DDS-08.02.2014-10Q
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 August 2, 2014
 
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 August 30, 2014      39,065,839
CLASS B COMMON STOCK as of August 30, 2014        4,010,929

 
 
 
 
 



Table of Contents

Index
 
DILLARD’S, INC.
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
DILLARD’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
 
 
August 2,
2014
 
February 1,
2014
 
August 3,
2013
Assets
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
235,331

 
$
237,134

 
$
113,735

Accounts receivable
 
19,331

 
30,840

 
26,239

Merchandise inventories
 
1,429,220

 
1,345,321

 
1,459,284

Other current assets
 
50,053

 
46,861

 
50,067

 
 
 
 
 
 
 
Total current assets
 
1,733,935

 
1,660,156

 
1,649,325

 
 
 
 
 
 
 
Property and equipment (net of accumulated depreciation and amortization of $2,379,919, $2,260,675 and $2,288,603)
 
2,081,577

 
2,134,200

 
2,198,693

Other assets
 
254,615

 
256,383

 
259,445

 
 
 
 
 
 
 
Total assets
 
$
4,070,127

 
$
4,050,739

 
$
4,107,463

 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Trade accounts payable and accrued expenses
 
$
658,239

 
$
640,336

 
$
713,103

Current portion of capital lease obligations
 
813

 
784

 
918

Federal and state income taxes including current deferred taxes
 
86,309

 
137,191

 
83,512

 
 
 
 
 
 
 
Total current liabilities
 
745,361

 
778,311

 
797,533

 
 
 
 
 
 
 
Long-term debt
 
614,785

 
614,785

 
614,785

Capital lease obligations
 
6,348

 
6,759

 
7,150

Other liabilities
 
231,709

 
228,439

 
229,155

Deferred income taxes
 
203,000

 
230,248

 
248,002

Subordinated debentures
 
200,000

 
200,000

 
200,000

Commitments and contingencies
 


 


 


Stockholders’ equity:
 
 

 
 

 
 

Common stock
 
1,237

 
1,237

 
1,237

Additional paid-in capital
 
936,106

 
935,208

 
933,264

Accumulated other comprehensive loss
 
(23,253
)
 
(24,074
)
 
(25,785
)
Retained earnings
 
3,554,170

 
3,413,240

 
3,248,620

Less treasury stock, at cost
 
(2,399,336
)
 
(2,333,414
)
 
(2,146,498
)
 
 
 
 
 
 
 
Total stockholders’ equity
 
2,068,924

 
1,992,197

 
2,010,838

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
4,070,127

 
$
4,050,739

 
$
4,107,463

 
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
 
Six Months Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
Net sales
 
$
1,474,484

 
$
1,479,852

 
$
3,025,798

 
$
3,028,988

Service charges and other income
 
38,404

 
36,944

 
75,631

 
77,189

 
 
 
 
 
 
 
 
 
 
 
1,512,888

 
1,516,796

 
3,101,429

 
3,106,177

 
 
 
 
 
 
 
 
 
Cost of sales
 
976,269

 
976,822

 
1,915,493

 
1,914,607

Selling, general and administrative expenses
 
400,459

 
398,218

 
794,110

 
788,414

Depreciation and amortization
 
62,058

 
64,244

 
124,017

 
129,360

Rentals
 
5,860

 
5,532

 
11,675

 
11,103

Interest and debt expense, net
 
15,203

 
16,246

 
31,044

 
32,556

Gain on disposal of assets
 
(50
)
 
(24
)
 
(439
)
 
(12,369
)
Asset impairment and store closing charges
 

 

 

 
6,527

 
 


 
 
 
 
 
 
Income before income taxes and income on and equity in losses of joint ventures
 
53,089

 
55,758

 
225,529

 
235,979

Income taxes
 
18,890

 
19,675

 
79,850

 
83,095

Income on and equity in losses of joint ventures
 
250

 
408

 
453

 
817

 
 
