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 July 30, 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 ¨

(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 August 27, 2011

 

47,457,387

CLASS B COMMON STOCK as of August 27, 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 July 30, 2011, January 29, 2011 and July 31, 2010

3

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings for the Three and Six Months Ended July 30, 2011 and July 31, 2010

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 30, 2011 and July 31, 2010

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 6.

Exhibits

28

 

 

 

SIGNATURES

28

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

 

 

 

July 30,

 

January 29,

 

July 31,

 

 

 

2011

 

2011

 

2010

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

179,525

 

$

343,291

 

$

214,713

 

Accounts receivable

 

19,571

 

25,950

 

59,644

 

Merchandise inventories

 

1,357,845

 

1,290,147

 

1,328,228

 

Other current assets

 

44,213

 

42,538

 

43,996

 

 

 

 

 

 

 

 

 

Total current assets

 

1,601,154

 

1,701,926

 

1,646,581

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

2,514,543

 

2,595,514

 

2,697,691

 

Other assets

 

61,641

 

76,726

 

69,408

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,177,338

 

$

4,374,166

 

$

4,413,680

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable and accrued expenses

 

$

706,869

 

$

689,281

 

$

701,695

 

Current portion of long-term debt

 

49,209

 

49,166

 

1,758

 

Current portion of capital lease obligations

 

2,247

 

2,184

 

848

 

Federal and state income taxes including current deferred taxes

 

64,057

 

90,581

 

36,483

 

 

 

 

 

 

 

 

 

Total current liabilities

 

822,382

 

831,212

 

740,784

 

 

 

 

 

 

 

 

 

Long-term debt

 

696,314

 

697,246

 

746,698

 

Capital lease obligations

 

10,285

 

11,383

 

9,655

 

Other liabilities

 

206,127

 

205,916

 

209,526

 

Deferred income taxes

 

311,274

 

341,689

 

331,350

 

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

 

827,939

 

805,422

 

785,404

 

Accumulated other comprehensive loss

 

(17,008

)

(17,830

)

(21,346

)

Retained earnings

 

2,742,624

 

2,653,437

 

2,534,594

 

Less treasury stock, at cost

 

(1,623,824

)

(1,355,526

)

(1,124,196

)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

1,930,956

 

2,086,720

 

2,175,667

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,177,338

 

$

4,374,166

 

$

4,413,680

 

 

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

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net sales

 

$

1,441,747

 

$

1,388,910

 

$

2,910,945

 

$

2,842,506

 

Service charges and other income

 

33,306

 

31,880

 

62,864

 

60,945

 

 

 

 

 

 

 

 

 

 

 

 

 

1,475,053

 

1,420,790

 

2,973,809

 

2,903,451

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

962,399

 

930,436

 

1,861,285

 

1,844,697

 

Advertising, selling, administrative and general expenses

 

396,037

 

392,054

 

785,304

 

785,696

 

Depreciation and amortization

 

64,097

 

64,455

 

128,128

 

128,171

 

Rentals

 

12,139

 

11,943

 

23,569

 

24,957

 

Interest and debt expense, net

 

18,422

 

18,462

 

36,697

 

37,318

 

Gain on disposal of assets

 

(2,363

)

(4,122

)

(2,391

)

(4,226

)

Asset impairment and store closing charges

 

 

 

1,200

 

2,208

 

 

 

 

 

 

 

 

 

 

 

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

 

24,322

 

7,562

 

140,017

 

84,630

 

Income taxes (benefit)

 

7,010

 

(240

)

49,720

 

27,040

 

Income on and equity in losses of joint ventures

 

253

 

(974

)

3,945

 

(1,928

)

 

 

 

 

 

 

 

 

 

 

Net income

 

17,565

 

6,828

 

94,242

 

55,662

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

2,727,879

 

2,530,433

 

2,653,437

 

2,484,447

 

Cash dividends declared

 

(2,820

)

(2,667

)

(5,055

)

(5,515

)

 

 

 

 

 

 

 

 

 

 

Retained earnings at end of period

 

$

2,742,624

 

$

2,534,594

 

$

2,742,624

 

$

2,534,594

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

$

0.10

 

$

1.69

 

$

0.80

 

Diluted

 

$

0.32

 

$

0.10

 

$

1.66

 

$

0.80

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.05

 

$

0.04

 

$

0.09

 

$

0.08

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

 

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

94,242

 

$

55,662

 

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

 

 

 

 

 

Depreciation and amortization of property and deferred financing costs

 

129,054

 

129,103

 

Gain on disposal of assets

 

(2,391

)

(4,226

)

Excess tax benefits from share-based compensation

 

