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 August 3, 2013

 

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).  

xYes  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 ¨

Non-accelerated filer ¨   (Do not check if a smaller reporting company)

 

Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 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, 2013      41,806,487

CLASS B COMMON STOCK as of August 27, 2013        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 August 3, 2013, February 2, 2013 and  July 28, 2012

3

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings for the Three and Six Months Ended August 3, 2013 and July 28, 2012

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended August 3, 2013 and July 28, 2012

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 3, 2013 and July 28, 2012

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

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

27

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 6.

Exhibits

29

 

 

 

SIGNATURES

29

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

 

 

 

August 3,

 

February 2,

 

July 28,

 

 

 

2013

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

113,735

 

$

124,060

 

$

162,533

 

Accounts receivable

 

26,239

 

31,519

 

33,414

 

Merchandise inventories

 

1,459,284

 

1,294,581

 

1,362,077

 

Other current assets

 

50,067

 

41,820

 

44,525

 

 

 

 

 

 

 

 

 

Total current assets

 

1,649,325

 

1,491,980

 

1,602,549

 

 

 

 

 

 

 

 

 

Property and equipment (net of accumulated depreciation and amortization of $2,288,603, $2,167,477 and $2,352,658)

 

2,198,693

 

2,287,015

 

2,388,107

 

Other assets

 

259,445

 

269,749

 

270,806

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,107,463

 

$

4,048,744

 

$

4,261,462

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable and accrued expenses

 

$

713,103

 

$

653,769

 

$

699,026

 

Current portion of long-term debt

 

 

 

75,857

 

Current portion of capital lease obligations

 

918

 

1,710

 

2,369

 

Other short-term borrowings

 

 

 

24,000

 

Federal and state income taxes including current deferred taxes

 

83,512

 

111,637

 

74,342

 

 

 

 

 

 

 

 

 

Total current liabilities

 

797,533

 

767,116

 

875,594

 

 

 

 

 

 

 

 

 

Long-term debt

 

614,785

 

614,785

 

614,785

 

Capital lease obligations

 

7,150

 

7,524

 

7,997

 

Other liabilities

 

229,155

 

233,492

 

246,620

 

Deferred income taxes

 

248,002

 

255,652

 

294,989

 

Subordinated debentures

 

200,000

 

200,000

 

200,000

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

1,237

 

1,237

 

1,227

 

Additional paid-in capital

 

933,264

 

932,495

 

837,401

 

Accumulated other comprehensive loss

 

(25,785

)

(31,275

)

(37,198

)

Retained earnings

 

3,248,620

 

3,099,566

 

3,228,474

 

Less treasury stock, at cost

 

(2,146,498

)

(2,031,848

)

(2,008,427

)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

2,010,838

 

1,970,175

 

2,021,477

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,107,463

 

$

4,048,744

 

$

4,261,462

 

 

See notes to condensed consolidated financial statements.

 

3



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DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(Unaudited)

(In Thousands, Except Per Share Data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

$

1,479,852

 

$

1,487,925

 

$

3,028,988

 

$

3,037,244

 

Service charges and other income

 

36,944

 

37,257

 

77,189

 

73,950

 

 

 

 

 

 

 

 

 

 

 

 

 

1,516,796

 

1,525,182

 

3,106,177

 

3,111,194

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

976,822

 

987,802

 

1,914,607

 

1,944,715

 

Selling, general and administrative expenses

 

398,218

 

398,788

 

788,414

 

792,026

 

Depreciation and amortization

 

64,244

 

64,215

 

129,360

 

128,235

 

Rentals

 

5,532

 

8,641

 

11,103

 

16,906

 

Interest and debt expense, net

 

16,246

 

17,673

 

32,556

 

35,128

 

Gain on disposal of assets

 

(24

)

(142

)

(12,369

)

(1,139

)

Asset impairment and store closing charges

 

 

 

6,527

 

 

 

 

 

 

 

 

 

 

 

 

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

 

55,758

 

48,205

 

235,979

 

195,323

 

Income taxes

 

19,675

 

17,330

 

83,095

 

70,300

 

Income on and equity in losses of joint ventures

 

408

 

147

 

817

 

982

 

 

 

 

 

 

 

 

 

 

 

Net income

 

36,491

 

31,022

 

153,701

 

126,005

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

3,214,446

 

3,199,848

 

3,099,566

 

3,107,344

 

Cash dividends declared

 

(2,317

)

(2,396

)

(4,647

)

(4,875

)

 

 

 

 

 

 

 

 

 

 

Retained earnings at end of period

 

$

3,248,620

 

$

3,228,474

 

$

3,248,620

 

$

3,228,474

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.79

 

$

0.64

 

$

3.30

 

$

2.58

 

Diluted

 

$

0.79

 

$

0.63

 

$

3.30

 

$

2.53

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.05

 

$

0.05

 

$

0.10

 

$

0.10

 

 

See notes to condensed consolidated financial statements.

