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 April 30, 2011

 

or

 

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

 

For the transition period from                      to                     .

 

Commission File Number:  1-6140

 

DILLARD’S, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

71-0388071

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS  72201

(Address of principal executive offices)

(Zip Code)

 

(501) 376-5200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

CLASS A COMMON STOCK as of May 28, 2011

50,315,211

 

CLASS B COMMON STOCK as of May 28, 2011

4,010,929

 

 

 

 



Table of Contents

 

Index

 

DILLARD’S, INC.

 

 

Page

 

Number

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of April 30, 2011, January 29, 2011 and May 1, 2010

3

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings for the Three Months Ended April 30, 2011 and May 1, 2010

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2011 and May 1, 2010

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

12

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

 

 

 

Item 4.

Controls and Procedures

21

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

22

 

 

 

Item 1A.

Risk Factors

22

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 6.

Exhibits

23

 

 

 

SIGNATURES

23

 

2



Table of Contents

 

PART 1.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

 

 

 

April 30,

 

January 29,

 

May 1,

 

 

 

2011

 

2011

 

2010

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

147,266

 

$

343,291

 

$

305,296

 

Accounts receivable

 

21,494

 

25,950

 

55,088

 

Merchandise inventories

 

1,504,033

 

1,290,147

 

1,453,551

 

Other current assets

 

43,178

 

42,538

 

41,647

 

 

 

 

 

 

 

 

 

Total current assets

 

1,715,971

 

1,701,926

 

1,855,582

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

2,547,924

 

2,595,514

 

2,717,977

 

Other assets

 

72,983

 

76,726

 

73,484

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,336,878

 

$

4,374,166

 

$

4,647,043

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable and accrued expenses

 

$

835,703

 

$

689,281

 

$

793,393

 

Current portion of long-term debt

 

49,187

 

49,166

 

1,738

 

Current portion of capital lease obligations

 

2,215

 

2,184

 

1,794

 

Federal and state income taxes including current deferred taxes

 

101,620

 

90,581

 

80,095

 

 

 

 

 

 

 

 

 

Total current liabilities

 

988,725

 

831,212

 

877,020

 

 

 

 

 

 

 

 

 

Long-term debt

 

696,783

 

697,246

 

747,145

 

Capital lease obligations

 

10,838

 

11,383

 

21,987

 

Other liabilities

 

206,809

 

205,916

 

213,493

 

Deferred income taxes

 

328,860

 

341,689

 

339,650

 

Subordinated debentures

 

200,000

 

200,000

 

200,000

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

1,221

 

1,217

 

1,210

 

Additional paid-in capital

 

817,006

 

805,422

 

784,560

 

Accumulated other comprehensive loss

 

(17,419

)

(17,830

)

(21,822

)

Retained earnings

 

2,727,879

 

2,653,437

 

2,530,433

 

Less treasury stock, at cost

 

(1,623,824

)

(1,355,526

)

(1,046,633

)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

1,904,863

 

2,086,720

 

2,247,748

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,336,878

 

$

4,374,166

 

$

4,647,043

 

 

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

 

 

 

April 30,

 

May 1,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net sales

 

$

1,469,198

 

$

1,453,596

 

Service charges and other income

 

29,558

 

29,065

 

 

 

 

 

 

 

 

 

1,498,756

 

1,482,661

 

 

 

 

 

 

 

Cost of sales

 

898,886

 

914,261

 

Advertising, selling, administrative and general expenses

 

389,267

 

393,642

 

Depreciation and amortization

 

64,031

 

63,716

 

Rentals

 

11,430

 

13,014

 

Interest and debt expense, net

 

18,275

 

18,856

 

Gain on disposal of assets

 

(28

)

(104

)

Asset impairment and store closing charges

 

1,200

 

2,208

 

 

 

 

 

 

 

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

 

115,695

 

77,068

 

Income taxes

 

42,710

 

27,280

 

Income on and equity in losses of joint ventures

 

3,692

 

(954

)

 

 

 

 

 

 

Net income

 

76,677

 

48,834

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

2,653,437

 

2,484,447

 

Cash dividends declared

 

(2,235

)

(2,848

)

 

 

 

 

 

 

Retained earnings at end of period

 

$

2,727,879

 

$

2,530,433

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

1.33

 

$

0.68

 

 

 

 

 

 

 

Diluted

 

$

1.31

 

$

0.68

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.04

 

$

0.04

 

 

See notes to condensed consolidated financial statements.