(9,958

)

(346

)

Asset impairment and store closing charges

 

1,200

 

2,208

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable

 

6,379

 

3,578

 

Increase in merchandise inventories

 

(67,698

)

(27,548

)

Increase in other current assets

 

(1,675

)

(721

)

Decrease in other assets

 

2,928

 

5,697

 

Increase in trade accounts payable and accrued expenses and other liabilities

 

19,930

 

35,727

 

Decrease in income taxes payable

 

(46,981

)

(70,464

)

 

 

 

 

 

 

Net cash provided by operating activities

 

125,030

 

128,670

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(48,700

)

(57,600

)

Distribution from joint venture

 

2,481

 

 

Proceeds from disposal of assets

 

12,595

 

4,122

 

 

 

 

 

 

 

Net cash used in investing activities

 

(33,624

)

(53,478

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal payments on long-term debt and capital lease obligations

 

(1,924

)

(14,544

)

Cash dividends paid

 

(4,713

)

(5,801

)

Purchase of treasury stock

 

(268,669

)

(182,559

)

Proceeds from stock issuance

 

10,176

 

386

 

Excess tax benefits from share-based compensation

 

9,958

 

346

 

 

 

 

 

 

 

Net cash used in financing activities

 

(255,172

)

(202,172

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(163,766

)

(126,980

)

Cash and cash equivalents, beginning of period

 

343,291

 

341,693

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

179,525

 

$

214,713

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Accrued capital expenditures

 

$

2,800

 

$

2,600

 

Stock awards

 

2,762

 

2,292

 

 

See notes to condensed consolidated financial statements.

 

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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 six months ended July 30, 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.

 

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 July 30, 2011:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,425,590

 

$

16,157

 

$

1,441,747

 

Gross profit (loss)

 

480,112

 

(764

)

479,348

 

Depreciation and amortization

 

64,052

 

45

 

64,097

 

Interest and debt expense (income), net

 

18,460

 

(38

)

18,422

 

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

 

26,351

 

(2,029

)

24,322

 

Income on and equity in losses of joint ventures

 

253

 

 

253

 

Total assets

 

4,145,208

 

32,130

 

4,177,338

 

 

 

 

 

 

 

 

 

Three Months Ended July 31, 2010:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,358,694

 

$

30,216

 

$

1,388,910

 

Gross profit

 

457,261

 

1,213

 

458,474

 

Depreciation and amortization

 

64,410

 

45

 

64,455

 

Interest and debt expense (income), net

 

18,503

 

(41

)

18,462

 

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

 

7,424

 

138

 

7,562

 

Income on and equity in losses of joint ventures

 

(974

)

 

(974

)

Total assets

 

4,339,006

 

74,674

 

4,413,680

 

 

 

 

 

 

 

 

 

Six Months Ended July 30, 2011:

 

 

 

 

 

 

 

Net sales from external customers

 

$

2,881,100

 

$

29,845

 

$

2,910,945

 

Gross profit (loss)

 

1,049,796

 

(136

)

1,049,660

 

Depreciation and amortization

 

128,037

 

91

 

128,128

 

Interest and debt expense (income), net

 

36,776

 

(79

)

36,697

 

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

 

142,692

 

(2,675

)

140,017

 

Income on and equity in losses of joint ventures

 

3,945

 

 

3,945

 

Total assets

 

4,145,208

 

32,130

 

4,177,338

 

 

 

 

 

 

 

 

 

Six Months Ended July 31, 2010:

 

 

 

 

 

 

 

Net sales from external customers

 

$

2,787,544

 

$

54,962

 

$

2,842,506

 

Gross profit

 

997,568

 

241

 

997,809

 

Depreciation and amortization

 

128,081

 

90

 

128,171

 

Interest and debt expense (income), net

 

37,402

 

(84

)

37,318

 

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

 

86,322

 

(1,692

)

84,630

 

Income on and equity in losses of joint ventures

 

(1,928

)

 

(1,928

)

Total assets

 

4,339,006

 

74,674

 

4,413,680

 

 

Intersegment construction revenues of $9.5 million and $15.0 million for the three and six months ended July 30, 2011, respectively, and intersegment construction revenues of $6.1 million and $12.7 million for the three and six months ended July 31, 2010, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.

 

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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 six months ended July 30, 2011 and July 31, 2010.