 

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DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,491

 

$

31,022

 

$

153,701

 

$

126,005

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Amortization of retirement plan and other retiree benefit adjustments (net of tax of $297, $522, $3,395 and $1,044)

 

480

 

918

 

5,490

 

1,836

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

36,971

 

$

31,940

 

$

159,191

 

$

127,841

 

 

See notes to condensed consolidated financial statements.

 

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DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

 

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

153,701

 

$

126,005

 

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

 

 

 

 

 

Depreciation and amortization of property and deferred financing costs

 

130,343

 

129,197

 

Gain on disposal of assets

 

(12,369

)

(1,139

)

Excess tax benefits from share-based compensation

 

 

(2,028

)

Asset impairment and store closing charges

 

6,527

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

5,280

 

(4,706

)

Increase in merchandise inventories

 

(164,703

)

(57,953

)

Increase in other current assets

 

(7,478

)

(9,900

)

Decrease in other assets

 

1,324

 

7,777

 

Increase in trade accounts payable and accrued expenses and other liabilities

 

54,870

 

44,417

 

Decrease in income taxes payable

 

(35,775

)

(78,849

)

 

 

 

 

 

 

Net cash provided by operating activities

 

131,720

 

152,821

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(40,868

)

(86,740

)

Proceeds from disposal of assets

 

18,269

 

7,883

 

 

 

 

 

 

 

Net cash used in investing activities

 

(22,599

)

(78,857

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal payments on long-term debt and capital lease obligations

 

(1,166

)

(2,031

)

Issuance cost of line of credit

 

(1,300

)

(5,350

)

Increase in short-term borrowings

 

 

24,000

 

Cash dividends paid

 

(2,330

)

(4,983

)

Purchase of treasury stock

 

(114,650

)

(153,099

)

Proceeds from stock issuance

 

 

3,732

 

Excess tax benefits from share-based compensation

 

 

2,028

 

 

 

 

 

 

 

Net cash used in financing activities

 

(119,446

)

(135,703

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(10,325

)

(61,739

)

Cash and cash equivalents, beginning of period

 

124,060

 

224,272

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

113,735

 

$

162,533

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Accrued capital expenditures

 

$

3,300

 

$

3,408

 

Stock awards

 

769

 

2,847

 

Accrued treasury stock purchase

 

 

9,016

 

 

See notes to condensed consolidated financial statements.

 

6



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 presentation have been included.  Operating results for the three and six months ended August 3, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2014 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 February 2, 2013 filed with the SEC on March 28, 2013.

 

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.

 

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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 August 3, 2013:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,458,778

 

$

21,074

 

$

1,479,852

 

Gross profit

 

501,417

 

1,613

 

503,030

 

Depreciation and amortization

 

64,186

 

58

 

64,244

 

Interest and debt expense (income), net

 

16,262

 

(16

)

16,246

 

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

 

55,282

 

476

 

55,758

 

Income on and equity in losses of joint ventures

 

408

 

 

408

 

Total assets

 

4,074,433

 

33,030

 

4,107,463

 

 

 

 

 

 

 

 

 

Three Months Ended July 28, 2012:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,456,025

 

$

31,900

 

$

1,487,925

 

Gross profit

 

498,717

 

1,406

 

500,123

 

Depreciation and amortization

 

64,164

 

51

 

64,215

 

Interest and debt expense (income), net

 

17,708

 

(35

)

17,673

 

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

 

48,028

 

177

 

48,205

 

Income on and equity in losses of joint ventures

 

147

 

 

147

 

Total assets

 

4,215,718

 

45,744

 

4,261,462

 

 

 

 

 

 

 

 

 

Six Months Ended August 3, 2013:

 

 

 

 

 

 

 

Net sales from external customers

 

$

2,988,778

 

$

40,210

 

$

3,028,988

 

Gross profit

 

1,111,306

 

3,075

 

1,114,381

 

Depreciation and amortization

 

129,243

 

117

 

129,360

 

Interest and debt expense (income), net

 

32,592

 

(36

)

32,556

 

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

 

235,181

 

798

 

235,979

 

Income on and equity in losses of joint ventures

 

817

 

 

817

 

Total assets

 

4,074,433

 

33,030

 

4,107,463

 

 

 

 

 

 

 

 

 

Six Months Ended July 28, 2012:

 

 

 

 

 

 

 

Net sales from external customers

 

$

2,978,000

 

$

59,244

 

$

3,037,244

 

Gross profit

 

1,089,780

 

2,749

 

1,092,529

 

Depreciation and amortization

 

128,139

 

96

 

128,235

 

Interest and debt expense (income), net

 

35,199

 

(71

)

35,128

 

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

 

194,996

 

327

 

195,323

 

Income on and equity in losses of joint ventures

 

982

 

 

982

 

Total assets

 

4,215,718

 

45,744

 

4,261,462

 

 

Intersegment construction revenues of $10.6 million and $12.4 million for the three and six months ended August 3, 2013, respectively, and intersegment construction revenues of $9.9 million and $17.8 million for the three and six months ended July 28, 2012, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.

