DDS-11.02.2013-10Q
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 November 2, 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).  
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 ¨
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 November 30, 2013      39,915,195
CLASS B COMMON STOCK as of November 30, 2013        4,010,929

 
 
 
 
 



Table of Contents

Index
 
DILLARD’S, INC.
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
DILLARD’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
 
 
November 2,
2013
 
February 2,
2013
 
October 27,
2012
Assets
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
110,972

 
$
124,060

 
$
124,794

Accounts receivable
 
31,710

 
31,519

 
30,755

Merchandise inventories
 
1,829,198

 
1,294,581

 
1,722,443

Other current assets
 
65,664

 
41,820

 
66,594

 
 
 
 
 
 
 
Total current assets
 
2,037,544

 
1,491,980

 
1,944,586

 
 
 
 
 
 
 
Property and equipment (net of accumulated depreciation and amortization of $2,353,194, $2,167,477 and $2,411,756)
 
2,164,545

 
2,287,015

 
2,345,908

Other assets
 
257,826

 
269,749

 
268,873

 
 
 
 
 
 
 
Total assets
 
$
4,459,915

 
$
4,048,744

 
$
4,559,367

 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Trade accounts payable and accrued expenses
 
$
1,035,827

 
$
653,769

 
$
1,028,163

Current portion of long-term debt
 

 

 
260

Current portion of capital lease obligations
 
770

 
1,710

 
2,099

Other short-term borrowings
 
170,000

 

 
27,000

Federal and state income taxes including current deferred taxes
 
91,848

 
111,637

 
79,989

 
 
 
 
 
 
 
Total current liabilities
 
1,298,445

 
767,116

 
1,137,511

 
 
 
 
 
 
 
Long-term debt
 
614,785

 
614,785

 
614,785

Capital lease obligations
 
6,957

 
7,524

 
7,705

Other liabilities
 
230,858

 
233,492

 
247,633

Deferred income taxes
 
236,300

 
255,652

 
282,319

Subordinated debentures
 
200,000

 
200,000

 
200,000

Commitments and contingencies
 

 

 

Stockholders’ equity:
 
 

 
 

 
 

Common stock
 
1,237

 
1,237

 
1,228

Additional paid-in capital
 
933,264

 
932,495

 
838,264

Accumulated other comprehensive loss
 
(25,305
)
 
(31,275
)
 
(36,280
)
Retained earnings
 
3,296,788

 
3,099,566

 
3,274,629

Less treasury stock, at cost
 
(2,333,414
)
 
(2,031,848
)
 
(2,008,427
)
 
 
 
 
 
 
 
Total stockholders’ equity
 
1,872,570

 
1,970,175

 
2,069,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
4,459,915

 
$
4,048,744

 
$
4,559,367

 
See notes to condensed consolidated financial statements.


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Table of Contents

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except Per Share Data)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Net sales
 
$
1,468,612

 
$
1,449,623

 
$
4,497,600

 
$
4,486,867

Service charges and other income
 
38,313

 
36,722

 
115,502

 
110,672

 
 
 
 
 
 
 
 
 
 
 
1,506,925

 
1,486,345

 
4,613,102

 
4,597,539

 
 
 
 
 
 
 
 
 
Cost of sales
 
937,407

 
919,623

 
2,852,014

 
2,864,338

Selling, general and administrative expenses
 
404,406

 
404,637

 
1,192,820

 
1,196,663

Depreciation and amortization
 
64,942

 
65,798

 
194,302

 
194,033

Rentals
 
5,946

 
7,624

 
17,049

 
24,530

Interest and debt expense, net
 
15,789

 
17,011

 
48,345

 
52,139

Gain on disposal of assets
 
(2
)
 
(1,072
)
 
(12,371
)
 
(2,211
)
Asset impairment and store closing charges
 

 

 
6,527

 

 
 


 
 
 
 
 
 
Income before income taxes and income on and equity in losses of joint ventures
 
78,437

 
72,724

 
314,416

 
268,047

Income taxes
 
27,570

 
24,231

 
110,665

 
94,531

Income on and equity in losses of joint ventures
 
1

 
21

 
818

 
1,003

 
 
 
 
 
 
 
 