 

Stock option transactions for the three months ended July 30, 2011 are summarized as follows:

 

 

 

 

 

Weighted Average

 

Fixed Options

 

Shares

 

Exercise Price

 

Outstanding, beginning of period

 

2,985,310

 

$

25.79

 

Granted

 

 

 

Exercised

 

715,310

 

25.93

 

Expired

 

 

 

Outstanding, end of period

 

2,270,000

 

$

25.74

 

Options exercisable at period end

 

2,270,000

 

$

25.74

 

 

During the three months ended July 30, 2011, the intrinsic value of stock options exercised was $20.9 million.  At July 30, 2011, the intrinsic value of outstanding and exercisable stock options was $69.3 million.

 

Note 4.  Asset Impairment and Store Closing Charges

 

There were no asset impairment and store closing costs recorded during the three months ended July 30, 2011 and July 31, 2010.

 

During the six months ended July 30, 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 one property currently held for sale.

 

During the six months ended July 31, 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 one property currently held for sale.

 

Following is a summary of the activity in the reserve established for store closing charges for the six months ended July 30, 2011:

 

(in thousands)

 

Balance
Beginning
of Period

 

Adjustments
and Charges

 

Cash Payments

 

Balance
End of Period

 

Rent, property taxes and utilities

 

$

1,360

 

$

703

 

$

809

 

$

1,254

 

 

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

 

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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

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

17,565

 

$

6,828

 

$

94,242

 

$

55,662

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

54,262

 

67,688

 

55,862

 

69,991

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.32

 

$

0.10

 

$

1.69

 

$

0.80

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income

 

$

17,565

 

$

6,828

 

$

94,242

 

$

55,662

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

54,262

 

67,688

 

55,862

 

69,991

 

Dilutive effect of stock-based compensation

 

978

 

 

1,024

 

 

Total weighted average equivalent shares

 

55,240

 

67,688

 

56,886

 

69,991

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.32

 

$

0.10

 

$

1.66

 

$

0.80

 

 

Total stock options outstanding were 2,270,000 and 4,009,369 at July 30, 2011 and July 31, 2010, respectively.  Of these, options to purchase 3,985,588 shares of Class A Common Stock at prices ranging from $25.74 to $26.57 were outstanding at July 31, 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 three and six months ended July 31, 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

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

17,565

 

$

6,828

 

$

94,242

 

$

55,662

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

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

 

411

 

476

 

822

 

952

 

Total comprehensive income

 

$

17,976

 

$

7,304

 

$

95,064

 

$

56,614

 

 

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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 seeks return of monies and alleges that certain officers and directors of the Company have 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 Arkansas Court of Appeals.  Plaintiff has appealed the decision of the Court of Appeals to the Arkansas Supreme Court where it is currently pending.  The named officers and directors will continue to contest these allegations vigorously.

 

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 seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On September 30, 2010, the 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.  It is not known whether the court will amend its Order upon exhaustion of the Berry appeals.  If so, the named officers and directors intend to contest these allegations vigorously.

 

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 July 30, 2011, letters of credit totaling $86.0 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 $1.0 million and $2.1 million during the three and six months ended July 30, 2011, respectively.  The Company expects to make contributions to the Pension Plan of approximately $2.1 million for the remainder of fiscal 2011.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

831

 

$

721

 

$

1,663

 

$

1,443

 

Interest cost

 

1,800

 

1,817

 

3,600

 

3,634

 

Net actuarial loss

 

492

 

594

 

984

 

1,188

 

Amortization of prior service cost

 

157

 

157

 

313

 

313

 

Net periodic benefit costs

 

$

3,280

 

$

3,289

 

$

6,560

 

$

6,578

 

 

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Table of Contents

 

Note 9.  Revolving Credit Agreement

 

At July 30, 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% (1.19% at July 30, 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 $843.5 million at July 30, 2011.  No borrowings were outstanding at July 30, 2011.  Letters of credit totaling $86.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $757 million at July 30, 2011.  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.  Stock Repurchase Programs

 

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.  At July 30, 2011, $250.0 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 six months ended July 30, 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 six months ended July 30, 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 three and six months ended July 31, 2010, the Company repurchased 3.0 million and 7.2 million shares of stock for approximately $77.6 million and $182.6 million at an average price of $26.12 and $25.39 per share, respectively, which completed the remaining authorization under the 2007 Stock Plan.

 

Note 11.  Income Taxes

 

The total amount of unrecognized tax benefits as of July 30, 2011 and July 31, 2010 was $8.2 million and $14.7 million, respectively, of which $5.5 million and $10.8 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 July 30, 2011 and July 31, 2010 was $3.4 million and $4.9 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.  During the three months ended July 30, 2011, the IRS

 

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Table of Contents

 

concluded its examination of the Company’s federal income tax returns for the fiscal tax years 2008 through 2009.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

During the three months ended July 30, 2011, income taxes included the recognition of tax benefits primarily related to federal tax credits, decreases in net operating loss valuation allowances, and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.  During the three months ended July 31, 2010, income taxes included the recognition of tax benefits primarily related to a state administrative settlement.