 

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.  No stock options were granted during the three and six months ended August 3, 2013 and July 28, 2012, and no stock options were outstanding at August 3, 2013.  The intrinsic value of stock options exercised during the quarter ended July 28, 2012 was $2.0 million.

 

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Table of Contents

 

Note 4.  Asset Impairment and Store Closing Charges

 

There were no asset impairment and store closing charges recorded during the three months ended August 3, 2013 and during the three and six months ended July 28, 2012.

 

During the six months ended August 3, 2013, the Company recorded a pretax charge of $6.5 million for asset impairment and store closing costs.  The charge was for the write-down of an operating property and certain cost method investments.

 

Following is a summary of the activity in the reserve established for store closing charges for the six months ended August 3, 2013:

 

(in thousands)

 

Balance
Beginning
of Period

 

Adjustments
and Charges*

 

Cash Payments

 

Balance
End of Period

 

Rent, property taxes and utilities

 

$

251

 

$

101

 

$

224

 

$

128

 

 


* included in rentals

 

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

 

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

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

36,491

 

$

31,022

 

$

153,701

 

$

126,005

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

46,327

 

48,288

 

46,632

 

48,834

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.79

 

$

0.64

 

$

3.30

 

$

2.58

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income

 

$

36,491

 

$

31,022

 

$

153,701

 

$

126,005

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

46,327

 

48,288

 

46,632

 

48,834

 

Dilutive effect of stock-based compensation

 

 

944

 

 

937

 

Total weighted average equivalent shares

 

46,327

 

49,232

 

46,632

 

49,771

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.79

 

$

0.63

 

$

3.30

 

$

2.53

 

 

No stock options were outstanding at August 3, 2013, and total stock options outstanding were 2,100,000 at July 28, 2012.

 

Note 6.  Commitments and Contingencies

 

Various legal proceedings, in the form of lawsuits and claims, which occur in the normal course of business, are pending against the Company and its subsidiaries.  In the opinion of management, disposition of these matters is not expected to have a material adverse effect on the Company’s financial position, cash flows or results of operations.

 

At August 3, 2013, letters of credit totaling $47.2 million were issued under the Company’s revolving credit facility.

 

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Note 7.  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 $0.7 million and $1.4 million during the three and six months ended August 3, 2013, respectively.  The Company expects to make contributions to the Pension Plan of approximately $1.3 million for the remainder of fiscal 2013.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,059

 

$

817

 

$

2,118

 

$

1,634

 

Interest cost

 

1,695

 

1,823

 

3,391

 

3,647

 

Net actuarial loss

 

753

 

1,283

 

1,506

 

2,566

 

Amortization of prior service cost

 

24

 

157

 

48

 

313

 

Plan curtailment gain

 

 

 

(1,480

)

 

Net periodic benefit costs

 

$

3,531

 

$

4,080

 

$

5,583

 

$

8,160

 

 

Net periodic benefit costs are included in selling, general and administrative expenses.

 

Note 8.  Revolving Credit Agreement

 

At August 3, 2013, the Company maintained a $1.0 billion revolving credit facility (“credit agreement”) with J. P. Morgan Securities LLC (“JPMorgan”) and Wells Fargo Capital Finance, LLC as the lead agents for various banks, secured by the inventory of Dillard’s, Inc. operating subsidiaries.  The credit agreement expires July 1, 2018.

 

Borrowings under the credit agreement accrue interest at either JPMorgan’s Base Rate or LIBOR plus 1.5% (1.69% at August 3, 2013) subject to certain availability thresholds as defined in the credit agreement.

 

Limited to 90% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $982.3 million at August 3, 2013.  No borrowings were outstanding at August 3, 2013.  Letters of credit totaling $47.2 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $935 million at August 3, 2013.  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 9.  Stock Repurchase Programs

 

All repurchases of the Company’s Class A Common Stock were made at the market price at the trade date.  Accordingly, all amounts paid to reacquire these shares were allocated to Treasury Stock.

 

2013 Stock Plan

 

In March 2013, the Company’s Board of Directors authorized the repurchase of up to $250 million of the Company’s Class A Common Stock under an open-ended stock plan (“2013 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.  No repurchases were made during the three months ended August 3, 2013.  During the six months ended August 3, 2013, the Company repurchased 0.3 million shares for $22.7 million at an average price of $79.04 per share.  At August 3, 2013, $227.3 million of authorization remained under the 2013 Stock Plan.

 

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Table of Contents

 

2012 Stock Plan

 

In February 2012, the Company’s Board of Directors authorized the repurchase of up to $250 million of the Company’s Class A Common Stock under an open-ended stock plan (“2012 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 three months ended July 28, 2012, the Company repurchased 2.1 million shares for $134.6 million at an average price of $64.52 per share.  During the six months ended August 3, 2013, the Company repurchased 1.2 million shares for $92.0 million at an average price of $79.14 per share, which completed the authorization under the 2012 Stock Plan.