 
Net income
 
50,868

 
48,514

 
204,569

 
174,519

 
 
 
 
 
 
 
 
 
Retained earnings at beginning of period
 
3,248,620

 
3,228,474

 
3,099,566

 
3,107,344

Cash dividends declared
 
(2,700
)
 
(2,359
)
 
(7,347
)
 
(7,234
)
 
 
 
 
 
 
 
 
 
Retained earnings at end of period
 
$
3,296,788

 
$
3,274,629

 
$
3,296,788

 
$
3,274,629

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.13

 
$
1.03

 
$
4.43

 
$
3.62

Diluted
 
$
1.13

 
$
1.01

 
$
4.43

 
$
3.55

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.06

 
$
0.05

 
$
0.16

 
$
0.15

 
See notes to condensed consolidated financial statements.

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Table of Contents

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Net income
 
$
50,868

 
$
48,514

 
$
204,569

 
$
174,519

Other comprehensive income:
 
 

 
 

 
 

 
 

Amortization of retirement plan and other retiree benefit adjustments (net of tax of $297, $522, $3,692 and $1,566)
 
480

 
918

 
5,970

 
2,754

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
51,348

 
$
49,432

 
$
210,539

 
$
177,273

 
See notes to condensed consolidated financial statements.


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DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 
 
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
Operating activities:
 
 

 
 

Net income
 
$
204,569

 
$
174,519

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

 
 

Depreciation and amortization of property and deferred financing costs
 
195,664

 
195,489

Gain on disposal of assets
 
(12,371
)
 
(2,211
)
Excess tax benefits from share-based compensation
 

 
(2,376
)
Asset impairment and store closing charges
 
6,527

 

Changes in operating assets and liabilities:
 
 

 
 

Increase in accounts receivable
 
(191
)
 
(2,047
)
Increase in merchandise inventories
 
(534,617
)
 
(418,319
)
Increase in other current assets
 
(23,075
)
 
(31,969
)
Decrease in other assets
 
2,643

 
9,264

Increase in trade accounts payable and accrued expenses and other liabilities
 
372,994

 
383,047

Decrease in income taxes payable
 
(39,141
)
 
(85,524
)
 
 
 
 
 
Net cash provided by operating activities
 
173,002

 
219,873

 
 
 
 
 
Investing activities:
 
 

 
 

Purchases of property and equipment
 
(65,295
)
 
(111,910
)
Proceeds from disposal of assets
 
18,279

 
11,978

 
 
 
 
 
Net cash used in investing activities
 
(47,016
)
 
(99,932
)
 
 
 
 
 
Financing activities:
 
 

 
 

Principal payments on long-term debt and capital lease obligations
 
(1,507
)
 
(78,190
)
Issuance cost of line of credit
 
(1,354
)
 
(5,373
)
Increase in short-term borrowings
 
170,000

 
27,000

Cash dividends paid
 
(4,647
)
 
(7,364
)
Purchase of treasury stock
 
(301,566
)
 
(162,115
)
Proceeds from stock issuance
 

 
4,247

Excess tax benefits from share-based compensation
 

 
2,376

 
 
 
 
 
Net cash used in financing activities
 
(139,074
)
 
(219,419
)
 
 
 
 
 
Decrease in cash and cash equivalents
 
(13,088
)
 
(99,478
)
Cash and cash equivalents, beginning of period
 
124,060

 
224,272

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
110,972

 
$
124,794

 
 
 
 
 
Non-cash transactions:
 
 

 
 

Accrued capital expenditures
 
$
9,700

 
$
4,900

Stock awards
 
769

 
2,848

 
 
 
 
 
 
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 presentation have been included.  Operating results for the three and nine months ended November 2, 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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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 November 2, 2013:
 
 

 
 


 

Net sales from external customers
 
$
1,437,492

 
$
31,120


$
1,468,612

Gross profit
 
529,453

 
1,752


531,205

Depreciation and amortization
 
64,878

 
64


64,942

Interest and debt expense (income), net
 
15,806

 
(17
)

15,789

Income before income taxes and income on and equity in losses of joint ventures
 
78,040

 
397


78,437

Income on and equity in losses of joint ventures
 
1

 