 

During the six months ended July 30, 2011, income taxes included the recognition of tax benefits primarily related to federal tax credits, decreases in net operating loss valuation allowances, and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.  During the six months ended July 31, 2010, income taxes included the recognition of tax benefits primarily related to a state administrative settlement and federal tax credit refund claims.

 

Note 12.  Income on Joint Venture

 

During the six months ended July 30, 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 on Disposal of Assets

 

During the three months ended July 30, 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 on disposal of assets.

 

During the three months ended July 31, 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 on disposal of assets.

 

Note 14.  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 and trade accounts receivable approximates their carrying values at July 30, 2011 due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt at July 30, 2011 was approximately $747 million.  The carrying value of the Company’s long-term debt at July 30, 2011 was $745 million.  The fair value of the Company’s subordinated debentures at July 30, 2011 was approximately $194 million.  The carrying value of the Company’s subordinated debentures at July 30, 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

 

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·        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

 

 

 

 

 

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 July 30, 2011

 

$

26,348

 

$

 

$

 

$

26,348

 

As of January 29, 2011

 

27,548

 

 

 

27,548

 

 

 

 

 

 

 

 

 

 

 

As of July 31, 2010

 

$

31,748

 

$

 

$

 

$

31,748

 

As of January 30, 2010

 

33,956

 

 

 

33,956

 

 

During the six months ended July 30, 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 six months ended July 31, 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.

 

Note 15.  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.

 

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Table of Contents

 

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

 

Our second quarter of fiscal 2011 continued with improved operating results.  Building on increased comparable store sales momentum during our first quarter, second quarter comparable store sales increased even more over the prior second quarter while we held our gross margin rate steady and leveraged our operating expenses.  Net income increased $10.8 million to $17.6 million for the quarter ended July 30, 2011 from $6.8 million in the comparable prior year quarter.

 

Included in net income for the quarter ended July 30, 2011 is a $2.1 million pretax gain ($1.4 million after tax or $0.02 per share) relating to the sale of an interest in a mall joint venture.

 

Included in net income for the quarter ended July 31, 2010 are a $4.0 million pretax gain ($2.6 million after tax or $0.04 per share) related to the sale of a retail store location and a $2.0 million income tax benefit ($0.03 per share) related to a state administrative settlement.

 

Highlights of the quarter ended July 30, 2011 compared to the quarter ended July 31, 2010 included:

 

·                  net income of $17.6 million, or $0.32 per share, compared to $6.8 million, or $0.10 per share,

·                  a comparable store sales increase of 6% while maintaining gross margin from retail operations at 33.7% of sales and

·                  operating expenses decreased 70 basis points of sales.

 

As of July 30, 2011, we had working capital of $778.8 million, cash and cash equivalents of $179.5 million and $945.5 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $125.0 million for the six months ended July 30, 2011.  We operated 305 total stores, including 14 clearance centers, and one internet store, as of July 30, 2011, a decrease of five stores from the same period last year.

 

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(1)

 

 

 

July 30,
2011

 

July 31,
2010

 

Net sales (in millions)

 

$

1,441.7

 

$

1,388.9

 

Net sales trend

 

4

%

(3

)%

Gross profit (in millions)

 

$

479.3

 

$

458.5

 

Gross profit as a percentage of net sales

 

33.2

%

33.0

%

Cash flow from operations (in millions)

 

$

125.0

 

$

128.7

 

Total store count at end of period

 

305

 

310

 

Retail sales per square foot

 

$

27

 

$

25

 

Retail store sales trend

 

5

%

(1

)%

Comparable retail store sales trend

 

6

%

0

%

Comparable retail store inventory trend

 

3

%

(6

)%

Retail merchandise inventory turnover

 

2.7

 

2.7

 

 


(1)Cash flow from operations data is for the six months ended July 30, 2011 and July 31, 2010.

 

14



Table of Contents

 

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 and other income 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.

