Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended October 29, 2011

 

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

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS  72201

(Address of principal executive offices)

(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. x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o 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 x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

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 November 26, 2011

46,217,724

 

 

CLASS B COMMON STOCK as of November 26, 2011

4,010,929

 

 

 

 



Table of Contents

 

Index

 

DILLARD’S, INC.

 

 

Page
Number

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 29, 2011, January 29, 2011 and October 30, 2010

3

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings for the Three and Nine Months Ended October 29, 2011 and October 30, 2010

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 29, 2011 and October 30, 2010

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 6.

Exhibits

30

 

 

SIGNATURES

30

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

 

 

 

October 29,

 

January 29,

 

October 30,

 

 

 

2011

 

2011

 

2010

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,383

 

$

343,291

 

$

167,119

 

Restricted cash

 

24,901

 

 

 

Accounts receivable

 

20,262

 

25,950

 

51,421

 

Merchandise inventories

 

1,756,526

 

1,290,147

 

1,708,504

 

Other current assets

 

63,069

 

42,538

 

66,065

 

 

 

 

 

 

 

 

 

Total current assets

 

1,971,141

 

1,701,926

 

1,993,109

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

2,476,363

 

2,595,514

 

2,649,718

 

Other assets

 

269,626

 

76,726

 

69,264

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,717,130

 

$

4,374,166

 

$

4,712,091

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable and accrued expenses

 

$

1,028,555

 

$

689,281

 

$

1,049,231

 

Current portion of long-term debt

 

57,219

 

49,166

 

49,145

 

Current portion of capital lease obligations

 

2,279

 

2,184

 

2,153

 

Other short-term borrowings

 

142,000

 

 

 

Federal and state income taxes including current deferred taxes

 

68,996

 

90,581

 

29,791

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,299,049

 

831,212

 

1,130,320

 

 

 

 

 

 

 

 

 

Long-term debt

 

634,812

 

697,246

 

697,704

 

Capital lease obligations

 

9,723

 

11,383

 

11,921

 

Other liabilities

 

206,534

 

205,916

 

211,247

 

Deferred income taxes

 

333,055

 

341,689

 

344,334

 

Subordinated debentures

 

200,000

 

200,000

 

200,000

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

1,225

 

1,217

 

1,211

 

Additional paid-in capital

 

828,796

 

805,422

 

785,411

 

Accumulated other comprehensive loss

 

(16,597

)

(17,830

)

(20,870

)

Retained earnings

 

2,968,076

 

2,653,437

 

2,546,338

 

Less treasury stock, at cost

 

(1,747,543

)

(1,355,526

)

(1,195,525

)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

2,033,957

 

2,086,720

 

2,116,565

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,717,130

 

$

4,374,166

 

$

4,712,091

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(Unaudited)

(In Thousands, Except Per Share Data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net sales

 

$

1,382,612

 

$

1,344,118

 

$

4,293,557

 

$

4,186,624

 

Service charges and other income

 

33,926

 

28,919

 

96,790

 

89,864

 

 

 

 

 

 

 

 

 

 

 

 

 

1,416,538

 

1,373,037

 

4,390,347

 

4,276,488

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

879,997

 

857,474

 

2,741,282

 

2,702,171

 

Advertising, selling, administrative and general expenses

 

404,766

 

398,494

 

1,190,070

 

1,184,190

 

Depreciation and amortization

 

64,734

 

64,953

 

192,862

 

193,124

 

Rentals

 

11,229

 

11,641

 

34,798

 

36,598

 

Interest and debt expense, net

 

17,750

 

18,043

 

54,447

 

55,361

 

(Gain) loss on disposal of assets

 

(1,456

)

934

 

(3,847

)

(3,292

)

Asset impairment and store closing charges

 

 

 

1,200

 

2,208

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and income on and equity in (losses) of joint ventures

 

39,518

 

21,498

 

179,535

 

106,128

 

Income taxes (benefit)

 

(188,360

)

6,035

 

(138,640

)

33,075

 

Income on and equity in (losses) of joint ventures

 

293

 

(1,082

)

4,238

 

(3,010

)

 

 

 

 

 

 

 

 

 

 

Net income

 

228,171

 

14,381

 

322,413

 

70,043

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

2,742,624

 

2,534,594

 

2,653,437

 

2,484,447

 

Cash dividends declared

 

(2,719

)

(2,637

)

(7,774

)

(8,152

)

 

 

 

 

 

 

 

 

 

 

Retained earnings at end of period

 

$

2,968,076

 

$

2,546,338

 

$

2,968,076

 

$

2,546,338

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

4.38

 

$

0.22

 

$

5.90

 

$

1.02

 

Diluted

 

$

4.31

 

$

0.22

 

$

5.80

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.05

 

$

0.04

 

$

0.14

 

$

0.12

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in Thousands)

 

 

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

322,413

 

$

70,043

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of property and deferred financing costs

 

194,272

 

194,520

 

Gain on disposal of assets

 

(3,847

)

(3,292

)

Gain on repurchase of debt

 

(173

)

(21

)

Excess tax benefits from share-based compensation

 

(10,171

)

(353

)

Asset impairment and store closing charges

 

1,200

 

2,208

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable

 

5,688

 

11,801

 

Increase in merchandise inventories

 

(466,379

)

(407,824

)

Increase in other current assets

 

(20,531

)

(22,901

)

(Increase) decrease in other assets

 

(205,503

)

5,411

 

Increase in trade accounts payable and accrued expenses and other liabilities

 

338,632

 

373,373

 

Decrease in income taxes payable

 

(20,048

)

(64,054

)

 

 

 

 

 

 

Net cash provided by operating activities

 

135,553

 

158,911

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(80,304

)

(73,750

)

Proceeds from disposal of assets

 

22,966

 

6,094

 

Restricted cash

 

(24,901

)

 

Distribution from joint venture

 

2,481

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(79,758

)

(67,656

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Purchase of treasury stock

 

(392,388

)

(241,574

)

Principal payments on long-term debt and capital lease obligations

 

(55,773

)

(16,522

)

Cash dividends paid

 

(7,533

)

(8,472

)

Increase in short-term borrowings

 

142,000

 

 

Proceeds from stock issuance

 

10,820

 

386

 

Excess tax benefits from share-based compensation

 

10,171

 

353

 

 

 

 

 

 

 

Net cash used in financing activities

 

(292,703

)

(265,829

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(236,908

)

(174,574

)

Cash and cash equivalents, beginning of period

 

343,291

 

341,693

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

106,383

 

$

167,119

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Accrued capital expenditures

 

$

6,796

 

$

2,500

 

Stock awards

 

2,762

 

2,292

 

Capital lease transactions

 

 

3,966

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

DILLARD’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included.  Operating results for the three and nine months ended October 29, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 28, 2012 due to the seasonal nature of the business.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed with the SEC on March 23, 2011.