1

Total assets
 
4,420,445

 
39,470


4,459,915

 
 
 
 
 
 
 
Three Months Ended October 27, 2012:
 
 
 
 



Net sales from external customers
 
$
1,424,722

 
$
24,901


$
1,449,623

Gross profit
 
528,971

 
1,029


530,000

Depreciation and amortization
 
65,742

 
56


65,798

Interest and debt expense (income), net
 
17,042

 
(31
)

17,011

Income (loss) before income taxes and income on and equity in losses of joint ventures
 
72,760

 
(36
)

72,724

Income on and equity in losses of joint ventures
 
21

 


21

Total assets
 
4,514,849

 
44,518


4,559,367

 
 
 
 
 
 
 
Nine Months Ended November 2, 2013:
 
 
 
 



Net sales from external customers
 
$
4,426,270

 
$
71,330


$
4,497,600

Gross profit
 
1,640,759

 
4,827


1,645,586

Depreciation and amortization
 
194,121

 
181


194,302

Interest and debt expense (income), net
 
48,398

 
(53
)

48,345

Income before income taxes and income on and equity in losses of joint ventures
 
313,221

 
1,195


314,416

Income on and equity in losses of joint ventures
 
818

 


818

Total assets
 
4,420,445

 
39,470


4,459,915

 
 
 
 
 
 
 
Nine Months Ended October 27, 2012:
 
 
 
 



Net sales from external customers
 
$
4,402,721

 
$
84,146


$
4,486,867

Gross profit
 
1,618,751

 
3,778


1,622,529

Depreciation and amortization
 
193,881

 
152


194,033

Interest and debt expense (income), net
 
52,241

 
(102
)

52,139

Income before income taxes and income on and equity in losses of joint ventures
 
267,756

 
291


268,047

Income on and equity in losses of joint ventures
 
1,003

 


1,003

Total assets
 
4,514,849

 
44,518


4,559,367

 
Intersegment construction revenues of $9.2 million and $21.5 million for the three and nine months ended November 2, 2013, respectively, and intersegment construction revenues of $10.5 million and $28.3 million for the three and nine months ended October 27, 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

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at each grant date.  No stock options were granted during the three and nine months ended November 2, 2013 and October 27, 2012, and no stock options were outstanding at November 2, 2013.  The intrinsic value of stock options exercised during the three months ended October 27, 2012 was $1.0 million.

Note 4.  Asset Impairment and Store Closing Charges
 
There were no asset impairment and store closing charges recorded during the three months ended November 2, 2013 and the three and nine months ended October 27, 2012.
 
During the nine months ended November 2, 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 nine months ended November 2, 2013:
 
(in thousands)
 
Balance
Beginning
of Period
 
Adjustments
and Charges*
 
Cash Payments
 
Balance
End of Period
Rent, property taxes and utilities
 
$
251

 
$
142

 
$
328

 
$
65

________________________________
* 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
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Basic:
 
 

 
 

 
 

 
 

Net income
 
$
50,868

 
$
48,514

 
$
204,569

 
$
174,519

 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
45,155

 
47,127

 
46,139

 
48,265

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.13

 
$
1.03

 
$
4.43

 
$
3.62

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Diluted:
 
 

 
 

 
 

 
 

Net income
 
$
50,868

 
$
48,514

 
$
204,569

 
$
174,519

 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
45,155

 
47,127

 
46,139

 
48,265

Dilutive effect of stock-based compensation
 

 
978

 

 
951

Total weighted average equivalent shares
 
45,155

 
48,105

 
46,139

 
49,216

 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
1.13

 
$
1.01

 
$
4.43

 
$
3.55

 
No stock options were outstanding at November 2, 2013, and total stock options outstanding were 2,080,000 at October 27, 2012.

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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 November 2, 2013, letters of credit totaling $46.8 million were issued under the Company’s revolving credit facility.

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 $2.1 million during the three and nine months ended November 2, 2013, respectively.  The Company expects to make contributions to the Pension Plan of approximately $0.7 million for the remainder of fiscal 2013.
 