 

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 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

 

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Table of Contents

 

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

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Service charges and other income

 

2.3

 

2.3

 

2.2

 

2.1

 

 

 

102.3

 

102.3

 

102.2

 

102.1

 

Cost of sales

 

66.8

 

67.0

 

63.9

 

64.9

 

Advertising, selling, administrative and general expenses

 

27.5

 

28.2

 

27.0

 

27.6

 

Depreciation and amortization

 

4.4

 

4.6

 

4.4

 

4.5

 

Rentals

 

0.8

 

0.9

 

0.8

 

0.9

 

Interest and debt expense, net

 

1.3

 

1.3

 

1.3

 

1.3

 

Gain on disposal of assets

 

(0.2

)

(0.3

)

(0.1

)

(0.1

)

Asset impairment and store closing charges

 

0.0

 

0.0

 

0.1

 

0.0

 

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

 

1.7

 

0.6

 

4.8

 

3.0

 

Income taxes (benefit)

 

0.5

 

(0.0

)

1.7

 

0.9

 

Income on and equity in losses of joint ventures

 

0.0

 

(0.1

)

0.1

 

(0.1

)

Net income

 

1.2

%

0.5

%

3.2

%

2.0

%

 

16



Table of Contents

 

Net Sales

 

 

 

Three Months Ended

 

 

 

 

 

July 30,

 

July 31,

 

 

 

(in thousands of dollars)

 

2011

 

2010

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

1,425,590

 

$

1,358,694

 

$

66,896

 

Construction segment

 

16,157

 

30,216

 

(14,059

)

Total net sales

 

$

1,441,747

 

$

1,388,910

 

$

52,837

 

 

The percent change by category in the Company’s retail operations segment sales for the three months ended July 30, 2011 compared to the three months ended July 31, 2010 as well as the percentage by segment and category to total net sales is as follows:

 

 

 

Three Months

 

 

 

% Change
2011-2010

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

5.1

%

14

%

Ladies’ apparel and accessories

 

3.7

 

40

 

Juniors’ and children’s apparel

 

5.3

 

8

 

Men’s apparel and accessories

 

9.5

 

18

 

Shoes

 

5.8

 

14

 

Home and furniture

 

(2.6

)

5

 

 

 

 

 

99

 

Construction segment

 

 

 

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $66.9 million or 5% during the three months ended July 30, 2011 compared to the three months ended July 31, 2010 while sales in comparable stores increased 6% between the same periods.  Sales of ladies’ apparel and accessories were up moderately.  All other merchandise categories experienced a significant increase of sales between the periods with the exception of home and furniture which had a moderate decline.

 

The number of sales transactions decreased 1% for the three months ended July 30, 2011 over the comparable prior year period while the average dollars per sales transaction increased significantly.  We recorded an allowance for sales returns of $8.6 million and $8.0 million as of July 30, 2011 and July 31, 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.  Any further deterioration in the United States economy could have an adverse affect on consumer confidence and consumer spending habits, which could result in reduced customer traffic and comparable store sales, higher inventory levels and markdowns and lower overall profitability.

 

Net sales from the construction segment decreased $14.1 million or 47% during the three months ended July 30, 2011 compared to the quarter ended July 31, 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 six months of 2011, we have been awarded approximately $123 million in new contracts.

 

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Table of Contents

 

 

 

Six Months Ended

 

 

 

 

 

July 30,

 

July 31,

 

 

 

(in thousands of dollars)

 

2011

 

2010

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

2,881,100

 

$

2,787,544

 

$

93,556

 

Construction segment

 

29,845

 

54,962

 

(25,117

)

Total net sales

 

$

2,910,945

 

$

2,842,506

 

$

68,439

 

 

The percent change by category in the Company’s retail operations segment sales for the six months ended July 30, 2011 compared to the six months ended July 31, 2010 as well as the percentage by segment and category to total net sales is as follows:

 

 

 

Six Months

 

 

 

% Change
2011-2010

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

3.9

%

15

%

Ladies’ apparel and accessories

 

2.8

 

39

 

Juniors’ and children’s apparel

 

3.7

 

8

 

Men’s apparel and accessories

 

5.1

 

17

 

Shoes

 

5.6

 

15

 

Home and furniture

 

(4.5

)

5

 

 

 

 

 

99

 

Construction segment

 

 

 

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $93.6 million, or 3%, during the six months ended July 30, 2011 compared to the six months ended July 31, 2010 while sales in comparable stores increased 4% between the same periods.  Sales of shoes and men’s apparel and accessories increased significantly during the period.  Sales of cosmetics, ladies’ apparel and accessories and juniors’ and children’s apparel increased moderately while sales in the home and furniture category declined moderately during the period.

 

The number of sales transactions decreased 2% for the six months ended July 30, 2011 compared to the six months ended July 31, 2010 while the average dollars per sales transaction increased significantly.

 

Storewide sales penetration of exclusive brand merchandise for the six months ended July 30, 2011 was 22.1% compared to 23.1% during the six months ended July 31, 2010.

 

Net sales from the construction segment decreased $25.1 million or 46% during the six months ended July 30, 2011 compared to the six months ended July 31, 2010.