 

Restricted cash — During the three months ended October 29, 2011, our wholly-owned captive insurance subsidiary entered into an agreement in which $24.9 million was placed into a trust for the benefit of a third party insurance provider.  The purpose of the trust (and additional standby letters of credit of $24.9 million) is to collateralize a third party insurer for workers’ compensation and general liability obligations under casualty insurance programs for policy years through fiscal 2011.  Prior to this change, all claims were secured by standby letters of credit.

 

Reclassifications — Certain items have been reclassified from their prior year classifications to conform to the current year presentation.  These reclassifications had no effect on net income or stockholders’ equity as previously reported.

 

Note 2.  Business Segments

 

The Company operates in two reportable segments:  the operation of retail department stores (“retail operations”) and a general contracting construction company (“construction”).

 

For the Company’s retail operations, the Company determined its operating segments on a store by store basis.  Each store’s operating performance has been aggregated into one reportable segment.  The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics, class of consumer, nature of products and distribution methods. Revenues from external customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue. Across all stores, the Company operates one store format under the Dillard’s name where each store offers the same general mix of merchandise with similar categories and similar customers.  The Company believes that disaggregating its operating segments would not provide meaningful additional information.

 

6



Table of Contents

 

The following tables summarize certain segment information, including the reconciliation of those items to the Company’s consolidated operations:

 

(in thousands of dollars)

 

Retail
Operations

 

Construction

 

Consolidated

 

Three Months Ended October 29, 2011:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,366,362

 

$

16,250

 

$

1,382,612

 

Gross profit

 

502,140

 

475

 

502,615

 

Depreciation and amortization

 

64,689

 

45

 

64,734

 

Interest and debt expense (income), net

 

17,791

 

(41

)

17,750

 

Income (loss) before income taxes and income on and equity in (losses) of joint ventures

 

40,041

 

(523

)

39,518

 

Income on and equity in (losses) of joint ventures

 

293

 

 

293

 

Total assets

 

4,686,248

 

30,882

 

4,717,130

 

 

 

 

 

 

 

 

 

Three Months Ended October 30, 2010:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,320,568

 

$

23,550

 

$

1,344,118

 

Gross profit

 

485,629

 

1,015

 

486,644

 

Depreciation and amortization

 

64,906

 

47

 

64,953

 

Interest and debt expense (income), net

 

18,118

 

(75

)

18,043

 

Income (loss) before income taxes and income on and equity in (losses) of joint ventures

 

21,586

 

(88

)

21,498

 

Income on and equity in (losses) of joint ventures

 

(1,082

)

 

(1,082

)

Total assets

 

4,644,060

 

68,031

 

4,712,091

 

 

 

 

 

 

 

 

 

Nine Months Ended October 29, 2011:

 

 

 

 

 

 

 

Net sales from external customers

 

$

4,247,462

 

$

46,095

 

$

4,293,557

 

Gross profit

 

1,551,936

 

339

 

1,552,275

 

Depreciation and amortization

 

192,726

 

136

 

192,862

 

Interest and debt expense (income), net

 

54,567

 

(120

)

54,447

 

Income (loss) before income taxes and income on and equity in (losses) of joint ventures

 

182,733

 

(3,198

)

179,535

 

Income on and equity in (losses) of joint ventures

 

4,238

 

 

4,238

 

Total assets

 

4,686,248

 

30,882

 

4,717,130

 

 

 

 

 

 

 

 

 

Nine Months Ended October 30, 2010:

 

 

 

 

 

 

 

Net sales from external customers

 

$

4,108,112

 

$

78,512

 

$

4,186,624

 

Gross profit

 

1,483,197

 

1,256

 

1,484,453

 

Depreciation and amortization

 

192,987

 

137

 

193,124

 

Interest and debt expense (income), net

 

55,520

 

(159

)

55,361

 

Income (loss) before income taxes and income on and equity in (losses) of joint ventures

 

107,908

 

(1,780

)

106,128

 

Income on and equity in (losses) of joint ventures

 

(3,010

)

 

(3,010

)

Total assets

 

4,644,060

 

68,031

 

4,712,091

 

 

Intersegment construction revenues of $10.8 million and $25.8 million for the three and nine months ended October 29, 2011, respectively, and intersegment construction revenues of $9.5 million and $22.2 million for the three and nine months ended October 30, 2010, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.

 

7



Table of Contents

 

Note 3.  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 nine months ended October 29, 2011 and October 30, 2010.

 

Stock option transactions for the three months ended October 29, 2011 are summarized as follows:

 

 

 

 

 

Weighted Average

 

Stock Options

 

Shares

 

Exercise Price

 

Outstanding, beginning of period

 

2,270,000

 

$

25.74

 

Granted

 

 

 

Exercised

 

(25,000

)

25.74

 

Expired

 

 

 

Outstanding, end of period

 

2,245,000

 

$

25.74

 

Options exercisable at period end

 

2,245,000

 

$

25.74

 

 

During the three months ended October 29, 2011, the intrinsic value of stock options exercised was $0.6 million.  At October 29, 2011, the intrinsic value of outstanding and exercisable stock options was $58.5 million.

 

Note 4.  Asset Impairment and Store Closing Charges

 

There were no asset impairment and store closing costs recorded during the three months ended October 29, 2011 and October 30, 2010.

 

During the nine months ended October 29, 2011, the Company recorded a pretax charge of $1.2 million for asset impairment and store closing costs.  The charge was for the write-down of a property currently held for sale.

 

During the nine months ended October 30, 2010, the Company recorded a pretax charge of $2.2 million for asset impairment and store closing costs.  The charge was for the write-down of a property currently held for sale.

 

Following is a summary of the activity in the reserve established for store closing charges for the nine months ended October 29, 2011:

 

(in thousands)

 

Balance
Beginning
of Period

 

Adjustments
and Charges*

 

Cash Payments

 

Balance
End of Period

 

Rent, property taxes and utilities

 

$

1,360

 

$

880

 

$

1,243

 

$

997

 

 


*included in rentals

 

Reserve amounts are included in trade accounts payable and accrued expenses and other liabilities.