The components of net periodic benefit costs are as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Components of net periodic benefit costs:
 
 

 
 

 
 

 
 

Service cost
 
$
1,059

 
$
817

 
$
3,178

 
$
2,450

Interest cost
 
1,696

 
1,823

 
5,086

 
5,470

Net actuarial loss
 
753

 
1,283

 
2,259

 
3,849

Amortization of prior service cost
 
24

 
157

 
72

 
470

Plan curtailment gain
 

 

 
(1,480
)
 

Net periodic benefit costs
 
$
3,532

 
$
4,080

 
$
9,115

 
$
12,239

 
Net periodic benefit costs are included in selling, general and administrative expenses.
 
Note 8.  Revolving Credit Agreement
 
At November 2, 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% (1.67% at November 2, 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 $1.0 billion at November 2, 2013.  Borrowings of $170.0 million were outstanding at November 2, 2013.  Letters of credit totaling $46.8 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $783 million at November 2, 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 below were made at the market price at the trade date.  Accordingly, all amounts paid to reacquire these shares were allocated to Treasury Stock.
 

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March 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 (“March 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.  During the three and nine months ended November 2, 2013, the Company repurchased 2.4 million shares and 2.7 million shares for $186.9 million and $209.6 million at an average price of $77.80 per share and $77.93 per share, respectively.  At November 2, 2013, $40.4 million of authorization remained under the March 2013 Stock Plan.

2012 Stock Plan
 
In February 2012, 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 (“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 nine months ended October 27, 2012, the Company repurchased 2.1 million shares for $134.6 million at an average price of $64.52 per share.  During the nine months ended November 2, 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 nine months ended October 27, 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 November 2, 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 October 27, 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 offset by a tax benefit recognized for an amended return filed where capital gain income was offset by a previously unrecognized capital loss carryforward available in the amended return year.
 
During the nine months ended November 2, 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 nine months ended October 27, 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 tax benefits recognized for: (i) an amended return filed where capital gain income was offset by a previously unrecognized capital loss carryforward available in the amended return year and (ii) net decreases in unrecognized tax benefits primarily related to statute lapses.

The Company is currently under examination by the IRS for the fiscal tax year 2011. At this time, the Company does not expect the results from this audit to have a material impact on the Company’s consolidated financial statements.


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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 Ended
 
Nine Months Ended
 
Affected Line Item in the Statement Where Net Income Is Presented
Details about AOCL Components
 
November 2, 2013
 
November 2, 2013
 
Defined benefit pension plan items
 
 

 
 

 
 
Amortization of prior service cost
 
$
24

 
$
72

 
(1)
Amortization of actuarial losses
 
753

 
2,259

 
(1)
Plan curtailment gain
 

 
7,331

 
(2)
 
 
777

 
9,662

 
Total before tax
 
 
297

 
3,692

 
Income tax expense
 
 
$
480

 
$
5,970

 
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 Ended
 
Nine Months Ended
 
 
November 2, 2013
 
November 2, 2013
Beginning balance
 
$
25,785

 
$
31,275

 
 
 
 
 
Other comprehensive income before reclassifications
 

 

Amounts reclassified from AOCL
 
(480
)
 
(5,970
)
Net other comprehensive income
 
(480
)
 
(5,970
)
 
 
 
 
 
Ending balance
 
$
25,305

 
$
25,305

 
Note 13.  Gain on Disposal of Assets
 
During the nine months ended November 2, 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 nine months ended November 2, 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 three months ended October 27, 2012, the Company received proceeds of $4.1 million from the sales of two former retail stores: one location was in Charlotte, North Carolina and was held for sale and the other location was in Colonial Heights, Virginia, which was closed during the period. The sales resulted in a net gain of $1.1 million that was recorded in gain on disposal of assets.
 

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Additionally, during the nine months ended October 27, 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 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.
 
The fair value of the Company’s cash and cash equivalents, accounts receivable and other short-term borrowings approximates their carrying values at November 2, 2013 due to the short-term maturities of these instruments.  The fair value of the Company’s long-term debt at November 2, 2013 was approximately $680 million.  The carrying value of the Company’s long-term debt at November 2, 2013 was $615 million.  The fair value of the Company’s subordinated debentures at November 2, 2013 was approximately $202 million.  The carrying value of the Company’s subordinated debentures at November 2, 2013 was $200 million.
 