 

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 stock plan (“May 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 28, 2012, the Company repurchased 439 thousand shares for $27.5 million at an average price of $62.71 per share, which completed the authorization under the May 2011 Stock Plan.

 

Note 10.  Income Taxes

 

During the three months ended August 3, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.  During the three months ended July 28, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.

 

During the six months ended August 3, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.  During the six months ended July 28, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by a benefit due to net decreases in unrecognized tax benefits primarily related to statute lapses.

 

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Note 11.                    Reclassifications from Accumulated Other Comprehensive Loss (“AOCL”)

 

Reclassifications from AOCL are summarized as follows (in thousands):

 

 

 

Amount
Reclassified
from AOCL

 

 

 

 

 

Three Months

 

Six Months

 

Affected Line Item in

 

 

 

Ended

 

Ended

 

the Statement Where

 

Details about AOCL Components

 

August 3, 2013

 

August 3, 2013

 

Net Income is Presented

 

 

 

 

 

 

 

 

 

Defined benefit pension plan items

 

 

 

 

 

 

 

Amortization of prior service costs

 

$

24

 

$

48

 

(1)

 

Amortization of actuarial losses

 

753

 

1,506

 

(1)

 

Plan curtailment gain

 

 

7,331

 

(2)

 

 

 

777

 

8,885

 

Total before tax

 

 

 

297

 

3,395

 

Income tax expense

 

 

 

$

480

 

$

5,490

 

Total net of tax

 

 


(1)         These items are included in the computation of net periodic pension cost.  See Note 7, Benefit Plans, for additional information.

(2)         The excess of the pension liability for the curtailed plan over the amount shown here is included in the computation of net periodic pension cost.  See Note 7, Benefit Plans, for additional information.

 

Note 12.                    Changes in Accumulated Other Comprehensive Loss

 

Changes in AOCL by component (net of tax) are summarized as follows (in thousands):

 

 

 

Defined Benefit
Pension Plan Items

 

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

 

 

August 3, 2013

 

August 3, 2013

 

 

 

 

 

 

 

Beginning balance

 

$

26,265

 

$

31,275

 

 

 

 

 

 

 

Other comprehensive income before reclassifications

 

 

 

Amounts reclassified from AOCL

 

(480

)

(5,490

)

Net other comprehensive income

 

(480

)

(5,490

)

 

 

 

 

 

 

Ending balance

 

$

25,785

 

$

25,785

 

 

Note 13.  Gain on Disposal of Assets

 

During the six months ended August 3, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas.  The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.

 

During the six months ended August 3, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.

 

During the six months ended July 28, 2012, the Company received proceeds of $7.8 million from the sales of two former retail stores located in Cincinnati, Ohio and Antioch, Tennessee that were held for sale and one building that was formerly a portion of a currently operating retail location, resulting in a net gain of $0.9 million.

 

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Table of Contents

 

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.

 

The fair value of the Company’s cash and cash equivalents and trade accounts receivable approximates their carrying values at August 3, 2013 due to the short-term maturities of these instruments.  The fair value of the Company’s long-term debt at August 3, 2013 was approximately $669 million.  The carrying value of the Company’s long-term debt at August 3, 2013 was $615 million.  The fair value of the Company’s subordinated debentures at August 3, 2013 was approximately $204 million.  The carrying value of the Company’s subordinated debentures at August 3, 2013 was $200 million.

 

During the six months ended August 3, 2013, the Company recognized an impairment charge of $5.4 million on certain cost method investments.  The Company evaluated all factors and determined that an other-than-temporary impairment charge was necessary.  These investments are recorded in other assets on the balance sheet.

 

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

 

 

 

 

 

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 use
As of August 3, 2013

 

$

3,000

 

$

 

$

3,000

 

$

 

 

Long-lived assets held for use

 

During the six months ended August 3, 2013, an additional long-lived asset group held for use was written down to its fair value of $3.0 million, resulting in an impairment charge of $1.2 million, which was included in earnings for the period.  The inputs used to calculate the fair value of these long-lived assets held for use was based upon an offer to purchase the property.

 

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Table of Contents

 

Note 15.  Recently Issued Accounting Standards

 

Presentation of Comprehensive Income

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires the Company to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income on the Company’s consolidated statement of comprehensive income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income.  This update does not change the current requirements for reporting net income or other comprehensive income in the consolidated financial statements of the Company, but does require the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  The provisions in this update were effective prospectively beginning with the Company’s first quarter of 2013. The adoption of this update affected the format and presentation of the Company’s consolidated financial statements and the footnotes thereto but did not have any other impact on the Company’s financial statements.