 

8



Table of Contents

 

Note 5.  Earnings Per Share Data

 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

228,171

 

$

14,381

 

$

322,413

 

$

70,043

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

52,107

 

65,923

 

54,611

 

68,635

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

4.38

 

$

0.22

 

$

5.90

 

$

1.02

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income

 

$

228,171

 

$

14,381

 

$

322,413

 

$

70,043

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

52,107

 

65,923

 

54,611

 

68,635

 

Dilutive effect of stock-based compensation

 

843

 

 

963

 

 

Total weighted average equivalent shares

 

52,950

 

65,923

 

55,574

 

68,635

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

4.31

 

$

0.22

 

$

5.80

 

$

1.02

 

 

Total stock options outstanding were 2,245,000 and 4,009,369 at October 29, 2011 and October 30, 2010, respectively.  Of these, options to purchase 4,009,369 shares of Class A Common Stock at prices ranging from $24.73 to $26.57 were outstanding at October 30, 2010 but were not included in the computations of diluted earnings per share because the effect of their inclusion would be antidilutive.  A negligible amount of dilution, included in the weighted average shares computation for the nine months ended October 30, 2010, was insignificant for presentation in the table above.

 

Note 6.  Comprehensive Income

 

The following table shows the computation of comprehensive income (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

228,171

 

$

14,381

 

$

322,413

 

$

70,043

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Amortization of retirement plan and other retiree benefit adjustments, net of taxes

 

411

 

476

 

1,233

 

1,428

 

Total comprehensive income

 

$

228,582

 

$

14,857

 

$

323,646

 

$

71,471

 

 

Note 7.  Commitments and Contingencies

 

On June 10, 2009, a lawsuit was filed in the Circuit Court of Pulaski County, Arkansas styled Billy K. Berry, Derivatively on behalf of Dillard’s, Inc. v. William Dillard II et al, Case Number CV-09-4227-2 (the “Berry” case). The lawsuit generally sought return of monies and alleged that certain officers and directors of the Company had been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On February 18, 2010, the Circuit Court entered an “Order of Dismissal with Prejudice and Final Judgment” dismissing the case as to all parties defendant.  The Circuit Court’s judgment was affirmed by the

 

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Arkansas Court of Appeals.  Plaintiff appealed the decision of the Court of Appeals to the Arkansas Supreme Court where, on September 15, 2011, that appeal was denied.

 

On May 27, 2009, a lawsuit was filed in the United States District Court for the Eastern District of Arkansas styled Steven Harben, Derivatively on Behalf of Nominal Defendant Dillard’s, Inc. v. William Dillard II et al, Case Number 4:09-IV-395.  The lawsuit generally sought return of monies and alleged that certain officers and directors of the Company had been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On September 30, 2010, the District Court dismissed the lawsuit in its entirety with prejudice but granted plaintiff’s request to stay final judgment pending the exhaustion of all appeals in the Berry case, discussed above.  On September 23, 2011, the District Court entered Judgment dismissing the case after the Arkansas Supreme Court denied the Berry appeal.  The period for any appeal to the United States Court of Appeals for the Eighth Circuit has expired.

 

Accordingly, each of these cases has been concluded.

 

Various other 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 have a material adverse effect on the Company’s financial position, cash flows or results of operations.

 

At October 29, 2011, letters of credit totaling $55.8 million were issued under the Company’s revolving credit facility.

 

Note 8.  Benefit Plans

 

The Company has an unfunded, nonqualified defined benefit plan (“Pension Plan”) for its officers.  The Pension 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 actuarial assumptions used to calculate pension costs are reviewed annually.  The Company made contributions to the Pension Plan of $1.2 million and $3.3 million during the three and nine months ended October 29, 2011, respectively.  The Company expects to make a contribution to the Pension Plan of approximately $1.1 million for the remainder of fiscal 2011.

 

The components of net periodic benefit costs are as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

831

 

$

721

 

$

2,494

 

$

2,165

 

Interest cost

 

1,800

 

1,817

 

5,400

 

5,451

 

Net actuarial loss

 

492

 

594

 

1,475

 

1,782

 

Amortization of prior service cost

 

157

 

157

 

470

 

470

 

Net periodic benefit costs

 

$

3,280

 

$

3,289

 

$

9,839

 

$

9,868

 

 

Note 9.  Revolving Credit Agreement

 

At October 29, 2011, the Company maintained a $1.0 billion revolving credit facility (“credit agreement”) with JPMorgan Chase Bank (“JPMorgan”) as the lead 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 starting at either JPMorgan’s Base Rate minus 0.5% or LIBOR plus 1.0% (1.25% at October 29, 2011) 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 $1.0 billion at October 29, 2011.  Borrowings of $142.0 million were outstanding and letters of credit totaling $55.8 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $802 million at October 29, 2011.  There are no financial covenant

 

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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.  Stock Repurchase Program

 

May 2011 Stock Plan

In May 2011, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended plan (“May 2011 Stock Plan”).  This authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 (“Exchange Act”) or through privately negotiated transactions.  During the three months ended October 29, 2011, the Company repurchased 2.9 million shares for $123.7 million at an average price of $42.40 per share.  At October 29, 2011, $126.3 million in share repurchase authorization remained under the May 2011 Stock Plan.

 

February 2011 Stock Plan

In February 2011, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended plan (“February 2011 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions.  During the nine months ended October 29, 2011, the Company repurchased 6.0 million shares for $250.0 million at an average price of $41.93 per share, which completed the authorization under the February 2011 Stock Plan.

 

2010 Stock Plan

In August 2010, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended plan (“2010 Stock Plan”).  During the three months ended October 30, 2010, the Company repurchased 2.9 million shares of stock under the 2010 Stock Plan for approximately $71.3 million at an average price of $24.86 per share.  During the nine months ended October 29, 2011, the Company repurchased 0.4 million shares for $18.7 million at an average price of $42.19 per share, which completed the remaining authorization under the 2010 Stock Plan.

 

2007 Stock Plan

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 under an open-ended plan (“2007 Stock Plan”).  During the nine months ended October 30, 2010, the Company repurchased 7.2 million shares of stock for approximately $182.6 million at an average price of $25.39 per share, which completed the remaining authorization under the 2007 Stock Plan.