 
 
 
 
 
 
 
Net income
 
34,449

 
36,491

 
146,132

 
153,701

 
 
 
 
 
 
 
 
 
Retained earnings at beginning of period
 
3,522,314

 
3,214,446

 
3,413,240

 
3,099,566

Cash dividends declared
 
(2,593
)
 
(2,317
)
 
(5,202
)
 
(4,647
)
 
 
 
 
 
 
 
 
 
Retained earnings at end of period
 
$
3,554,170

 
$
3,248,620

 
$
3,554,170

 
$
3,248,620

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic and diluted
 
$
0.80

 
$
0.79

 
$
3.36

 
$
3.30

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.06

 
$
0.05

 
$
0.12

 
$
0.10

 
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
 
Six Months Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
Net income
 
$
34,449

 
$
36,491

 
$
146,132

 
$
153,701

Other comprehensive income:
 
 

 
 

 
 

 
 

Amortization of retirement plan and other retiree benefit adjustments (net of tax of $254, $297, $509 and $3,395)
 
411

 
480

 
821

 
5,490

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
34,860

 
$
36,971

 
$
146,953

 
$
159,191

 
See notes to condensed consolidated financial statements.


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Table of Contents

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 
 
 
Six Months Ended
 
 
August 2,
2014
 
August 3,
2013
Operating activities:
 
 

 
 

Net income
 
$
146,132

 
$
153,701

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

 
 

Depreciation and amortization of property and deferred financing costs
 
124,791

 
130,343

Gain on disposal of assets
 
(439
)
 
(12,369
)
Asset impairment and store closing charges
 

 
6,527

Changes in operating assets and liabilities:
 
 

 
 

Decrease in accounts receivable
 
11,509

 
5,280

Increase in merchandise inventories
 
(83,899
)
 
(164,703
)
Increase in other current assets
 
(2,294
)
 
(7,478
)
Decrease in other assets
 
1,049

 
1,324

Increase in trade accounts payable and accrued expenses and other liabilities
 
15,117

 
54,870

Decrease in income taxes payable
 
(78,130
)
 
(35,775
)
 
 
 
 
 
Net cash provided by operating activities
 
133,836

 
131,720

 
 
 
 
 
Investing activities:
 
 

 
 

Purchases of property and equipment
 
(68,818
)
 
(40,868
)
Proceeds from disposal of assets
 
4,728

 
18,269

 
 
 
 
 
Net cash used in investing activities
 
(64,090
)
 
(22,599
)
 
 
 
 
 
Financing activities:
 
 

 
 

Principal payments on long-term debt and capital lease obligations
 
(382
)
 
(1,166
)
Issuance cost of line of credit
 

 
(1,300
)
Cash dividends paid
 
(5,245
)
 
(2,330
)
Purchase of treasury stock
 
(65,922
)
 
(114,650
)
 
 
 
 
 
Net cash used in financing activities
 
(71,549
)
 
(119,446
)
 
 
 
 
 
Decrease in cash and cash equivalents
 
(1,803
)
 
(10,325
)
Cash and cash equivalents, beginning of period
 
237,134

 
124,060

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
235,331

 
$
113,735

 
 
 
 
 
Non-cash transactions:
 
 

 
 

Accrued capital expenditures
 
$
16,695

 
$
3,300

Stock awards
 
898

 
769

 
 
 
 
 
 
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 six months ended August 2, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015 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 1, 2014 filed with the SEC on March 27, 2014.
 