 

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Service Charges and Other Income

 

 

 

Three Months Ended

 

Six Months Ended

 

Three
Months

 

Six
Months

 

(in thousands of dollars)

 

July 30,
2011

 

July 31,
2010

 

July 30,
2011

 

July 31,
2010

 

$ Change
2011-2010

 

$ Change
2011-2010

 

Service charges and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail operations segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased department income

 

$

2,424

 

$

2,331

 

$

4,734

 

$

4,532

 

$

93

 

$

202

 

Income from GE marketing and servicing alliance

 

24,086

 

23,013

 

45,217

 

43,207

 

1,073

 

2,010

 

Shipping and handling income

 

4,169

 

3,951

 

8,526

 

7,889

 

218

 

637

 

Other

 

2,622

 

2,529

 

4,362

 

4,896

 

93

 

(534

)

 

 

33,301

 

31,824

 

62,839

 

60,524

 

1,477

 

2,315

 

Construction segment

 

5

 

56

 

25

 

421

 

(51

)

(396

)

Total service charges and other income

 

$

33,306

 

$

31,880

 

$

62,864

 

$

60,945

 

$

1,426

 

$

1,919

 

 

Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased during the three and six months ended July 30, 2011 compared to the three and six months ended July 31, 2010 primarily due to decreased credit losses partially offset by reduced finance charge and late charge fee income related to recent credit regulation legislation.

 

Gross Profit (Loss)

 

(in thousands of dollars)

 

July 30, 2011

 

July 31, 2010

 

$ Change

 

% Change

 

Gross profit (loss):

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

480,112

 

$

457,261

 

$

22,851

 

5.0

%

Construction segment

 

(764

)

1,213

 

(1,977

)

(163.0

)

Total gross profit

 

$

479,348

 

$

458,474

 

$

20,874

 

4.6

%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

1,049,796

 

$

997,568

 

$

52,228

 

5.2

%

Construction segment

 

(136

)

241

 

(377

)

(156.4

)

Total gross profit

 

$

1,049,660

 

$

997,809

 

$

51,851

 

5.2

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30, 2011

 

July 31, 2010

 

July 30, 2011

 

July 31, 2010

 

Gross profit (loss) as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

33.7

%

33.7

%

36.4

%

35.8

%

Construction segment

 

(4.7

)

4.0

 

(0.5

)

0.4

 

Total gross profit as a percentage of net sales

 

33.2

 

33.0

 

36.1

 

35.1

 

 

Gross profit improved 20 basis points of sales and 100 basis points of sales during the three and six months ended July 30, 2011 compared to the three and six months ended July 31, 2010, respectively.

 

Gross profit as a percentage of sales from retail operations remained flat during the three months ended July 30, 2011 compared to the three months ended July 31, 2010 as a result of increased markdowns substantially offset by increased markups.  Gross profit from retail operations improved 60 basis points of sales during the six months ended July 30, 2011 compared to the six months ended July 31, 2010 as a result of decreased markdowns and increased markups.

 

During the three months ended July 30, 2011 compared to the three months ended July 31, 2010, gross margin improved slightly in juniors’ and children’s apparel, shoes and ladies’ apparel and accessories.  Gross margin was flat

 

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in cosmetics.  Home and furniture experienced a slight gross margin decline while men’s apparel and accessories experienced a moderate decline.

 

During the six months ended July 30, 2011 compared to the three months ended July 31, 2010, home and furniture, shoes and juniors’ and children’s apparel experienced moderate gross margin improvement while ladies’ apparel and accessories had a slight improvement.  Gross margin was flat in cosmetics, and men’s apparel and accessories was down slightly.

 

Inventory increased 3% in comparable stores as of July 30, 2011 compared to July 31, 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 $3 million and $4 million for the three and six months ended July 30, 2011, respectively.

 

We are continuing our efforts to manage the cadence of merchandise receipts to shorten the time span between receipt of product and point of sale to help reduce markdown risk and to keep customers engaged with a more continuous flow of fresh merchandise selections.  We also seek marked differentiation from the traditional department store format through our efforts to improve our merchandise selections as well as our level of service.   We are working to build and maintain relationships with merchandise vendors who offer distinctive products not normally offered by traditional department stores.  At the same time, we are enhancing our service levels to support a higher end shopping experience and to build lasting client relationships.