 

Note 11.    Income Taxes

 

The total amount of unrecognized tax benefits as of October 29, 2011 and October 30, 2010 was $8.2 million and $14.0 million, respectively, of which $5.6 million and $10.3 million, respectively, would, if recognized, affect the effective tax rate.  The Company classifies accrued interest expense and penalties relating to income tax in the condensed consolidated financial statements as income tax expense.  The total accrued interest and penalties in the condensed consolidated balance sheets as of October 29, 2011 and October 30, 2010 was $3.4 million and $4.6 million, respectively.  The estimated range of the reasonably possible unrecognized tax benefit decrease in the next twelve months is between $0.5 million and $1.5 million.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

In January 2011, the Company formed a wholly-owned subsidiary intended to operate as a real estate investment trust (“REIT”) and transferred certain properties to this subsidiary.  The Company entered into this transaction in order to enhance its financial flexibility by providing additional sources of liquidity.  At the time, the Company believed that a tax election might be available to the Company that would result in a taxable gain on the transfer of these properties to the REIT.  In May 2011, the Company requested that the Internal Revenue Service (“IRS”) review the REIT transaction and a potential tax election available to the Company, through the IRS’s voluntary Pre-Filing Agreement Program (“PFA”).  Through the PFA, in September 2011, the Company and the IRS entered into a Closing Agreement On Final Determination Covering Specific Matters under which agreement the

 

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IRS agreed with the Company regarding the tax treatment of the transfer of the properties to the REIT and the availability of the tax election to the Company.  Based on the agreement with the IRS, during the three months ended October 29, 2011 the Company determined to make the tax election in its tax return for the fiscal year ended January 29, 2011 (fiscal 2010) which was filed during the quarter.  This tax election increases the tax basis of the properties transferred to the REIT to their fair values at the date of the transfer.  The income tax that would otherwise be payable because of the gain recognized by this election was largely reduced by the utilization of a capital loss carryforward, that would otherwise have expired as of January 29, 2011, against a portion of the recognized gain.  Because of the Company’s past uncertainty regarding the incurrence of capital gain income, the deferred tax asset associated with that capital loss carryforward had been offset by a full valuation allowance since its recognition in fiscal 2005.  During the three months ended October 29, 2011, income taxes included the recognition of approximately $201.6 million in tax benefit due to the reversal of the valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of the properties to the REIT.  Approximately $134.4 million of the tax benefit relates to increased basis in depreciable property while approximately $67.2 million of the benefit relates to increased basis in land.  Due to the increased tax basis of the depreciable properties transferred to the REIT, the Company will recognize increased tax depreciation deductions in the future which are expected to yield cash tax benefits of approximately $5 million annually in years one through twenty and approximately $2 million annually in years twenty-one through forty beginning with the year ending January 28, 2012.  Due to the uncertainty surrounding whether the REIT will dispose of any of its land assets in the future, the Company cannot estimate when or if the cash tax benefits related to the increased basis in land will be received.

 

During the three months ended October 29, 2011, income taxes included the recognition of:  a tax benefit of approximately $201.6 million due to the reversal of a valuation allowance related to a capital loss carryforward; tax benefits related to federal tax credits; and net decreases in unrecognized tax benefits, interest and penalties.  During the three months ended October 30, 2010, income taxes included the recognition of tax benefits primarily due to a decrease in a capital loss valuation allowance.

 

During the nine months ended October 29, 2011, income taxes included the recognition of:  a tax benefit of approximately $201.6 million due to the reversal of a valuation allowance related to a capital loss carryforward; tax benefits related to federal tax credits; net decreases in unrecognized tax benefits, interest and penalties; decreases in net operating loss valuation allowances; and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.  Additionally, during the nine months ended October 29, 2011, the IRS concluded its examination of the Company’s federal income tax returns for the fiscal tax years 2008 through 2009, and no significant changes occurred in these tax years as a result of such examination.  During the nine months ended October 30, 2010, income taxes included the recognition of tax benefits primarily due to a state administrative settlement, a decrease in a capital loss valuation allowance, and federal tax credit refund claims.

 

Note 12.  Income on Joint Venture

 

During the nine months ended October 29, 2011, the Company received a distribution of excess cash from a mall joint venture of $6.7 million and recorded a related gain of $4.2 million in income on and equity in (losses) of joint ventures.

 

Note 13.  (Gain) Loss on Disposal of Assets

 

During the three months ended October 29, 2011, the Company received proceeds of $10.3 million from the sale of two former retail store locations, resulting in gains totaling $1.3 million that were recorded in (gain) loss on disposal of assets.

 

Additionally, during the nine months ended October 29, 2011, the Company received proceeds of $11.0 million from the sale of an interest in a mall joint venture, resulting in a gain of $2.1 million that was recorded in (gain) loss on disposal of assets.

 

During the three months ended October 30, 2010, the Company received proceeds of $1.9 million from the sale of a former retail store location, resulting in a loss of $1.1 million that was recorded in (gain) loss on disposal of assets.

 

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Additionally, during the nine months ended October 30, 2010, the Company received proceeds of $4.0 million from the sale of a former retail store location, resulting in a gain of $4.0 million that was recorded in (gain) loss on disposal of assets.

 

Note 14.  Note Repurchase

 

During the three months ended October 29, 2011, the Company repurchased $5.7 million face amount of 6.625% notes with an original maturity on January 15, 2018.  This repurchase resulted in a pretax gain of approximately $0.2 million which was recorded in net interest and debt expense during the three months ended October 29, 2011.

 

During the three months ended October 30, 2010, the Company repurchased $1.2 million face amount of 7.13% notes with an original maturity on August 1, 2018.  This repurchase resulted in a pretax gain of approximately $21 thousand which was recorded in net interest and debt expense during the three months ended October 30, 2010.

 

Note 15.  Fair Value Disclosures

 

The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange.

 

The fair value of the Company’s long-term debt and subordinated debentures is based on market prices or dealer quotes (for publicly traded unsecured notes) and on discounted future cash flows using current interest rates for financial instruments with similar characteristics and maturities (for bank notes and mortgage notes).

 

The fair value of the Company’s cash and cash equivalents, restricted cash, accounts receivable and other short-term borrowings approximates their carrying values at October 29, 2011 due to the short-term maturities of these instruments.  The fair value of the Company’s long-term debt at October 29, 2011 was approximately $679 million.  The carrying value of the Company’s long-term debt at October 29, 2011 was $692 million.  The fair value of the Company’s subordinated debentures at October 29, 2011 was approximately $194 million.  The carrying value of the Company’s subordinated debentures at October 29, 2011 was $200 million.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The FASB’s accounting guidance utilizes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels:

 

·        Level 1:  Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities

 

·        Level 2:  Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active

 

·        Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions

 

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Basis of Fair Value Measurements

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

Fair Value

 

Markets for

 

Observable

 

Unobservable

 

 

 

of Assets

 

Identical Items

 

Inputs

 

Inputs

 

(in thousands)

 

(Liabilities)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

 

 

 

 

 

 

 

As of October 29, 2011

 

$

17,348

 

$

 

$

 

$

17,348

 

As of January 29, 2011

 

27,548

 

 

 

27,548

 

 

 

 

 

 

 

 

 

 

 

As of October 30, 2010

 

$

28,748

 

$

 

$

 

$

28,748

 

As of January 30, 2010

 

33,956

 

 

 

33,956

 

 

During the nine months ended October 29, 2011, long-lived assets held for sale with a carrying value of $27.5 million were written down to their fair value of $26.3 million, resulting in an impairment charge of $1.2 million, which was included in earnings for the period. During the nine months ended October 29, 2011, the Company sold two former retail store locations with carrying values totaling $9.0 million.