During the nine months ended November 2, 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
 
 
Fair Value
of Assets
 
Quoted Prices In Active
Markets for
Identical Items
 
Significant Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(in thousands)
 
(Liabilities)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Long-lived assets held for use
 
 
 
 
 
 
 
 
As of November 2, 2013
 
$
3,000

 
$

 
$
3,000

 
$

 
Long-lived assets held for use
 
During the nine months ended November 2, 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 were based upon an offer to purchase the property.




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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 the Company's consolidated financial statements.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended February 2, 2013.
 
EXECUTIVE OVERVIEW
 
During the third quarter of fiscal 2013, Dillard’s improved its bottom line over last year's third quarter performance.  Comparable store sales were up (for the thirteenth consecutive quarter), and selling, general and administrative expenses improved 40 basis points of sales. Despite a 30 basis point decline in gross margin from retail operations, net income increased to $50.9 million from $48.5 million. This improvement in net income aided by $186.9 million of share repurchases during the current year third quarter helped raise earnings per share to $1.13 per share from $1.01 per share for the third quarter of last year.
 
Included in net income for the prior year third quarter ended October 27, 2012 are:

a $1.1 million pretax gain ($0.7 million after tax or $0.01 per share) related to the sale of two former retail store locations and
a $1.7 million tax benefit ($0.04 per share) due to a reversal of a valuation allowance related to a deferred tax asset consisting of a capital loss carryforward.

Highlights of the quarter ended November 2, 2013 as compared to the quarter ended October 27, 2012 included:
 
a 1% increase in comparable store sales,
a decrease in selling, general and administrative expenses of 40 basis points of sales,
the repurchase of $186.9 million (2.4 million shares) of our Class A Common Stock and
an increase in earnings per share to $1.13 per share from $1.01 per share.
 
As of November 2, 2013, we had working capital of $739.1 million, cash and cash equivalents of $111.0 million and $984.8 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $173.0 million for the nine months ended November 2, 2013.  We operated 299 total stores, including 17 clearance centers, and one internet store as of November 2, 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
 
 
November 2,
2013
 
October 27,
2012
Net sales (in millions)
 
$
1,468.6

 
$
1,449.6

Retail stores sales trend
 
1
%
 
4
 %
Comparable retail stores sales trend
 
1
%
 
5
 %
Gross profit (in millions)
 
$
531.2

 
$
530.0

Gross profit as a percentage of net sales
 
36.2
%
 
36.6
 %
Retail gross profit as a percentage of net sales
 
36.8
%
 
37.1
 %
Selling, general and administrative expenses as a percentage of net sales
 
27.5
%
 
27.9
 %
Cash flow from operations (in millions)*
 
$
173.0

 
$
219.9

Total retail store count at end of period
 
299

 
302

Retail sales per square foot
 
$
29

 
$
28

Comparable retail store inventory trend
 
6
%
 
(1
)%
Retail merchandise inventory turnover
 
2.4

 
2.5

 
_______________________________
*Cash flow from operations data is for the nine months ended November 2, 2013 and October 27, 2012.

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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.

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.
 

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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
 
Nine Months Ended
 
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Service charges and other income
 
2.6

 
2.5

 
2.6

 
2.5

 
 
 
 
 
 
 
 
 
 
 
102.6

 
102.5

 
102.6

 
102.5

 
 
 
 
 
 
 
 
 
Cost of sales
 
63.8

 
63.4

 
63.4

 
63.8

Selling, general and administrative expenses
 
27.5

 
27.9

 
26.5

 
26.7

Depreciation and amortization
 
4.4

 
4.5

 
4.3

 
4.3

Rentals
 
0.4

 
0.5

 
0.4

 
0.5

Interest and debt expense, net
 
1.1

 
1.2

 
1.1

 
1.2

Gain on disposal of assets
 

 
(0.1
)
 
(0.3
)
 

Asset impairment and store closing charges
 

 

 
0.1

 

 
 
 
 
 
 
 
 
 
Income before income taxes and income on and equity in losses of joint ventures
 
5.3

 
5.0

 
7.0

 
6.0

Income taxes
 
1.9

 
1.7

 
2.5

 
2.1

Income on and equity in losses of joint ventures
 

 

 