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 2, 2014:
 
 

 
 


 

Net sales from external customers
 
$
1,461,134

 
$
13,350


$
1,474,484

Gross profit
 
497,319

 
896


498,215

Depreciation and amortization
 
61,983

 
75


62,058

Interest and debt expense (income), net
 
15,212

 
(9
)

15,203

Income (loss) before income taxes and income on and equity in losses of joint ventures
 
53,752

 
(663
)

53,089

Income on and equity in losses of joint ventures
 
250

 


250

Total assets
 
4,045,457

 
24,670


4,070,127

 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
Six Months Ended August 2, 2014:
 
 
 
 



Net sales from external customers
 
$
3,000,327

 
$
25,471


$
3,025,798

Gross profit
 
1,108,691

 
1,614


1,110,305

Depreciation and amortization
 
123,868

 
149


124,017

Interest and debt expense (income), net
 
31,066

 
(22
)

31,044

Income (loss) before income taxes and income on and equity in losses of joint ventures
 
226,988

 
(1,459
)

225,529

Income on and equity in losses of joint ventures
 
453

 


453

Total assets
 
4,045,457

 
24,670


4,070,127

 
 
 
 
 
 
 
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

 
Intersegment construction revenues of $29.1 million and $43.8 million for the three and six months ended August 2, 2014, respectively, and intersegment construction revenues of $10.6 million and $12.4 million for the three and six months ended August 3, 2013, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.
 


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Table of Contents

Note 3.  Stock-Based Compensation
 
The Company has various stock option plans that provide for the granting of options to purchase shares of Class A Common Stock to certain key employees of the Company.  Exercise and vesting terms for options granted under the plans are determined at each grant date.  No stock options were granted during the three and six months ended August 2, 2014 and August 3, 2013, and no stock options were outstanding at August 2, 2014.

Note 4.  Asset Impairment and Store Closing Charges
 
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. 
 
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 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
 

 
 

 
 

 
 

Net income
 
$
34,449

 
$
36,491

 
$
146,132

 
$
153,701

 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
43,217

 
46,327

 
43,434

 
46,632

 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share
 
$
0.80

 
$
0.79

 
$
3.36

 
$
3.30

 
The Company maintains a capital structure in which common stock is the only security issued and outstanding, and there were no shares of preferred stock, stock options, other dilutive securities or potentially dilutive securities issued or outstanding during the three or six months ended August 2, 2014 and August 3, 2013.
 
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 2, 2014, letters of credit totaling $33.0 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 $0.8 million and $1.4 million during the three and six months ended August 2, 2014, respectively.  The Company expects to make contributions to the Pension Plan of approximately $1.5 million during the remainder of fiscal 2014.
 

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Table of Contents

The components of net periodic benefit costs are as follows (in thousands): 
 
 
Three Months Ended
 
Six Months Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
Components of net periodic benefit costs:
 
 

 
 

 
 

 
 

Service cost
 
$
1,099

 
$
1,059

 
$
2,198

 
$
2,118

Interest cost
 
1,911

 
1,695

 
3,822

 
3,391

Net actuarial loss
 
665

 
753

 
1,330

 
1,506

Amortization of prior service cost
 

 
24

 

 
48

Plan curtailment gain
 

 

 

 
(1,480
)
Net periodic benefit costs
 
$
3,675

 
$
3,531

 
$
7,350

 
$
5,583

 
Net periodic benefit costs are included in selling, general and administrative expenses.
 
Note 8.  Revolving Credit Agreement
 
At August 2, 2014, 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 certain 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% (1.66% at August 2, 2014) 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 $962.7 million at August 2, 2014No borrowings were outstanding at August 2, 2014, and letters of credit totaling $33.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $930 million at August 2, 2014.  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.
 
November 2013 Stock Plan
 
In November 2013, 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 (“November 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.  The November 2013 Stock Plan has no expiration date. During the six months ended August 2, 2014, the Company repurchased 0.3 million shares for $25.5 million at an average price of $89.82 per share.  At August 2, 2014, $224.5 million of authorization remained under the November 2013 Stock Plan.

March 2013 Stock Plan
 
In March 2013, 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 (“March 2013 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 August 2, 2014 and August 3, 2013, the Company repurchased 0.5 million and 0.3 million shares for $40.4 million and $22.7 million at an average price of $89.04 and $79.04 per share, respectively.  At August 2, 2014, no authorization remained under the March 2013 Stock Plan.