 

During the nine months ended October 30, 2010, long-lived assets held for sale with a carrying value of $34.0 million were written down to their fair value of $31.7 million, resulting in an impairment charge of $2.2 million, which was included in earnings for the period.  The inputs used to calculate the fair value of these long-lived assets in both periods included selling prices from commercial real estate transactions for similar assets in similar markets that we estimated would be used by a market participant in valuing these assets.  During the nine months ended October 30, 2010, the Company also sold a former retail store location with a carrying value of $3.0 million.

 

Note 16.  Recently Issued Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS.  This update is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively.  The Company does not expect the adoption of ASU No. 2011-04 to have a material impact on the Company’s financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, to make the presentation of items within other comprehensive income (“OCI”) more prominent.  The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders’ equity.  This new update is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  The adoption of this new standard may change the order in which certain financial statements are presented and will provide additional detail in those financial statements when applicable, but will not have any other impact on the Company’s financial statements.

 

Note 17.  Subsequent Event

 

The Company reached an agreement effective November 30, 2011 with i2 Technologies, Inc. (“i2”), a subsidiary of JDA Software Group, Inc. (“JDA”), to settle a lawsuit filed by Dillard’s against i2 over software sold to Dillard’s by i2 in 2000, prior to JDA’s acquisition of i2 in 2010.  Pursuant to the agreement, i2 paid Dillard’s $57.0 million during the three months ending January 28, 2012.  After providing for income taxes and settlement related expenses, the Company expects to record approximately $28.5 million of net income from this settlement during the three months ending January 28, 2012.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended January 29, 2011.

 

EXECUTIVE OVERVIEW

 

Improved sales headlined our third quarter operating performance of fiscal 2011, contributing to record-setting earnings per share.  Extending the sales momentum from our first two quarters, comparable store sales for the quarter ended October 29, 2011 increased 5% over the comparable prior year quarter as gross margin rates were held and operating expenses were leveraged.  Net income for the quarter increased to $228.2 million, or $4.31 per share—our highest historical third quarter earnings per share—compared to $14.4 million, or $0.22 per share, in the comparable prior year quarter.

 

Included in net income for the quarter ended October 29, 2011 are:

·                  a $201.6 million tax benefit ($3.81 per share) due to a reversal of a valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of properties to our REIT and

·                  a $1.3 million pretax gain ($0.9 million after tax or $0.02 per share) related to the sale of two former retail store locations.

 

Included in net income for the quarter ended October 30, 2010 is a $1.1 million pretax loss ($0.7 million after tax or $0.02 per share) related to the sale of a closed store and a $1.2 million income tax benefit ($0.02 per share) for a decrease in a capital loss valuation allowance.

 

Highlights of the quarter ended October 29, 2011 included:

·                  record earnings per share for a third quarter of $4.31 per share compared to $0.22 per share for the prior year third quarter.  Net income was $228.2 million for the quarter ended October 29, 2011 compared to net income of $14.4 million for the quarter ended October 30, 2010.

·                  a comparable store sales increase of 5% while maintaining gross margin from retail operations at 36.8% of sales and

·                  continued operating expense control, decreasing 30 basis points of sales.

·                  the repurchase of approximately $123.7 million (2.9 million shares) of Class A Common Stock.

 

As of October 29, 2011, we had working capital of $672.1 million, cash and cash equivalents of $106.4 million and $1,034.0 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $135.6 million for the nine months ended October 29, 2011.  We operated 304 total stores, including 16 clearance centers, and one internet store as of October 29, 2011, a decrease of 6 stores from the same period last year.

 

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Key Performance Indicators

 

We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:

 

 

 

Three Months Ended*

 

 

 

October 29,
2011

 

October 30,
2010

 

Net sales (in millions)

 

$

1,382.6

 

$

1,344.1

 

Net sales trend

 

3

%

(1

)%

Gross profit (in millions)

 

$

502.6

 

$

486.6

 

Gross profit as a percentage of net sales

 

36.4

%

36.2

%

Cash flow from operations (in millions)

 

$

135.6

 

$

158.9

 

Total retail store count at end of period

 

304

 

310

 

Retail sales per square foot

 

$

26

 

$

25

 

Retail store sales trend

 

4

%

0

%

Comparable retail store sales trend

 

5

%

1

%

Comparable retail store inventory trend

 

4

%

(2

)%

Retail merchandise inventory turnover

 

2.4

 

2.4

 

 


*Cash flow from operations data is for the nine months ended October 29, 2011 and October 30, 2010.

 

General

 

Net sales.  Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company.  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 during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; and sales in clearance centers.

 

Service charges and other income.  Service charges include income generated through the long-term marketing and servicing alliance (“Alliance”) with GE Consumer Finance (“GE”), which owns and manages the Dillard’s branded proprietary credit cards.  Other income includes 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 margin maintenance allowances and direct payroll for salon personnel.  Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.

 

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, term note and subordinated debentures, amortization of financing costs and interest on capital lease obligations.

 

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(Gain) loss on disposal of assets.  (Gain) loss on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an interest in a mall joint venture.

 

Asset impairment and store closing charges.  Asset impairment and store closing charges consist of write-downs to fair value of under-performing or available-for-sale 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.

 

Income on and equity in (losses) of joint ventures.  Income on and equity in (losses) of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures as well as a distribution of excess cash from one of the Company’s mall joint ventures.

 

Seasonality and Inflation

 

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our 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 in the future.  In response to recent economic volatility in Asia and to increasing fabric prices (including cotton) and overseas wages, we have sought solutions to help minimize the effects of these events on our operations during fiscal 2011 by (1) negotiating efficiencies through our longstanding relationships with our current suppliers, (2) considering alternative manufacturing sources, (3) redesigning our garments and incorporating other types of fibers where appropriate and (4) adjusting price points as necessary.  Consequently, we believe the effects of these currently known trends on our gross margins in fiscal 2011 will be minimal.

 

RESULTS OF OPERATIONS

 

The following table sets forth the results of operations and percentage of net sales for the periods indicated.