 

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DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

 

 

April 30,

 

May 1,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

76,677

 

$

48,834

 

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

 

 

 

 

 

Depreciation and amortization of property and deferred financing

 

64,485

 

64,182

 

Gain on disposal of property and equipment

 

(28

)

(104

)

Excess tax benefits from share-based compensation

 

(2,434

)

(26

)

Asset impairment and store closing charges

 

1,200

 

2,208

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable

 

4,456

 

8,134

 

Increase in merchandise inventories

 

(213,886

)

(152,871

)

(Increase) decrease in other current assets

 

(640

)

2,214

 

Decrease in other assets

 

845

 

2,049

 

Increase in trade accounts payable and accrued expenses and other liabilities

 

127,867

 

124,578

 

Increase (decrease) in income taxes payable

 

644

 

(18,905

)

 

 

 

 

 

 

Net cash provided by operating activities

 

59,186

 

80,293

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(16,961

)

(8,361

)

Distribution from joint venture

 

2,481

 

 

Proceeds from disposal of property and equipment

 

15

 

47

 

 

 

 

 

 

 

Net cash used in investing activities

 

(14,465

)

(8,314

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal payments on long-term debt and capital lease obligations

 

(956

)

(839

)

Cash dividends paid

 

(2,460

)

(2,953

)

Purchase of treasury stock

 

(247,083

)

(104,996

)

Proceeds from stock issuance

 

7,319

 

386

 

Excess tax benefits from share-based compensation

 

2,434

 

26

 

 

 

 

 

 

 

Net cash used in financing activities

 

(240,746

)

(108,376

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(196,025

)

(36,397

)

Cash and cash equivalents, beginning of period

 

343,291

 

341,693

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

147,266

 

$

305,296

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Accrued capital expenditures

 

$

2,350

 

$

1,400

 

Stock awards

 

2,206

 

1,767

 

 

See notes to condensed consolidated financial statements.

 

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DILLARD’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.         Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included.  Operating results for the three months ended April 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 28, 2012 due to the seasonal nature of the business.

 

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

 

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

 

Note 2.         Business Segments

 

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

 

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

 

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

 

 

 

Three Months Ended April 30, 2011

 

(in thousands of dollars)

 

Retail
Operations

 

Construction

 

Consolidated

 

Net sales from external customers

 

$

1,455,510

 

$

13,688

 

$

1,469,198

 

Gross profit

 

569,684

 

628

 

570,312

 

Depreciation and amortization

 

63,985

 

46

 

64,031

 

Interest and debt expense (income), net

 

18,316

 

(41

)

18,275

 

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

 

116,341

 

(646

)

115,695

 

Income on and equity in losses of joint ventures

 

3,692

 

 

3,692

 

Total assets

 

4,300,720

 

36,158

 

4,336,878

 

 

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Table of Contents

 

 

 

Three Months Ended May 1, 2010

 

(in thousands of dollars)

 

Retail
Operations

 

Construction

 

Consolidated

 

Net sales from external customers

 

$

1,428,851

 

$

24,745

 

$

1,453,596

 

Gross profit (loss)

 

540,307

 

(972

)

539,335

 

Depreciation and amortization

 

63,671

 

45

 

63,716

 

Interest and debt expense (income), net

 

18,899

 

(43

)

18,856

 

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

 

78,898

 

(1,830

)

77,068

 

Income on and equity in losses of joint ventures

 

(954

)

 

(954

)

Total assets

 

4,569,287

 

77,756

 

4,647,043

 

 

Intersegment construction revenues of $5.5 million and $6.6 million were eliminated during consolidation and have been excluded from net sales for the quarters ended April 30, 2011 and May 1, 2010, respectively.

 

Note 3.         Stock-Based Compensation

 

The Company has various stock option plans that provide for the granting of options to purchase shares of Class A Common Stock to certain key employees of the Company.  Exercise and vesting terms for options granted under the plans are determined at each grant date.  There were no stock options granted during the quarters ended April 30, 2011 and May 1, 2010.