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Table of Contents

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 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.
 
Note 10.  Income Taxes
 
During the three months ended August 2, 2014, 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 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 six months ended August 2, 2014, 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.

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
 
Six Months Ended
 
Affected Line Item in the Statement Where Net Income Is Presented
Details about AOCL Components
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
 
Defined benefit pension plan items
 
 

 
 

 
 

 
 

 
 
Amortization of prior service cost
 
$

 
$
24

 
$

 
$
48

 
(1)
Amortization of actuarial losses
 
665

 
753

 
1,330

 
1,506

 
(1)
Plan curtailment gain
 

 

 

 
7,331

 
(2)
 
 
665

 
777

 
1,330

 
8,885

 
Total before tax
 
 
254

 
297

 
509

 
3,395

 
Income tax expense
 
 
$
411

 
$
480

 
$
821

 
$
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.
 


11

Table of Contents

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
 
Six Months Ended
 
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Beginning balance
 
$
23,664

 
$
26,265

 
$
24,074

 
$
31,275

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 

 

 

Amounts reclassified from AOCL
 
(411
)
 
(480
)
 
(821
)
 
(5,490
)
Net other comprehensive income
 
(411
)
 
(480
)
 
(821
)
 
(5,490
)
 
 
 
 
 
 
 
 
 
Ending balance
 
$
23,253

 
$
25,785

 
$
23,253

 
$
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.

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 August 2, 2014 due to the short-term maturities of these instruments.  The fair value of the Company’s long-term debt at August 2, 2014 was approximately $687 million.  The carrying value of the Company’s long-term debt at August 2, 2014 was $615 million.  The fair value of the Company’s subordinated debentures at August 2, 2014 was approximately $208 million.  The carrying value of the Company’s subordinated debentures at August 2, 2014 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 Financial Accounting Standards Board's ("FASB") 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

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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 August 3, 2013
 
$
3,000

 
$

 
$
3,000

 
$

 
Long-lived assets held for use
 
During the six months ended August 3, 2013, a 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 charged against earnings during 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.

Note 15.  Recently Issued Accounting Standards
 
Presentation of Discontinued Operations
 
In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which stipulates that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also removed the conditions that (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company adopted this guidance as of the beginning of its fiscal year 2014. The adoption of this guidance had no impact on the Company's condensed consolidated financial statements.

Revenue from Contracts with Customers
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will be effective for the Company retrospectively beginning in the first quarter of fiscal 2017 with early adoption not permitted. The Company is currently assessing the impact of this update on its condensed 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 1, 2014.
 
EXECUTIVE OVERVIEW

Although comparable store sales were up for a sixteenth consecutive quarter, our bottom line results for the second quarter of fiscal 2014 were down from the same time last year. Comparable store sales increased 1% over last year's second quarter, while gross margin from retail operations declined 33 basis points as we took more markdowns. Selling general and administrative expenses increased 25 basis points of sales over the prior year second quarter. Net income was $34.4 million for the second quarter of 2014, down from net income of $36.5 million of the prior year second quarter, while earnings per share increased to $0.80 per share--our highest historical second fiscal quarter earnings per share--from $0.79 per share between the same periods.

As of August 2, 2014, we had working capital of $988.6 million, cash and cash equivalents of $235.3 million and $814.8 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $133.8 million for the six months ended August 2, 2014, increasing slightly over the prior year comparable period.  We operated 296 total stores, including 18 clearance centers, and one internet store as of August 2, 2014, a decrease of four stores from August 3, 2013.
 