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Service charges and other income

 

2.5

 

2.1

 

2.2

 

2.1

 

 

 

102.5

 

102.1

 

102.2

 

102.1

 

Cost of sales

 

63.6

 

63.8

 

63.8

 

64.5

 

Advertising, selling, administrative and general expenses

 

29.3

 

29.6

 

27.7

 

28.3

 

Depreciation and amortization

 

4.7

 

4.8

 

4.5

 

4.6

 

Rentals

 

0.8

 

0.9

 

0.8

 

0.9

 

Interest and debt expense, net

 

1.3

 

1.3

 

1.3

 

1.3

 

(Gain) loss on disposal of assets

 

(0.1

)

0.1

 

(0.1

)

(0.1

)

Asset impairment and store closing charges

 

0.0

 

0.0

 

0.0

 

0.1

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and income on and equity in (losses) of joint ventures

 

2.9

 

1.6

 

4.2

 

2.5

 

Income taxes (benefit)

 

(13.6

)

0.4

 

(3.2

)

0.8

 

Income on and equity in (losses) of joint ventures

 

0.0

 

(0.1

)

0.1

 

0.0

 

 

 

 

 

 

 

 

 

 

 

Net income

 

16.5

%

1.1

%

7.5

%

1.7

%

 

17



Table of Contents

 

Net Sales

 

 

 

Three Months Ended

 

 

 

 

 

October 29,

 

October 30,

 

 

 

(in thousands of dollars)

 

2011

 

2010

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

1,366,362

 

$

1,320,568

 

$

45,794

 

Construction segment

 

16,250

 

23,550

 

(7,300

)

Total net sales

 

$

1,382,612

 

$

1,344,118

 

$

38,494

 

 

The percent change by category in the Company’s retail operations segment sales for the three months ended October 29, 2011 compared to the three months ended October 30, 2010 as well as the percentage by segment and category to total net sales for the three months ended October 29, 2011 is as follows:

 

 

 

Three Months

 

 

 

% Change
2011-2010

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

4.4

%

16

%

Ladies’ apparel and accessories

 

3.0

 

36

 

Juniors’ and children’s apparel

 

4.8

 

9

 

Men’s apparel and accessories

 

3.0

 

16

 

Shoes

 

4.8

 

17

 

Home and furniture

 

(1.3

)

5

 

 

 

 

 

99

 

Construction segment

 

 

 

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased 4%, exclusive of adjustments to the sales reserve, during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 while sales in comparable stores increased 5% between the same periods.  Sales of shoes and juniors’ and children’s apparel increased significantly during the period.  Sales of cosmetics, ladies’ apparel and accessories and men’s apparel and accessories increased moderately during the period while sales in the home and furniture category declined slightly during the period.

 

The number of sales transactions decreased 3% for the three months ended October 29, 2011 over the comparable prior year period while the average dollars per sales transaction increased significantly.  We recorded an allowance for sales returns of $7.7 million and $7.2 million as of October 29, 2011 and October 30, 2010, respectively.

 

We believe that we may continue to see some sales growth in the retail operations segment during the coming months; however, there is no guarantee of improved sales performance.

 

Net sales from the construction segment decreased $7.3 million or 31% during the three months ended October 29, 2011 compared to the three months ended October 30, 2010.  We believe this decrease is primarily attributable to the negative impact that the weak United States economy has had in previous quarters and continues to have on demand for construction projects in private industry.  During the first nine months of 2011, we have been awarded approximately $136 million in new contracts.

 

18



Table of Contents

 

 

 

Nine Months Ended

 

 

 

 

 

October 29,

 

October 30,

 

 

 

(in thousands of dollars)

 

2011

 

2010

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

4,247,462

 

$

4,108,112

 

$

139,350

 

Construction segment

 

46,095

 

78,512

 

(32,417

)

Total net sales

 

$

4,293,557

 

$

4,186,624

 

$

106,933

 

 

The percent change by category in the Company’s retail operations segment sales for the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 as well as the percentage by segment and category to total net sales for the nine months ended October 29, 2011 is as follows:

 

 

 

Nine Months

 

 

 

% Change
2011-2010

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

4.1

%

15

%

Ladies’ apparel and accessories

 

2.8

 

38

 

Juniors’ and children’s apparel

 

4.0

 

9

 

Men’s apparel and accessories

 

4.4

 

17

 

Shoes

 

5.3

 

15

 

Home and furniture

 

(3.4

)

5

 

 

 

 

 

99

 

Construction segment

 

 

 

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased 3% during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 while sales in comparable stores increased 4% between the same periods.  Moderate sales increases were noted in most merchandise categories during the period, with the exception of shoes which experienced a significant sales increase and home and furniture which experienced a moderate sales decline.

 

The number of sales transactions decreased 2% for the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 while the average dollars per sales transaction increased significantly.

 

Net sales from the construction segment decreased $32.4 million or 41% during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010.

 

Service Charges and Other Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

Three
Months

 

Nine
Months

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

October 29,
2011

 

October 30,
2010

 

$ Change
2011-2010

 

$ Change
2011-2010

 

Service charges and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail operations segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased department income

 

$

2,372

 

$

2,311

 

$

7,106

 

$

6,844

 

$

61

 

$

262

 

Income from GE marketing and servicing alliance

 

25,297

 

20,926

 

70,515

 

64,133

 

4,371

 

6,382

 

Shipping and handling income

 

4,012

 

3,659

 

12,538

 

11,547

 

353

 

991

 

Other

 

2,115

 

2,000

 

6,475

 

6,896

 

115

 

(421

)

 

 

33,796

 

28,896

 

96,634

 

89,420

 

4,900

 

7,214

 

Construction segment

 

130

 

23

 

156

 

444

 

107

 

(288

)

Total

 

$

33,926

 

$

28,919

 

$

96,790

 

$

89,864

 

$

5,007

 

$

6,926

 

 

Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased $4.4 million during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 primarily due to decreased credit losses and increased late charge fee income.  Income from the

 

19



Table of Contents

 

Alliance increased $6.4 million during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 primarily due to decreased credit losses partially offset by reduced finance charge and late charge fee income.

 

Gross Profit

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change

 

% Change

 

Gross profit:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

502,140

 

$

485,629

 

$

16,511

 

3.4

%

Construction segment

 

475

 

1,015

 

(540

)

(53.2

)

Total gross profit

 

$

502,615

 

$

486,644

 

$

15,971

 

3.3

%

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

1,551,936

 

$

1,483,197

 

$

68,739

 

4.6

%

Construction segment

 

339

 

1,256

 

(917

)

(73.0

)

Total gross profit

 

$

1,552,275

 

$

1,484,453

 

$

67,822

 

4.6

%

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2011

 

October 30,
2010

 

October 29,
2011

 

October 30,
2010

 

Gross profit as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

36.8

%

36.8

%

36.5

%

36.1

%

Construction segment

 

2.9

 

4.3

 

0.7

 

1.6

 

Total gross profit as a percentage of net sales

 

36.4

 

36.2

 

36.2

 

35.5

 

 

Gross profit improved 20 basis points of sales and 70 basis points of sales during the three and nine months ended October 29, 2011 compared to the three and nine months ended October 30, 2010, respectively.