 

Guidance on Financial Statement Presentation of Unrecognized Tax Benefit

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides explicit presentation guidelines.  Under this ASU, an unrecognized tax benefit, or portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except when specific conditions are met as outlined in the ASU.  When these specific conditions are met, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date.  The adoption of this update is not expected to have a material impact on our consolidated 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 February 2, 2013.

 

EXECUTIVE OVERVIEW

 

For the second quarter of fiscal 2013, Dillard’s operating results improved over its prior year performance.  Comparable store sales were up for the twelfth consecutive quarter, and gross profit from retail operations improved 10 basis points of sales.  Selling, general and administrative expenses were down in total dollars but increased 10 basis points of sales.  Net income increased to $36.5 million, or $0.79 per share — our highest historical second fiscal quarter earnings per share — compared to $31.0 million, or $0.63 per share, for the second quarter of last year.

 

Highlights of the quarter ended August 3, 2013 as compared to the quarter ended July 28, 2012 included:

 

·                  a 1% increase in comparable store sales,

·                  gross margin from retail operations improvement of 10 basis points of sales, and

·                  record second quarter earnings per share of $0.79 per share, a 25% increase over the prior year second quarter.

 

As of August 3, 2013, we had working capital of $851.8 million, cash and cash equivalents of $113.7 million and $814.8 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $131.7 million for the six months ended August 3, 2013.  We operated 300 total stores, including 18 clearance centers, and one internet store as of August 3, 2013, a decrease of three 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

 

 

 

August 3,
2013

 

July 28,
2012

 

Net sales (in millions)

 

$

1,479.9

 

$

1,487.9

 

Retail stores sales trend

 

0

%

2

%

Comparable retail stores sales trend

 

1

%

3

%

Gross profit (in millions)

 

$

503.0

 

$

500.1

 

Gross profit as a percentage of net sales

 

34.0

%

33.6

%

Retail gross profit as a percentage of net sales

 

34.4

%

34.3

%

Selling, general and administrative expenses as a percentage of net sales

 

26.9

%

26.8

%

Cash flow from operations (in millions)*

 

$

131.7

 

$

152.8

 

Total retail store count at end of period

 

300

 

303

 

Retail sales per square foot

 

$

29

 

$

29

 

Comparable retail store inventory trend

 

8

%

0

%

Retail merchandise inventory turnover

 

2.6

 

2.7

 

 


*Cash flow from operations data is for the six months ended August 3, 2013 and July 28, 2012.

 

15



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.  Comparable store sales exclude the change in the allowance for sales returns.  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; sales in clearance centers; and changes in the allowance for sales returns.

 

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 cards.  Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.

 

Cost of sales.  Cost of sales includes the cost of merchandise sold (net of purchase discounts and non-specific margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, 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.

 

Selling, general and administrative expenses.  Selling, general and administrative 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, including contingent rent, 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 note, term note, subordinated debentures and borrowings under the Company’s credit facility.  Interest and debt expense also includes gains and losses on note repurchases, if any, 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 investment.

 

Asset impairment and store closing charges.  Asset impairment and store closing charges consist of (a) write-downs to fair value of under-performing or held for sale properties and of cost method investments and (b) 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.

 

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.

 

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Table of Contents

 

We do not believe that inflation has had a material effect on our results during the periods presented; however, our business could be affected by such in the future.

 

RESULTS OF OPERATIONS

 

The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Service charges and other income

 

2.5

 

2.5

 

2.5

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

102.5

 

102.5

 

102.5

 

102.4

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

66.0

 

66.4

 

63.2

 

64.0

 

Selling, general and administrative expenses

 

26.9

 

26.8

 

26.0

 

26.1

 

Depreciation and amortization

 

4.3

 

4.3

 

4.3

 

4.2

 

Rentals

 

0.4

 

0.6

 

0.4

 

0.6

 

Interest and debt expense, net

 

1.1

 

1.2

 

1.1

 

1.1

 

Gain on disposal of assets

 

(0.0

)

(0.0

)

(0.4

)

(0.0

)

Asset impairment and store closing charges

 

0.0

 

0.0

 

0.2

 

0.0

 

 

 

 

 

 

 

 

 

 

 

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

 

3.8

 

3.2

 

7.8

 

6.4

 

Income taxes

 

1.3

 

1.1

 

2.7

 

2.3

 

Income on and equity in losses of joint ventures

 

0.0

 

0.0

 

0.0

 

0.0

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2.5

%

2.1

%

5.1

%

4.1

%

 

17



Table of Contents

 

Net Sales (Three-Month Comparison)

 

 

 

Three Months Ended

 

 

 

 

 

August 3,

 

July 28,

 

 

 

(in thousands of dollars)

 

2013

 

2012

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

1,458,778

 

$

1,456,025

 

$

2,753

 

Construction segment

 

21,074

 

31,900

 

(10,826

)

Total net sales

 

$

1,479,852

 

$

1,487,925

 

$

(8,073

)

 

The percent change in the Company’s sales by segment and product category for the three months ended August 3, 2013 compared to the three months ended July 28, 2012 as well as the sales percentage by segment and product category to total net sales for the three months ended August 3, 2013 is as follows:

 

 

 

Three Months

 

 

 

% Change
2013-2012

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

(2.4

)%

14

%

Ladies’ apparel

 

(2.6

)

25

 

Ladies’ accessories and lingerie

 

6.9

 

16

 

Juniors’ and children’s apparel

 

3.1

 

8

 

Men’s apparel and accessories

 

0.2

 

17

 

Shoes

 

0.5

 

14

 

Home and furniture

 

(4.4

)

5

 

 

 

 

 

99

 

Construction segment

 

(33.9

)

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $2.8 million or 0% during the three months ended August 3, 2013 compared to the three months ended July 28, 2012 while sales in comparable stores increased 1% between the same periods.  Sales of ladies’ accessories and lingerie increased significantly over the prior year period, and sales of juniors’ and children’s apparel increased moderately.  Sales of shoes increased slightly over the prior year period while sales of men’s apparel and accessories remained essentially flat.  Sales of cosmetics, ladies’ apparel and home and furniture decreased moderately between the periods.

 

We believe that we may continue to see some sales growth in the retail operations segment during fiscal 2013 as compared to fiscal 2012; however, there is no guarantee of improved sales performance.

 

The number of sales transactions decreased 4% for the three months ended August 3, 2013 over the comparable prior year period while the average dollars per sales transaction increased 4%.  We recorded an allowance for sales returns of $6.7 million and $7.6 million as of August 3, 2013 and July 28, 2012, respectively.

 

During the three months ended August 3, 2013, net sales from the construction segment decreased $10.8 million or 34% compared to the three months ended July 28, 2012 due to a shift in the timing of certain construction projects.  We believe that sales in the construction segment for fiscal 2013 will be similar to fiscal 2012; however, there is no guarantee of this sales performance.  The backlog of awarded construction contracts at August 3, 2013 totaled $64.3 million.

 

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Table of Contents

 

Net Sales (Six-Month Comparison)

 

 

 

Six Months Ended

 

 

 

 

 

August 3,

 

July 28,

 

 

 

(in thousands of dollars)

 

2013

 

2012

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

2,988,778

 

$

2,978,000

 

$

10,778

 

Construction segment

 

40,210

 

59,244

 

(19,034

)

Total net sales

 

$

3,028,988

 

$

3,037,244

 

$

(8,256

)

 

The percent change in the Company’s sales by segment and product category for the six months ended August 3, 2013 compared to the six months ended July 28, 2012 as well as the sales percentage by segment and product category to total net sales for the six months ended August 3, 2013 is as follows:

 

 

 

Six Months

 

 

 

% Change
2013-2012

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

(0.8

)%

15

%

Ladies’ apparel

 

(2.5

)

24

 

Ladies’ accessories and lingerie

 

7.9

 

15

 

Juniors’ and children’s apparel

 

2.8

 

9

 

Men’s apparel and accessories

 

(0.8

)

17

 

Shoes

 

1.2

 

15

 

Home and furniture

 

(6.5

)

4

 

 

 

 

 

99

 

Construction segment

 

(32.1

)

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $10.8 million or 0% during the six months ended August 3, 2013 compared to the six months ended July 28, 2012 while sales in comparable stores increased 1% between the same periods.  Sales of ladies’ accessories and lingerie increased significantly over the prior year period, and sales of juniors’ and children’s apparel increased moderately.  Sales of shoes increased slightly over the prior year period while sales of cosmetics and men’s apparel and accessories decreased slightly.  Sales of ladies’ apparel decreased moderately over the prior year period, and sales of home and furniture decreased significantly.

 

The number of sales transactions decreased 3% for the six months ended August 3, 2013 compared to the six months ended July 28, 2012 while the average dollars per sales transaction increased 3%.

 

Storewide sales penetration of exclusive brand merchandise for the six months ended August 3, 2013 was 21.4% compared to 21.9% during the six months ended July 28, 2012.

 

During the six months ended August 3, 2013, net sales from the construction segment decreased $19.0 million or 32% compared to the six months ended July 28, 2012 due to a shift in the timing of certain construction projects.

 

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Table of Contents

 

Service Charges and Other Income

 

 

 

Three Months Ended

 

Six Months Ended

 

Three
Months

 

Six
Months

 

(in thousands of dollars)

 

August 3,
2013

 

July 28,
2012

 

August 3,
2013

 

July 28,
2012

 

$ Change
2013-2012

 

$ Change
2013-2012

 

Service charges and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail operations segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased department income

 

$

2,159

 

$

2,370

 

$

4,404

 

$

4,858

 

$

(211

)

$

(454

)

Income from GE marketing and servicing alliance

 

27,628

 

26,243

 

55,036

 

51,430

 

1,385

 

3,606

 

Shipping and handling income

 

4,674

 

4,355

 

9,457

 

8,707

 

319

 

750

 

Other

 

2,476

 

4,254

 

8,279

 

8,901

 

(1,778

)

(622

)

 

 

36,937

 

37,222

 

77,176

 

73,896

 

(285

)

3,280

 

Construction segment

 

7

 

35

 

13

 

54

 

(28

)

(41

)

Total service charges and other income

 

$

36,944

 

$

37,257

 

$

77,189

 

$

73,950

 

$

(313

)

$

3,239

 

 

Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased during the three months ended August 3, 2013 primarily due to increases in finance charge income.  Income from the Alliance increased during the six months ended August 3, 2013 primarily due to increases in finance charges and decreased credit losses.