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 2,
2014
 
August 3,
2013
Net sales (in millions)
 
$
1,474.5

 
$
1,479.9

Retail stores sales trend
 
 %
 
%
Comparable retail stores sales trend
 
1
 %
 
1
%
Gross profit (in millions)
 
$
498.2

 
$
503.0

Gross profit as a percentage of net sales
 
33.8
 %
 
34.0
%
Retail gross profit as a percentage of net sales
 
34.0
 %
 
34.4
%
Selling, general and administrative expenses as a percentage of net sales
 
27.2
 %
 
26.9
%
Cash flow from operations (in millions)*
 
$
133.8

 
$
131.7

Total retail store count at end of period
 
296

 
300

Retail sales per square foot
 
$
29

 
$
29

Comparable retail store inventory trend
 
(1
)%
 
8
%
Retail merchandise inventory turnover
 
2.6

 
2.6

 
_____________________
*Cash flow from operations data is for the six months ended August 2, 2014 and August 3, 2014.

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 quarter and the corresponding quarter 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.
 

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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 and capitalized interest, relating to the Company’s unsecured notes, 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, when applicable.  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
 
Six Months Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Service charges and other income
 
2.6

 
2.5

 
2.5

 
2.5

 
 
 
 
 
 
 
 
 
 
 
102.6

 
102.5

 
102.5

 
102.5

 
 
 
 
 
 
 
 
 
Cost of sales
 
66.2

 
66.0

 
63.3

 
63.2

Selling, general and administrative expenses
 
27.2

 
26.9

 
26.2

 
26.0

Depreciation and amortization
 
4.2

 
4.3

 
4.1

 
4.3

Rentals
 
0.4

 
0.4

 
0.4

 
0.4

Interest and debt expense, net
 
1.0

 
1.1

 
1.0

 
1.1

Gain on disposal of assets
 

 

 

 
(0.4
)
Asset impairment and store closing charges
 

 

 

 
0.2

 
 
 
 
 
 
 
 
 
Income before income taxes and income on and equity in losses of joint ventures
 
3.6

 
3.8

 
7.5

 
7.8

Income taxes
 
1.3

 
1.3

 
2.6

 
2.7

Income on and equity in losses of joint ventures
 

 

 

 

 
 
 
 
 
 
 
 
 
Net income
 
2.3
 %
 
2.5
 %
 
4.8
 %
 
5.1
 %


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Table of Contents

Net Sales (Three-Month Comparison)
 
 
 
Three Months Ended
 
 
(in thousands of dollars)
 
August 2,
2014
 
August 3,
2013
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
1,461,134

 
$
1,458,778

 
$
2,356

Construction segment
 
13,350

 
21,074

 
(7,724
)
Total net sales
 
$
1,474,484

 
$
1,479,852

 
$
(5,368
)
 
The percent change in the Company’s sales by segment and product category for the three months ended August 2, 2014 compared to the three months ended August 3, 2013 as well as the sales percentage by segment and product category to total net sales for the three months ended August 2, 2014 are as follows: 
 
 
% Change
2014-2013
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(0.5
)%
 
14
%
Ladies’ apparel
 
0.2

 
25

Ladies’ accessories and lingerie
 
0.4

 
16

Juniors’ and children’s apparel
 
4.2

 
8

Men’s apparel and accessories
 
1.1

 
18

Shoes
 
0.1

 
14

Home and furniture
 
(9.3
)
 
4

 
 
 

 
99

Construction segment
 
(36.7
)
 
1

Total
 
 

 
100
%
 
Net sales from the retail operations segment increased $2.4 million during the three months ended August 2, 2014 compared to the three months ended August 3, 2013, remaining essentially unchanged on a percentage basis. Sales in comparable stores increased 1% between the same periods.  Sales of juniors’ and children’s apparel increased moderately over the prior year period, and sales of men’s apparel and accessories increased slightly.  Sales of shoes, ladies' apparel and ladies’ accessories and lingerie remained essentially flat between the periods. Sales of cosmetics decreased slightly compared to the prior year period while sales of home and furniture decreased significantly.
 