 

Gross profit as a percentage of sales from retail operations remained flat during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 as a result of increased markdowns partially offset by increased markups.  Gross profit as a percentage of sales from retail operations improved 40 basis points during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 as a result of increased markups and decreased markdowns.

 

During the three months ended October 29, 2011 as compared to the three months ended October 30, 2010, gross margin was flat in most merchandise categories, with the exception of a slight gross margin decline in ladies’ apparel and accessories and a significant gross margin improvement in home and furniture.

 

During the nine months ended October 29, 2011 as compared to the nine months ended October 30, 2010, gross margin improved moderately in home and furniture and improved slightly in shoes and juniors’ and children’s apparel.  Gross margin was flat in cosmetics and ladies’ apparel and accessories while men’s apparel and accessories experienced a slight gross margin decline.

 

Inventory increased 4% in comparable stores as of October 29, 2011 compared to October 30, 2010 as management has planned more aggressively in light of improved sales trends.  A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $6 million for the three and nine months ended October 29, 2011, respectively.

 

Gross profit from the construction segment declined 140 basis points of sales and 90 basis points of sales during the three and nine months ended October 29, 2011 compared to the three and nine months ended October 30, 2010, respectively.  The three-month gross margin decline from the prior year was the result of fewer projects caused by the reduction in demand for construction services combined with pricing pressures in an already competitive marketplace.  The nine-month gross margin decline was also attributable to a $1.2 million loss recorded during the nine months ended October 29, 2011 on an electrical contract partially offset by a $2.2 million loss recorded in the

 

20



Table of Contents

 

prior year comparable period on certain electrical contracts stemming from job delays due to bad weather and job underperformance.

 

Advertising, Selling, Administrative and General Expenses (“SG&A”)

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change

 

% Change

 

SG&A:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

403,658

 

$

397,355

 

$

6,303

 

1.6

%

Construction segment

 

1,108

 

1,139

 

(31

)

(2.7

)

Total SG&A

 

$

404,766

 

$

398,494

 

$

6,272

 

1.6

%

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

1,186,492

 

$

1,180,737

 

$

5,755

 

0.5

%

Construction segment

 

3,578

 

3,453

 

125

 

3.6

 

Total SG&A

 

$

1,190,070

 

$

1,184,190

 

$

5,880

 

0.5

%

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2011

 

October 30,
2010

 

October 29,
2011

 

October 30,
2010

 

SG&A as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

29.5

%

30.1

%

27.9

%

28.7

%

Construction segment

 

6.8

 

4.8

 

7.8

 

4.4

 

Total SG&A as a percentage of net sales

 

29.3

 

29.6

 

27.7

 

28.3

 

 

SG&A improved 30 basis points of sales during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 while total SG&A dollars increased $6.3 million.  The dollar increase was most noted in payroll and payroll related taxes ($4.9 million), primarily of selling payroll, and supplies ($3.3 million) partially offset by decreased net advertising expenditures ($2.8 million) and utilities ($2.3 million).

 

SG&A improved 60 basis points of sales during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 while total SG&A dollars increased $5.9 million.  The dollar increase was most noted in payroll and payroll related taxes ($10.4 million), primarily of selling payroll, and supplies ($6.7 million) partially offset by decreased net advertising expenditures ($8.7 million).

 

Rentals

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change

 

% Change

 

Rentals:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

11,213

 

$

11,626

 

$

(413

)

(3.6

)%

Construction segment

 

16

 

15

 

1

 

6.7

 

Total rentals

 

$

11,229

 

$

11,641

 

$

(412

)

(3.5

)%

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

34,763

 

$

36,537

 

$

(1,774

)

(4.9

)%

Construction segment

 

35

 

61

 

(26

)

(42.6

)

Total rentals

 

$

34,798

 

$

36,598

 

$

(1,800

)

(4.9

)%

 

The decrease in rental expense for the three and nine months ended October 29, 2011 compared to the three and nine months ended October 30, 2010, respectively, was primarily due to a decrease in the amount of equipment leased by the Company.

 

21



Table of Contents

 

Interest and Debt Expense, Net

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change

 

% Change

 

Interest and debt expense (income), net:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

17,791

 

$

18,118

 

$

(327

)

(1.8

)%

Construction segment

 

(41

)

(75

)

34

 

45.3

 

Total interest and debt expense, net

 

$

17,750

 

$

18,043

 

$

(293

)

(1.6

)%

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

54,567

 

$

55,520

 

$

(953

)

(1.7

)%

Construction segment

 

(120

)

(159

)

39

 

24.5

 

Total interest and debt expense, net

 

$

54,447

 

$

55,361

 

$

(914

)

(1.7

)%

 

The decrease in net interest and debt expense for the nine months ended October 29, 2011 is primarily attributable to note maturities and repurchases during the period partially offset by an increase in credit facility interest.  Total weighted average debt outstanding during the nine months ended October 29, 2011 increased approximately $35.9 million compared to the nine months ended October 30, 2010.

 

(Gain) Loss on Disposal of Assets

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change

 

(Gain) loss on disposal of assets:

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

Retail operations segment

 

$

(1,456

)

$

934

 

$

2,390

 

Construction segment

 

 

 

 

Total (gain) loss on disposal of assets

 

$

(1,456

)

$

934

 

$

2,390

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

Retail operations segment

 

$

(3,911

)

$

(3,280

)

$

631

 

Construction segment

 

64

 

(12

)

(76

)

Total (gain) loss on disposal of assets

 

$

(3,847

)

$

(3,292

)

$

555

 

 

During the three months ended October 29, 2011, the Company received proceeds of $10.3 million from the sale of two former retail store locations, resulting in gains totaling $1.3 million that were recorded in (gain) loss on disposal of assets.

 

Additionally, during the nine months ended October 29, 2011, the Company received proceeds of $11.0 million from the sale of an interest in a mall joint venture, resulting in a gain of $2.1 million that was recorded in (gain) loss on disposal of assets.

 

During the three months ended October 30, 2010, the Company received proceeds of $1.9 million from the sale of a former retail store location, resulting in a loss of $1.1 million that was recorded in (gain) loss on disposal of assets.