 

 
 
 
 
 
 
 
 
 
Net income
 
3.5
 %
 
3.3
 %
 
4.5
 %
 
3.9
 %


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Table of Contents

Net Sales (Three-Month Comparison)
 
 
 
Three Months Ended
 
 
(in thousands of dollars)
 
November 2,
2013
 
October 27,
2012
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
1,437,492

 
$
1,424,722

 
$
12,770

Construction segment
 
31,120

 
24,901

 
6,219

Total net sales
 
$
1,468,612

 
$
1,449,623

 
$
18,989

 
The percent change in the Company’s sales by segment and product category for the three months ended November 2, 2013 compared to the three months ended October 27, 2012 as well as the sales percentage by segment and product category to total net sales for the three months ended November 2, 2013 are as follows: 
 
 
Three Months
 
 
% Change
2013-2012
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(1.0
)%
 
15
%
Ladies’ apparel
 
1.5

 
22

Ladies’ accessories and lingerie
 
4.5

 
14

Juniors’ and children’s apparel
 
(0.6
)
 
9

Men’s apparel and accessories
 
0.9

 
17

Shoes
 
1.7

 
17

Home and furniture
 
(6.0
)
 
4

 
 
 

 
98

Construction segment
 
25.0

 
2

Total
 
 

 
100
%
 
Net sales from the retail operations segment increased $12.8 million or 1% during the three months ended November 2, 2013 compared to the three months ended October 27, 2012. Sales in comparable stores also increased 1% between the same periods.  Sales of ladies’ accessories and lingerie increased significantly over the prior year period, and sales of shoes and ladies' apparel increased moderately.  Sales of men’s apparel and accessories increased slightly over the prior year period while sales of cosmetics and juniors’ and children’s apparel decreased slightly.  Sales of home and furniture decreased significantly 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 2% for the three months ended November 2, 2013 compared to the three months ended October 27, 2012 while the average dollars per sales transaction increased 2%.  We recorded an allowance for sales returns of $6.6 million and $7.0 million as of November 2, 2013 and October 27, 2012, respectively.
 
During the three months ended November 2, 2013, net sales from the construction segment increased $6.2 million or 25% compared to the three months ended October 27, 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 November 2, 2013 totaled $158.0 million.


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Table of Contents

Net Sales (Nine-Month Comparison)
 
 
 
Nine Months Ended
 
 
(in thousands of dollars)
 
November 2,
2013
 
October 27,
2012
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
4,426,270

 
$
4,402,721

 
$
23,549

Construction segment
 
71,330

 
84,146

 
(12,816
)
Total net sales
 
$
4,497,600

 
$
4,486,867

 
$
10,733

 
The percent change in the Company’s sales by segment and product category for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012 as well as the sales percentage by segment and product category to total net sales for the nine months ended November 2, 2013 are as follows: 
 
 
Nine Months
 
 
% Change
2013-2012
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(0.9
)%
 
15
%
Ladies’ apparel
 
(1.3
)
 
23

Ladies’ accessories and lingerie
 
6.9

 
15

Juniors’ and children’s apparel
 
1.6

 
9

Men’s apparel and accessories
 
(0.3
)
 
17

Shoes
 
1.4

 
15

Home and furniture
 
(6.3
)
 
4

 
 
 

 
98

Construction segment
 
(15.2
)
 
2

Total
 
 

 
100
%
 
Net sales from the retail operations segment increased $23.5 million or 1% during the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012. Sales in comparable stores also increased 1% between the same periods.  Sales of ladies’ accessories and lingerie increased significantly over the prior year period, sales of juniors’ and children’s apparel increased moderately, and sales of shoes increased slightly. Sales of men’s apparel and accessories remained essentially flat over the prior year period while sales of cosmetics and ladies’ apparel decreased slightly. Sales of home and furniture declined significantly over the prior year period.

The number of sales transactions decreased 2% for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012 while the average dollars per sales transaction increased 3%.
 