 

Gross Profit

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

% Change

 

Gross profit:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

501,417

 

$

498,717

 

$

2,700

 

0.5

%

Construction segment

 

1,613

 

1,406

 

207

 

14.7

 

Total gross profit

 

$

503,030

 

$

500,123

 

$

2,907

 

0.6

%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

1,111,306

 

$

1,089,780

 

$

21,526

 

2.0

%

Construction segment

 

3,075

 

2,749

 

326

 

11.9

 

Total gross profit

 

$

1,114,381

 

$

1,092,529

 

$

21,852

 

2.0

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3, 2013

 

July 28, 2012

 

August 3, 2013

 

July 28, 2012

 

Gross profit as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

34.4

%

34.3

%

37.2

%

36.6

%

Construction segment

 

7.7

 

4.4

 

7.6

 

4.6

 

Total gross profit as a percentage of net sales

 

34.0

 

33.6

 

36.8

 

36.0

 

 

Gross profit improved 40 basis points of sales during the three months ended August 3, 2013 compared to the three months ended July 28, 2012, and gross profit improved 80 basis points during the six months ended August 3, 2013 compared to the six months ended July 28, 2012.

 

During the three months ended August 3, 2013 compared to the three months ended July 28, 2012, gross profit from retail operations improved 10 basis points of sales as a result of decreased markdowns partially offset by decreased markups.  Gross margin improved moderately in men’s apparel and accessories and improved slightly in juniors’ and children’s apparel while gross margin in ladies’ apparel remained essentially flat.  Gross margin declined slightly in shoes and cosmetics and declined moderately in ladies’ accessories and lingerie and home and furniture.

 

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Table of Contents

 

During the six months ended August 3, 2013 compared to the six months ended July 28, 2012, gross profit from retail operations improved 60 basis points of sales as a result of decreased markdowns partially offset by decreased markups.  Gross margin improved moderately in men’s apparel and accessories and home and furniture and improved slightly in juniors’ and children’s apparel while gross margin remained essentially flat in ladies’ apparel and ladies’ accessories and lingerie.  Gross margin declined slightly in cosmetics and shoes.

 

Inventory in total and comparable stores increased 7% and 8%, respectively, as of August 3, 2013 compared to July 28, 2012.  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 August 3, 2013, respectively.

 

We believe that gross profit from retail operations will improve slightly during fiscal 2013 as compared to fiscal 2012; however, there is no guarantee of improved gross profit performance.

 

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

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

% Change

 

SG&A:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

397,125

 

$

397,551

 

$

(426

)

(0.1

)%

Construction segment

 

1,093

 

1,237

 

(144

)

(11.6

)

Total SG&A

 

$

398,218

 

$

398,788

 

$

(570

)

(0.1

)%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

786,220

 

$

789,600

 

$

(3,380

)

(0.4

)%

Construction segment

 

2,194

 

2,426

 

(232

)

(9.6

)

Total SG&A

 

$

788,414

 

$

792,026

 

$

(3,612

)

(0.5

)%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3, 2013

 

July 28, 2012

 

August 3, 2013

 

July 28, 2012

 

SG&A as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

27.2

%

27.3

%

26.3

%

26.5

%

Construction segment

 

5.2

 

3.9

 

5.5

 

4.1

 

Total SG&A as a percentage of net sales

 

26.9

 

26.8

 

26.0

 

26.1

 

 

SG&A increased 10 basis points of sales during the three months ended August 3, 2013 compared to the three months ended July 28, 2012 while total SG&A dollars decreased $0.6 million.  The decrease in SG&A dollars is primarily due to a decrease in services purchased ($2.3 million) and advertising expenses ($2.2 million) partially offset by increases in payroll ($2.2 million), primarily of selling payroll.

 

SG&A decreased $3.6 million or 10 basis points of sales during the six months ended August 3, 2013 compared to the six months ended July 28, 2012.  The dollar decrease was most noted in advertising expense ($5.2 million) and insurance ($1.8 million) partially offset by increases in payroll ($6.0 million), primarily of selling payroll.  During the six months ended August 3, 2013, the Company also recorded a $1.5 million pretax credit to pension expense for a gain from a pension plan curtailment.

 

We believe that SG&A will improve slightly as a percentage of sales during fiscal 2013 as compared to fiscal 2012; however, there is no guarantee of improved SG&A performance.