 

Additionally, during the nine months ended October 30, 2010, the Company received proceeds of $4.0 million from the sale of a former retail store location, resulting in a gain of $4.0 million that was recorded in (gain) loss on disposal of assets.

 

22



Table of Contents

 

Asset Impairment and Store Closing Charges

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change

 

Asset impairment and store closing charges:

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

Retail operations segment

 

$

1,200

 

$

2,208

 

$

(1,008

)

Construction segment

 

 

 

 

Total asset impairment and store closing charges

 

$

1,200

 

$

2,208

 

$

(1,008

)

 

There were no asset impairment and store closing costs recorded during the three months ended October 29, 2011 and October 30, 2010.

 

During the nine months ended October 29, 2011, the Company recorded a pretax charge of $1.2 million for asset impairment and store closing costs.  The charge was for the write-down of a property currently held for sale.

 

During the nine months ended October 30, 2010, the Company recorded a pretax charge of $2.2 million for asset impairment and store closing costs.  The charge was for the write-down of a property currently held for sale.

 

Income Taxes

 

The total amount of unrecognized tax benefits as of October 29, 2011 and October 30, 2010 was $8.2 million and $14.0 million, respectively, of which $5.6 million and $10.3 million, respectively, would, if recognized, affect the effective tax rate.  The Company classifies accrued interest expense and penalties relating to income tax in the condensed consolidated financial statements as income tax expense.  The total accrued interest and penalties in the condensed consolidated balance sheets as of October 29, 2011 and October 30, 2010 was $3.4 million and $4.6 million, respectively.  The estimated range of the reasonably possible unrecognized tax benefit decrease in the next twelve months is between $0.5 million and $1.5 million.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

In January 2011, the Company formed a wholly-owned subsidiary intended to operate as a real estate investment trust (“REIT”) and transferred certain properties to this subsidiary.  The Company entered into this transaction in order to enhance its financial flexibility by providing additional sources of liquidity.  At the time, the Company believed that a tax election might be available to the Company that would result in a taxable gain on the transfer of these properties to the REIT.  In May 2011, the Company requested that the Internal Revenue Service (“IRS”) review the REIT transaction and a potential tax election available to the Company, through the IRS’s voluntary Pre-Filing Agreement Program (“PFA”).  Through the PFA, in September 2011, the Company and the IRS entered into a Closing Agreement On Final Determination Covering Specific Matters under which agreement the IRS agreed with the Company regarding the tax treatment of the transfer of the properties to the REIT and the availability of the tax election to the Company.  Based on the agreement with the IRS, during the three months ended October 29, 2011 the Company determined to make the tax election in its tax return for the fiscal year ended January 29, 2011 (fiscal 2010) which was filed during the quarter.  This tax election increases the tax basis of the properties transferred to the REIT to their fair values at the date of the transfer.  The income tax that would otherwise be payable because of the gain recognized by this election was largely reduced by the utilization of a capital loss carryforward, that would otherwise have expired as of January 29, 2011, against a portion of the recognized gain.  Because of the Company’s past uncertainty regarding the incurrence of capital gain income, the deferred tax asset associated with that capital loss carryforward had been offset by a full valuation allowance since its recognition in fiscal 2005.  During the three months ended October 29, 2011, income taxes included the recognition of approximately $201.6 million in tax benefit due to the reversal of the valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of the properties to the REIT.  Approximately $134.4 million of the tax benefit relates to increased basis in depreciable property while approximately $67.2 million of the benefit relates to increased basis in land.  Due to the increased tax basis of the depreciable properties transferred to the REIT, the Company will recognize increased tax depreciation deductions in the future which are expected to yield cash tax benefits of approximately $5 million annually in years one through twenty and approximately $2 million annually in years twenty-one through forty beginning with the year ending January 28, 2012.  Due to the uncertainty surrounding whether the REIT will dispose of any of its land assets in the future, the Company cannot estimate when or if the cash tax benefits related to the increased basis in land will be received.

 

23



Table of Contents

 

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately (473.1)% and 29.6% for the three months ended October 29, 2011 and October 30, 2010, respectively.  During the three months ended October 29, 2011, income taxes included the recognition of:  a tax benefit of approximately $201.6 million due to the reversal of a valuation allowance related to a capital loss carryforward; tax benefits related to federal tax credits; and net decreases in unrecognized tax benefits, interest and penalties.   During the three months ended October 30, 2010, income taxes included the recognition of tax benefits primarily due to a decrease in a capital loss valuation allowance.

 

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately (75.4)% and 32.1% for the nine months ended October 29, 2011 and October 30, 2010, respectively.  During the nine months ended October 29, 2011, income taxes included the recognition of:  a tax benefit of approximately $201.6 million due to the reversal of a valuation allowance related to a capital loss carryforward; tax benefits related to federal tax credits; net decreases in unrecognized tax benefits, interest and penalties; decreases in net operating loss valuation allowances; and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.  Additionally, during the nine months ended October 29, 2011, the IRS concluded its examination of the Company’s federal income tax returns for the fiscal tax years 2008 through 2009, and no significant changes occurred in these tax years as a result of such examination.  During the nine months ended October 30, 2010, income taxes included the recognition of tax benefits primarily due to a state administrative settlement, a decrease in a capital loss valuation allowance, and federal tax credit refund claims.

 

The Company’s income tax rate for the remainder of fiscal 2011 is dependent upon results of operations and may change if the results for fiscal 2011 are different from current expectations.  The Company’s effective tax rate for the remainder of fiscal 2011 is estimated to approximate 36%.

 

FINANCIAL CONDITION

 

Financial Position Summary

 

(in thousands of dollars)

 

October 29,
2011

 

January 29,
2011

 

$ Change

 

% Change

 

Cash and cash equivalents

 

$

106,383

 

$

343,291

 

$

(236,908

)

(69.0

)%

Restricted cash

 

24,901

 

 

24,901

 

*

 

Other short-term borrowings

 

142,000

 

 

142,000

 

*

 

Long-term debt, including current portion

 

692,031

 

746,412

 

(54,381

)

(7.3

)

Subordinated debentures

 

200,000

 

200,000

 

 

 

Stockholders’ equity

 

1,832,367

 

2,086,720

 

(254,353

)

(12.2

)

 

 

 

 

 

 

 

 

 

 

Current ratio

 

1.52

 

2.05

 

 

 

 

 

Debt to capitalization

 

36.1

%

31.2

%

 

 

 

 

 

(in thousands of dollars)

 

October 29,
2011

 

October 30,
2010

 

$ Change