 

The construction segment recorded a gross loss of $0.8 million and $0.1 million during the three and six months ended July 30, 2011, respectively.  This gross margin decline of $2.0 million (870 basis points of sales) and $0.4 million (90 basis points of sales) from the prior year was the result of (a) fewer projects caused by the reduction in demand for construction services combined with pricing pressures in an already competitive marketplace and (b) a $1.2 million loss recorded during the three months ended July 30, 2011 on an electrical contract. This decrease was partially offset by a $2.2 million loss recorded in the prior year 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)

 

July 30, 2011

 

July 31, 2010

 

$ Change

 

% Change

 

SG&A:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

394,780

 

$

390,938

 

$

3,842

 

1.0

%

Construction segment

 

1,257

 

1,116

 

141

 

12.6

 

Total SG&A

 

$

396,037

 

$

392,054

 

$

3,983

 

1.0

%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

782,834

 

$

783,382

 

$

(548

)

(0.1

)%

Construction segment

 

2,470

 

2,314

 

156

 

6.7

 

Total SG&A

 

$

785,304

 

$

785,696

 

$

(392

)

0.0

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30, 2011

 

July 31, 2010

 

July 30, 2011

 

July 31, 2010

 

SG&A as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

27.7

%

28.8

%

27.2

%

28.1

%

Construction segment

 

7.8

 

3.7

 

8.3

 

4.2

 

Total SG&A as a percentage of net sales

 

27.5

 

28.2

 

27.0

 

27.6

 

 

SG&A improved 70 basis points of sales during the three months ended July 30, 2011 compared to the three months ended July 31, 2010 while total SG&A dollars increased $4.0 million.  The dollar increase was most noted in payroll and payroll related taxes ($5.5 million), primarily of selling payroll, services purchased ($2.1 million) and supplies ($1.6 million) partially offset by decreased net advertising expenditures ($2.9 million) and utilities ($1.9 million).

 

The six-month decline in SG&A of $0.4 million, or 60 basis points of sales, was most noted in net advertising expenditures ($5.9 million) partially offset by an increase in payroll and payroll related taxes ($5.5 million).

 

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Table of Contents

 

Rentals

 

(in thousands of dollars)

 

July 30, 2011

 

July 31, 2010

 

$ Change

 

% Change

 

Rentals:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

12,133

 

$

11,920

 

$

213

 

1.8

%

Construction segment

 

6

 

23

 

(17

)

(73.9

)

Total rentals

 

$

12,139

 

$

11,943

 

$

196

 

1.6

%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

23,550

 

$

24,911

 

$

(1,361

)

(5.5

)%

Construction segment

 

19

 

46

 

(27

)

(58.7

)

Total rentals

 

$

23,569

 

$

24,957

 

$

(1,388

)

(5.6

)%

 

The $1.4 million decrease in rental expense for the six months ended July 30, 2011 compared to the six months ended July 31, 2010 was primarily due to a decrease in the amount of equipment leased by the Company.

 

Interest and Debt Expense, Net

 

(in thousands of dollars)

 

July 30, 2011

 

July 31, 2010

 

$ Change

 

% Change

 

Interest and debt expense (income), net:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

18,460

 

$

18,503

 

$

(43

)

(0.2

)%

Construction segment

 

(38

)

(41

)

3

 

7.3

 

Total interest and debt expense, net

 

$

18,422

 

$

18,462

 

$

(40

)

(0.2

)%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

36,776

 

$

37,402

 

$

(626

)

(1.7

)%

Construction segment

 

(79

)

(84

)

5

 

6.0

 

Total interest and debt expense, net

 

$

36,697

 

$

37,318

 

$

(621

)

(1.7

)%

 

The decrease in net interest and debt expense for the six-month period is primarily attributable to higher investment income and a reduction in capitalized lease expenses.  Total weighted average debt outstanding during the six months ended July 30, 2011 increased approximately $53.3 million compared to the six months ending July 31, 2010.

 

Gain (Loss) on Disposal of Assets

 

(in thousands of dollars)

 

July 30, 2011

 

July 31, 2010

 

$ Change

 

 

 

Gain (loss) on disposal of assets:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

2,363

 

$

4,110

 

$

(1,747

)

 

 

Construction segment

 

 

12

 

(12

)

 

 

Total gain on disposal of assets

 

$

2,363

 

$

4,122

 

$

(1,759

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

2,454

 

$

4,214

 

$

(1,760

)

 

 

Construction segment

 

(63

)

12

 

(75

)

 

 

Total gain on disposal of assets

 

$

2,391

 

$

4,226

 

$

(1,835

)

 

 

 

During the three months ended July 30, 2011, we 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 on disposal of assets.

 

During the three months ended July 31, 2010, we received proceeds of $4.0 million from the sale of a retail store location, resulting in a gain of $4.0 million that was recorded in gain on disposal of assets.

