and natural gas; 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, debt levels and their ability to meet credit obligations;
adequate and stable availability of materials, production facilities and labor
from which the Company sources its merchandise; changes in operating expenses,
including employee wages, commission structures and related benefits; system
failures or data security; possible future acquisitions of store properties from
other department store operators; 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; potential disruption from
terrorist activity and the effect on ongoing consumer confidence; epidemic,
pandemic or other public health issues; 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. The Company’s filings with the Securities and
Exchange Commission, including its report on From 10-K for the fiscal year ended
February 2, 2008, contain other information on factors that may affect financial
results or cause actual results to differ materially from forward-looking
statements.
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 2,
2008.
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
3, 2008, 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 3, 2008 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
From time
to time, we are involved in 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 10, 2008, 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 2, 2008.
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
3, 2008 through March 1, 2008
|
-
|
$-
|
-
|
$200,000,000
|
March
2, 2008 through April 5, 2008
|
-
|
-
|
-
|
200,000,000
|
April
6, 2008 through May 3, 2008
|
-
|
-
|
-
|
200,000,000
|
Total
|
-
|
$-
|
-
|
$200,000,000
|
In
November 2007, the Company’s 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
3,
|
|
May
5,
|
|
February
2,
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
January
31,
|
2008
|
|
2007
|
|
2008
|
|
2007*
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.14
|
|
3.42
|
|
1.54
|
|
3.34
|
|
2.01
|
|
2.12
|
|
1.05
|
* 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 10,
2008
|
/s/ James I.
Freeman
|
|
James
I. Freeman
|
|
Senior
Vice-President & Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|