The number of sales transactions decreased 3% for the three months ended August 2, 2014 compared to the three months ended August 3, 2013 while the average dollars per sales transaction increased 3%.  We recorded an allowance for sales returns of $6.6 million and $6.7 million as of August 2, 2014 and August 3, 2013, respectively.
 
During the three months ended August 2, 2014, net sales from the construction segment decreased $7.7 million or 37% compared to the three months ended August 3, 2013 due to a delay in the timing of certain construction projects.  The backlog of awarded construction contracts at August 2, 2014 totaled $340.6 million, increasing approximately 73% from February 1, 2014 and approximately 430% from August 3, 2013.



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Table of Contents

Net Sales (Six-Month Comparison)
 
 
 
Six Months Ended
 
 
(in thousands of dollars)
 
August 2,
2014
 
August 3,
2013
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
3,000,327

 
$
2,988,778

 
$
11,549

Construction segment
 
25,471

 
40,210

 
(14,739
)
Total net sales
 
$
3,025,798

 
$
3,028,988

 
$
(3,190
)
 
The percent change in the Company’s sales by segment and product category for the six months ended August 2, 2014 compared to the six months ended August 3, 2013 as well as the sales percentage by segment and product category to total net sales for the six months ended August 2, 2014 are as follows: 
 
 
% Change
2014-2013
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(1.2
)%
 
15
%
Ladies’ apparel
 
0.6

 
24

Ladies’ accessories and lingerie
 
0.9

 
16

Juniors’ and children’s apparel
 
3.5

 
8

Men’s apparel and accessories
 
2.2

 
17

Shoes
 
(0.7
)
 
15

Home and furniture
 
(7.1
)
 
4

 
 
 

 
99

Construction segment
 
(36.7
)
 
1

Total
 
 

 
100
%
 
Net sales from the retail operations segment increased $11.5 million during the six months ended August 2, 2014 compared to the six months ended August 3, 2013, remaining essentially unchanged on a percentage basis. Sales in comparable stores increased 1% between the same periods.  Sales of juniors’ and children’s apparel and men’s apparel and accessories increased moderately over the prior year period, and sales of ladies’ accessories and lingerie and ladies' apparel increased slightly.  Sales of cosmetics and shoes decreased slightly over the prior year period while sales of home and furniture decreased significantly.
 
The number of sales transactions decreased 2% for the six months ended August 2, 2014 compared to the six months ended August 3, 2013 while the average dollars per sales transaction increased 3%. 

Storewide sales penetration of exclusive brand merchandise for the six months ended August 2, 2014 was 21.6% compared to 21.8% during the six months ended August 3, 2013.
 
During the six months ended August 2, 2014, net sales from the construction segment decreased $14.7 million or 37% compared to the six months ended August 3, 2013 due to a delay 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 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
 
$ Change
2014-2013
 
$ Change
2014-2013
Service charges and other income:
 
 

 
 

 
 

 
 

 
 

 
 

Retail operations segment
 
 

 
 

 
 

 
 

 
 

 
 

Leased department income
 
$
2,083

 
$
2,159

 
$
4,050

 
$
4,404

 
$
(76
)
 
$
(354
)
Income from GE marketing and servicing alliance
 
28,229

 
27,628

 
55,747

 
55,036

 
601

 
711

Shipping and handling income
 
5,203

 
4,674

 
10,057

 
9,457

 
529

 
600

Other
 
2,873

 
2,476

 
5,753

 
8,279

 
397

 
(2,526
)
 
 
38,388

 
36,937

 
75,607

 
77,176

 
1,451

 
(1,569
)
Construction segment
 
16

 
7

 
24

 
13

 
9

 
11

Total service charges and other income
 
$
38,404

 
$
36,944

 
$
75,631

 
$
77,189

 
$
1,460

 
$
(1,558
)
 
Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased during the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 primarily from increases in finance charge income partially offset by increased credit losses.
 