 

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Table of Contents

 

Asset Impairment and Store Closing Charges

 

(in thousands of dollars)

 

July 30, 2011

 

July 31, 2010

 

$ Change

 

 

 

Asset impairment and store closing charges:

 

 

 

 

 

 

 

 

 

Six 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 charges recorded during the three months ended July 30, 2011 and July 31, 2010.

 

During the six months ended July 30, 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 one property currently held for sale.

 

During the six months ended July 31, 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 one property currently held for sale.

 

Income Taxes

 

The total amount of unrecognized tax benefits as of July 30, 2011 and July 31, 2010 was $8.2 million and $14.7 million, respectively, of which $5.5 million and $10.8 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 July 30, 2011 and July 31, 2010 was $3.4 million and $4.9 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.  During the three months ended July 30, 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.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 28.5% and (3.6)% for the three months ended July 30, 2011 and July 31, 2010, respectively.  During the three months ended July 30, 2011, income taxes included the recognition of tax benefits primarily related to federal tax credits, decreases in net operating loss valuation allowances, and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.  During the three months ended July 31, 2010, income taxes included the recognition of tax benefits primarily due to a state administrative settlement.

 

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 34.5% and 32.7% for the six months ended July 30, 2011 and July 31, 2010, respectively.  During the six months ended July 30, 2011, income taxes included the recognition of tax benefits primarily related to federal tax credits, decreases in net operating loss valuation allowances, and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.  During the six months ended July 31, 2010, income taxes included the recognition of tax benefits primarily due to a state administrative settlement 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 income tax rate may also change based on the way in which the tax structure of the real estate investment trust formed in January 2011 is finalized.  The Company’s effective tax rate for the remainder of fiscal 2011 is estimated to approximate 36%.

 

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Table of Contents

 

Income on Joint Venture

 

During the six months ended July 30, 2011, the Company’s retail operations segment 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.

 

FINANCIAL CONDITION

 

Financial Position Summary

 

(in thousands of dollars)

 

July 30,
2011

 

January 29,
2011

 

$ Change

 

% Change

 

Cash and cash equivalents

 

$

179,525

 

$

343,291

 

$

(163,766

)

(47.7

)%

Long-term debt, including current portion

 

745,523

 

746,412

 

(889

)

(0.1

)

Subordinated debentures

 

200,000

 

200,000

 

 

 

Stockholders’ equity

 

1,930,956

 

2,086,720

 

(155,764

)

(7.5

)

 

 

 

 

 

 

 

 

 

 

Current ratio

 

1.95

 

2.05

 

 

 

 

 

Debt to capitalization

 

32.9

%

31.2

%

 

 

 

 

 

(in thousands of dollars)

 

July 30,
2011

 

July 31,
2010

 

$ Change

 

% Change

 

Cash and cash equivalents

 

$

179,525

 

$

214,713

 

$

(35,188

)

(16.4

)%

Long-term debt, including current portion

 

745,523

 

748,456

 

(2,933

)

(0.4

)

Subordinated debentures

 

200,000

 

200,000

 

 

 

Stockholders’ equity

 

1,930,956

 

2,175,667

 

(244,711

)

(11.2

)

 

 

 

 

 

 

 

 

 

 

Current ratio

 

1.95

 

2.22

 

 

 

 

 

Debt to capitalization

 

32.9

%

30.4

%

 

 

 

 

 

Net cash flows from operations decreased to $125.0 million during the six months ended July 30, 2011 compared to $128.7 million for the six months ended July 31, 2010.  This $3.7 million decrease is primarily attributable to a decrease of $33.4 million related to changes in working capital items, primarily of changes in inventories as the Company responds to improved sales trends.  This decrease was partially offset by higher net income, as adjusted for non-cash items, of $29.7 million for the six months ended July 30, 2011 as compared to the six months ended July 31, 2010.

 

GE owns and manages Dillard’s branded proprietary credit card business under the 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 $45.2 million and $43.2 million from GE during the six months ended July 30, 2011 and July 31, 2010, respectively.  While future cash flows under this Alliance are difficult to predict, the Company expects income from the Alliance to improve moderately during fiscal 2011 compared to fiscal 2010.  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.

 

During the six months ended July 30, 2011, we 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 on disposal of assets.

 

During the six months ended July 31, 2010, we received proceeds of $4.0 million from the sale of a retail store location, resulting in a gain of $4.0 million that was recorded in gain on disposal of assets.

 

Capital expenditures were $48.7 million and $57.6 million for the six months ended July 30, 2011 and July 31, 2010, respectively.  The current year expenditures were primarily for the remodeling of existing stores and equipment

 

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upgrades,