During the nine months ended November 2, 2013, net sales from the construction segment decreased $12.8 million or 15% compared to the nine months ended October 27, 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
 
Nine Months Ended
 
Three
Months
 
Nine
 Months
(in thousands of dollars)
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
 
$ Change
2013-2012
 
$ Change
2013-2012
Service charges and other income:
 
 

 
 

 
 

 
 

 
 

 
 

Retail operations segment
 
 

 
 

 
 

 
 

 
 

 
 

Leased department income
 
$
1,990

 
$
2,358

 
$
6,394

 
$
7,216

 
$
(368
)
 
$
(822
)
Income from GE marketing and servicing alliance
 
29,281

 
27,301

 
84,317

 
78,731

 
1,980

 
5,586

Shipping and handling income
 
4,262

 
3,965

 
13,720

 
12,671

 
297

 
1,049

Other
 
2,766

 
3,094

 
11,045

 
11,996

 
(328
)
 
(951
)
 
 
38,299

 
36,718

 
115,476

 
110,614

 
1,581

 
4,862

Construction segment
 
14

 
4

 
26

 
58

 
10

 
(32
)
Total service charges and other income
 
$
38,313

 
$
36,722

 
$
115,502

 
$
110,672

 
$
1,591

 
$
4,830

 
Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased during the three and nine months ended November 2, 2013 primarily due to increases in finance charge income.
 
Gross Profit
 
(in thousands of dollars)
 
November 2, 2013
 
October 27, 2012
 
$ Change
 
% Change
Gross profit:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
529,453

 
$
528,971

 
$
482

 
0.1
%
Construction segment
 
1,752

 
1,029

 
723

 
70.3

Total gross profit
 
$
531,205

 
$
530,000

 
$
1,205

 
0.2
%
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
1,640,759

 
$
1,618,751

 
$
22,008

 
1.4
%
Construction segment
 
4,827

 
3,778

 
1,049

 
27.8

Total gross profit
 
$
1,645,586

 
$
1,622,529

 
$
23,057

 
1.4
%
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Gross profit as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
36.8
%
 
37.1
%
 
37.1
%
 
36.8
%
Construction segment
 
5.6

 
4.1

 
6.8

 
4.5

Total gross profit as a percentage of net sales
 
36.2

 
36.6

 
36.6

 
36.2

 
Gross profit declined 40 basis points of sales during the three months ended November 2, 2013 compared to the three months ended October 27, 2012, and gross profit improved 40 basis points during the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012.
 
During the three months ended November 2, 2013 compared to the three months ended October 27, 2012, gross profit from retail operations declined 30 basis points of sales as a result of increased markdowns partially offset by increased markups.  Gross margin declined moderately in shoes and men’s apparel and accessories and declined slightly in juniors’ and children’s apparel. Gross margin was essentially flat in cosmetics and ladies' apparel. Gross margin improved moderately in ladies’ accessories and lingerie and improved significantly in home and furniture.


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Table of Contents

During the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012, gross profit from retail operations improved 30 basis points of sales primarily as a result of decreased markdowns.  Gross margin improved moderately in home and furniture and improved slightly in ladies’ accessories and lingerie and men’s apparel and accessories. Gross margin was essentially flat in cosmetics, ladies’ apparel and juniors’ and children’s apparel, and gross margin declined slightly in shoes.
 
Inventory in total and comparable stores increased 6% as of November 2, 2013 compared to October 27, 2012.  A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $6 million for the three and nine months ended November 2, 2013, respectively.
 
We believe that gross profit from retail operations may 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)
 
November 2, 2013
 
October 27, 2012
 
$ Change
 
% Change
SG&A:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
403,101

 
$
403,605

 
$
(504
)
 
(0.1
)%
Construction segment
 
1,305

 
1,032

 
273

 
26.5

Total SG&A
 
$
404,406

 
$
404,637

 
$
(231
)
 
(0.1
)%
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
1,189,320

 
$
1,193,205

 
$
(3,885
)
 
(0.3
)%
Construction segment
 
3,500

 
3,458

 
42

 
1.2

Total SG&A
 
$
1,192,820

 
$
1,196,663

 
$
(3,843
)
 
(0.3
)%
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
SG&A as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
28.0
%
 
28.3
%
 
26.9
%
 
27.1
%
Construction segment
 
4.2

 
4.1

 
4.9

 
4.1

Total SG&A as a percentage of net sales
 
27.5

 
27.9

 
26.5

 
26.7

 
SG&A decreased $0.2 million or 40 basis points of sales during the three months ended November 2, 2013 compared to the three months ended October 27, 2012.  This decrease was primarily due to a decrease in advertising expenses ($2.3 million) and taxes other than income taxes ($1.0 million) partially offset by an increase in payroll ($2.9 million), primarily of selling payroll.
 