Gross Profit
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
 
% Change
Gross profit:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
497,319

 
$
501,417

 
$
(4,098
)
 
(0.8
)%
Construction segment
 
896

 
1,613

 
(717
)
 
(44.5
)
Total gross profit
 
$
498,215

 
$
503,030

 
$
(4,815
)
 
(1.0
)%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
1,108,691

 
$
1,111,306

 
$
(2,615
)
 
(0.2
)%
Construction segment
 
1,614

 
3,075

 
(1,461
)
 
(47.5
)
Total gross profit
 
$
1,110,305

 
$
1,114,381

 
$
(4,076
)
 
(0.4
)%
 
 
Three Months Ended
 
Six Months Ended
 
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Gross profit as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
34.0
%
 
34.4
%
 
37.0
%
 
37.2
%
Construction segment
 
6.7

 
7.7

 
6.3

 
7.6

Total gross profit as a percentage of net sales
 
33.8

 
34.0

 
36.7

 
36.8

 
Gross profit as a percentage of net sales declined 20 basis points of sales during the three months ended August 2, 2014 compared to the three months ended August 3, 2013. Gross profit from retail operations declined 33 basis points of sales during the same comparable periods as a result of increased markdowns partially offset by increased markups.  Gross margin declined moderately in home and furniture and men’s apparel and accessories, and gross margin was essentially flat in cosmetics, shoes, ladies' accessories and lingerie and ladies' apparel. Gross margin improved moderately in juniors’ and children’s apparel.

Gross profit as a percentage of net sales declined 10 basis points of sales during the six months ended August 2, 2014 compared to the six months ended August 3, 2013. Gross profit from retail operations declined 23 basis points of sales during

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Table of Contents

the same comparable periods as a result of increased markdowns partially offset by increased markups.  Gross margin declined moderately in home and furniture and men’s apparel and accessories, and gross margin was essentially flat in cosmetics, shoes and ladies' accessories and lingerie. Gross margin improved slightly in juniors’ and children’s apparel and ladies' apparel.

Inventory in total and comparable stores decreased 2% and 1%, respectively, as of August 2, 2014 compared to August 3, 2013.  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 2, 2014, respectively.

 
Selling, General and Administrative Expenses (“SG&A”)
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
 
% Change
SG&A:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
398,968

 
$
397,125

 
$
1,843

 
0.5
%
Construction segment
 
1,491

 
1,093

 
398

 
36.4

Total SG&A
 
$
400,459

 
$
398,218

 
$
2,241

 
0.6
%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
791,176

 
$
786,220

 
$
4,956

 
0.6
%
Construction segment
 
2,934

 
2,194

 
740

 
33.7

Total SG&A
 
$
794,110

 
$
788,414

 
$
5,696

 
0.7
%
 
 
Three Months Ended
 
Six Months Ended
 
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
SG&A as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
27.3
%
 
27.2
%
 
26.4
%
 
26.3
%
Construction segment
 
11.2

 
5.2

 
11.5

 
5.5

Total SG&A as a percentage of net sales
 
27.2

 
26.9

 
26.2

 
26.0

 
SG&A increased $2.2 million or 25 basis points of sales during the three months ended August 2, 2014 compared to the three months ended August 3, 2013.  This increase was primarily due to an increase in payroll and payroll taxes ($8.4 million) partially offset by a decrease in insurance ($4.5 million) and advertising expenses ($2.8 million).

SG&A increased $5.7 million or 21 basis points of sales during the six months ended August 2, 2014 compared to the six months ended August 3, 2013.  This increase was primarily due to an increase in payroll and payroll taxes ($14.1 million) partially offset by a decrease in advertising ($5.1 million) and insurance expenses ($4.6 million). During the six months ended August 3, 2013, the Company also recognized a $1.5 million pretax reduction of pension expense for a gain from a pension plan curtailment.