 

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Table of Contents

 

Rentals

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

% Change

 

Rentals:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

5,523

 

$

8,629

 

$

(3,106

)

(36.0

)%

Construction segment

 

9

 

12

 

(3

)

(25.0

)

Total rentals

 

$

5,532

 

$

8,641

 

$

(3,109

)

(36.0

)%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

11,081

 

$

16,880

 

$

(5,799

)

(34.4

)%

Construction segment

 

22

 

26

 

(4

)

(15.4

)

Total rentals

 

$

11,103

 

$

16,906

 

$

(5,803

)

(34.3

)%

 

The decrease in rental expense for the three and six months ended August 3, 2013 compared to the three and six months ended July 28, 2012 was primarily due to a reduction in the amount of equipment leased by the Company.

 

We believe that rental expense will decline during fiscal 2013, with a current projected reduction of $8 million from fiscal 2012, primarily as a result of the expiration of certain equipment leases.

 

Interest and Debt Expense, Net

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

% Change

 

Interest and debt expense (income), net:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

16,262

 

$

17,708

 

$

(1,446

)

(8.2

)%

Construction segment

 

(16

)

(35

)

19

 

54.3

 

Total interest and debt expense, net

 

$

16,246

 

$

17,673

 

$

(1,427

)

(8.1

)%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

32,592

 

$

35,199

 

$

(2,607

)

(7.4

)%

Construction segment

 

(36

)

(71

)

35

 

49.3

 

Total interest and debt expense, net

 

$

32,556

 

$

35,128

 

$

(2,572

)

(7.3

)%

 

The decrease in net interest and debt expense for the three and six months ended August 3, 2013 compared to the three and six months ended July 28, 2012 was primarily attributable to lower average debt levels.  Total weighted average debt decreased approximately $49.1 million and $61.8 million for the three and six months ended August 3, 2013 compared to the three and six months ended July 28, 2012, respectively.

 

Gain on Disposal of Assets

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

Gain on disposal of assets:

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

Retail operations segment

 

$

24

 

$

141

 

$

(117

)

Construction segment

 

 

1

 

(1

)

Total gain on disposal of assets

 

$

24

 

$

142

 

$

(118

)

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

Retail operations segment

 

$

12,362

 

$

1,138

 

$

11,224

 

Construction segment

 

7

 

1

 

6

 

Total gain on disposal of assets

 

$

12,369

 

$

1,139

 

$

11,230

 

 

During the six months ended August 3, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas.  The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.

 

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Table of Contents

 

During the six months ended August 3, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.

 

During the six months ended July 28, 2012, the Company received proceeds of $7.8 million from the sales of two former retail stores located in Cincinnati, Ohio and Antioch, Tennessee that were held for sale and one building that was formerly a portion of a currently operating retail location, resulting in a net gain of $0.9 million.

 

Asset Impairment and Store Closing Charges

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

Asset impairment and store closing charges:

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

Retail operations segment

 

$

6,527

 

$

 

$

6,527

 

Construction segment

 

 

 

 

Total asset impairment and store closing charges

 

$

6,527

 

$

 

$

6,527

 

 

There were no asset impairment and store closing charges recorded during the three months ended August 3, 2013 and during the three and six months ended July 28, 2012.

 

During the six months ended August 3, 2013, the Company recorded a pretax charge of $6.5 million for asset impairment and store closing costs.  The charge was for the write-down of an operating property and certain cost method investments.

 

Income Taxes

 

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.0% and 35.8% for the three months ended August 3, 2013 and July 28, 2012, respectively.  During the three months ended August 3, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.  During the three months ended July 28, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.

 

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.1% and 35.8% for the six months ended August 3, 2013 and July 28, 2012, respectively.  During the six months ended August 3, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.  During the six months ended July 28, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by a benefit due to net decreases in unrecognized tax benefits primarily related to statute lapses.

 

The Company expects the fiscal 2013 federal and state effective income tax rate to approximate 35%.  This rate may change if results of operations for fiscal 2013 differ from management’s current expectations.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

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Table of Contents

 

FINANCIAL CONDITION

 

A summary of net cash flows for the six months ended August 3, 2013 and July 28, 2012 follows:

 

 

 

Six Months Ended

 

 

 

(in thousands of dollars)

 

August 3, 2013

 

July 28, 2012

 

$ Change

 

Operating Activities

 

$

131,720

 

$

152,821

 

$

(21,101

)

Investing Activities

 

(22,599

)

(78,857

)

56,258

 

Financing Activities

 

(119,446

)

(135,703

)

16,257

 

Total Cash Used

 

$

(10,325

)

$

(61,739

)

$

51,414

 

 

Net cash flows from operations decreased $21.1 million during the six months ended August 3, 2013 compared to the six months ended July 28, 2012.  This decline was primarily attributable to a decrease of $47.3 million related to changes in working capital items, primarily of increases of inventories partially of