SG&A decreased $3.8 million or 20 basis points of sales during the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012.  This decrease was most noted in advertising expense ($7.5 million), insurance ($1.6 million) and taxes other than income taxes ($1.2 million) partially offset by an increase in payroll ($8.9 million), primarily of selling payroll.  During the nine months ended November 2, 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.


21

Table of Contents

Rentals
 
(in thousands of dollars)
 
November 2, 2013
 
October 27, 2012
 
$ Change
 
% Change
Rentals:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
5,933

 
$
7,611

 
$
(1,678
)
 
(22.0
)%
Construction segment
 
13

 
13

 

 

Total rentals
 
$
5,946

 
$
7,624

 
$
(1,678
)
 
(22.0
)%
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
17,015

 
$
24,492

 
$
(7,477
)
 
(30.5
)%
Construction segment
 
34

 
38

 
(4
)
 
(10.5
)
Total rentals
 
$
17,049

 
$
24,530

 
$
(7,481
)
 
(30.5
)%
 
The decrease in rental expense for the three and nine months ended November 2, 2013 compared to the three and nine months ended October 27, 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)
 
November 2, 2013
 
October 27, 2012
 
$ Change
 
% Change
Interest and debt expense (income), net:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
15,806

 
$
17,042

 
$
(1,236
)
 
(7.3
)%
Construction segment
 
(17
)
 
(31
)
 
14

 
(45.2
)
Total interest and debt expense, net
 
$
15,789

 
$
17,011

 
$
(1,222
)
 
(7.2
)%
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
48,398

 
$
52,241

 
$
(3,843
)
 
(7.4
)%
Construction segment
 
(53
)
 
(102
)
 
49

 
(48.0
)
Total interest and debt expense, net
 
$
48,345

 
$
52,139

 
$
(3,794
)
 
(7.3
)%
 
The decrease in net interest and debt expense for the three months ended November 2, 2013 compared to the three months ended October 27, 2012 was primarily attributable to lower average debt levels and lower average credit facility fees partially offset by lower investment income.  Total weighted average debt decreased approximately $21.2 million for the three months ended November 2, 2013 compared to the three months ended October 27, 2012, which includes an increase in weighted average short-term debt under the credit facility.

The decrease in net interest and debt expense for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012 was primarily attributable to lower average debt levels partially offset by lower investment income.  Total weighted average debt decreased approximately $48.3 million for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012, which includes an increase in weighted average short-term debt under the credit facility.
 

22

Table of Contents

Gain on Disposal of Assets
 
(in thousands of dollars)
 
November 2, 2013
 
October 27, 2012
 
$ Change
(Gain) loss on disposal of assets:
 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

Retail operations segment
 
$
(6
)
 
$
(1,071
)
 
$
1,065

Construction segment
 
4

 
(1
)
 
5

Total gain on disposal of assets
 
$
(2
)
 
$
(1,072
)
 
$
1,070

 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

Retail operations segment
 
$
(12,367
)
 
$
(2,210
)
 
$
(10,157
)
Construction segment
 
(4
)
 
(1
)
 
(3
)
Total gain on disposal of assets
 
$
(12,371
)
 
$
(2,211
)
 
$
(10,160
)
 
During the nine months ended November 2, 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 nine months ended November 2, 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 three months ended October 27, 2012, the Company received proceeds of $4.1 million from the sales of two former retail stores: one location was in Charlotte, North Carolina and was held for sale and the other location was in Colonial Heights, Virginia, which was closed during the period. The sales resulted in a net gain of $1.1 million that was recorded in gain on disposal of assets.

Additionally, during the nine months ended October 27, 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)
 
November 2, 2013
 
October 27, 2012
 
$ Change
Asset impairment and store closing charges:
 
 

 
 

 
 

Nine months ended
 
 

 
 

 
 

Retail operations segment
 
$
6,527