20

Table of Contents

Depreciation and Amortization
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
 
% Change
Depreciation and amortization:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
61,983

 
$
64,186

 
$
(2,203
)
 
(3.4
)%
Construction segment
 
75

 
58

 
17

 
29.3

Total depreciation and amortization
 
$
62,058

 
$
64,244

 
$
(2,186
)
 
(3.4
)%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
123,868

 
$
129,243

 
$
(5,375
)
 
(4.2
)%
Construction segment
 
149

 
117

 
32

 
27.4

Total rentals
 
$
124,017

 
$
129,360

 
$
(5,343
)
 
(4.1
)%
 
The decrease in depreciation and amortization expense for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 was primarily due to the timing and composition of capital expenditures.


Rentals
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
 
% Change
Rentals:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
5,842

 
$
5,523

 
$
319

 
5.8
%
Construction segment
 
18

 
9

 
9

 
100.0

Total rentals
 
$
5,860

 
$
5,532

 
$
328

 
5.9
%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
11,639

 
$
11,081

 
$
558

 
5.0
%
Construction segment
 
36

 
22

 
14

 
63.6

Total rentals
 
$
11,675

 
$
11,103

 
$
572

 
5.2
%
 
The increase in rental expense for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 was primarily due to an increase in the amount of equipment leased by the Company.



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Table of Contents

Interest and Debt Expense, Net
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
 
% Change
Interest and debt expense (income), net:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
15,212

 
$
16,262

 
$
(1,050
)
 
(6.5
)%
Construction segment
 
(9
)
 
(16
)
 
7

 
43.8

Total interest and debt expense, net
 
$
15,203

 
$
16,246

 
$
(1,043
)
 
(6.4
)%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
31,066

 
$
32,592

 
$
(1,526
)
 
(4.7
)%
Construction segment
 
(22
)
 
(36
)
 
14

 
38.9

Total interest and debt expense, net
 
$
31,044

 
$
32,556

 
$
(1,512
)
 
(4.6
)%
 
The decrease in net interest and debt expense for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 was primarily attributable to a reduction in credit facility fees and an increase in capitalized interest.  Total weighted average debt decreased approximately $44.1 million and $23.1 million for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013, respectively.


 Gain on Disposal of Assets
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
(Gain) loss on disposal of assets:
 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

Retail operations segment
 
$
(50
)
 
$
(24
)
 
$
(26
)
Construction segment
 

 

 

Total gain on disposal of assets
 
$
(50
)
 
$
(24
)
 
$
(26
)
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

Retail operations segment
 
$
(439
)
 
$
(12,362
)
 
$
11,923

Construction segment
 

 
(7
)
 
7

Total gain on disposal of assets
 
$
(439
)
 
$
(12,369
)
 
$
11,930

 
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.
  

Asset Impairment and Store Closing Charges 
 
There were no asset impairment and store closing charges recorded during the three or six months ended August 2, 2014 or the three months ended August 3, 2013. During the six months ended August 3, 2013, the Company's retail operations segment 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.

 

22

Table of Contents

Income Taxes
 
The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.4% and 35.0% for the three months ended August 2, 2014 and August 3, 2013, respectively.  During the three months ended August 2, 2014, 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 three months ended August 2, 2014, the IRS concluded its examination of the Company's federal income tax returns for fiscal tax years 2011 and 2012, with no material changes in these tax years as a result of such examination. 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.

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.3% and 35.1% for the six months ended August 2, 2014 and August 3, 2013, respectively.  During the six months ended August 2, 2014, 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.

The Company expects the fiscal 2014 federal and state effective income tax rate to approximate 35%.  This rate may change if results of operations for fiscal 2014 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.

FINANCIAL CONDITION
 
A summary of net cash flows for the six months ended August 2, 2014 and August 3, 2013 follows: 
 
 
Six Months Ended
 
 
(in thousands of dollars)
 
August 2, 2014
 
August 3, 2013
 
$ Change
Operating Activities
 
$
133,836

 
$
131,720

 
$
2,116