 

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

 

 

 

 

 

Weighted Average

 

Fixed Options

 

Shares

 

Exercise Price

 

Outstanding, beginning of period

 

3,351,869

 

$

25.80

 

Granted

 

 

 

Exercised

 

(366,559

)

$

25.88

 

Expired

 

 

 

Outstanding, end of period

 

2,985,310

 

$

25.79

 

Options exercisable at period end

 

2,985,310

 

$

25.79

 

 

During the quarter ended April 30, 2011, the intrinsic value of stock options exercised was $6.7 million.  At April 30, 2011, the intrinsic value of outstanding and exercisable stock options was $66.4 million.

 

Note 4.         Asset Impairment and Store Closing Charges

 

During the quarter ended April 30, 2011, the Company recorded a pretax charge of $1.2 million for asset impairment and store closing costs.  The charge was for the write-down of one property currently held for sale.

 

During the quarter ended May 1, 2010, the Company recorded a pretax charge of $2.2 million for asset impairment and store closing costs.  The charge was for the write-down of one property currently held for sale.

 

Following is a summary of the activity in the reserve established for store closing charges for the quarter ended April 30, 2011:

 

(in thousands)

 

Balance,
Beginning
of Period

 

Adjustments
and Charges

 

Cash Payments

 

Balance,
End of Period

 

 

 

 

 

 

 

 

 

 

 

Rentals, property taxes and utilities

 

$

1,360

 

$

265

 

$

416

 

$

1,209

 

 

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

 

7



Table of Contents

 

Note 5.         Earnings Per Share Data

 

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

 

 

 

Three Months Ended

 

 

 

April 30,

 

May 1,

 

 

 

2011

 

2010

 

Basic:

 

 

 

 

 

Net income

 

$

76,677

 

$

48,834

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

57,463

 

72,295

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.33

 

$

0.68

 

 

 

 

Three Months Ended

 

 

 

April 30,

 

May 1,

 

 

 

2011

 

2010

 

Diluted:

 

 

 

 

 

Net income

 

$

76,677

 

$

48,834

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

57,463

 

72,295

 

Dilutive effect of stock-based compensation

 

1,069

 

 

Total weighted average equivalent shares

 

58,532

 

72,295

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.31

 

$

0.68

 

 

Total stock options outstanding were 2,985,310 and 4,029,369 at April 30, 2011 and May 1, 2010, respectively.  Of these, options to purchase 4,029,369 shares of Class A common stock at prices ranging from $24.73 to $26.57 per share were outstanding at May 1, 2010 but were not included in the computation of diluted earnings per share because the effect of their inclusion would be antidilutive.

 

Note 6.         Comprehensive Income

 

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

 

 

 

Three Months Ended

 

 

 

April 30,

 

May 1,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net income

 

$

76,677

 

$

48,834

 

Other comprehensive income:

 

 

 

 

 

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

 

411

 

476

 

Total comprehensive income

 

$

77,088

 

$

49,310

 

 

Note 7.         Commitments and Contingencies

 

On June 10, 2009, a lawsuit was filed in the Circuit Court of Pulaski County, Arkansas styled Billy K. Berry, Derivatively on behalf of Dillard’s, Inc. v. William Dillard II et al, Case Number CV-09-4227-2 (the “Berry” case). The lawsuit generally seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On February 18, 2010, the Circuit Court entered an “Order of Dismissal with Prejudice and Final Judgment” dismissing the case as to all parties defendant.  The Circuit Court’s judgment was affirmed by the Arkansas Court of Appeals.  Plaintiff has appealed the decision of the Court of Appeals to the Arkansas Supreme Court where it is currently pending.  The named officers and directors will continue to contest these allegations vigorously.

 

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Table of Contents

 

On May 27, 2009, a lawsuit was filed in the United States District Court for the Eastern District of Arkansas styled Steven Harben, Derivatively on Behalf of Nominal Defendant Dillard’s, Inc. v. William Dillard II et al, Case Number 4:09-IV-395.  The lawsuit generally seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On September 30, 2010, the court dismissed the lawsuit in its entirety with prejudice but granted plaintiff’s request to stay final judgment pending the exhaustion of all appeals in the Berry case, discussed above.  It is not known whether the court will amend its Order upon exhaustion of the Berry appeals.  If so, the named officers and directors intend to contest these allegations vigorously.

 

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

 

At April 30, 2011, letters of credit totaling $85.8 million were issued under the Company’s $1.0 billion revolving credit facility.

 

Note 8.         Benefit Plans

 

The Company has an unfunded, nonqualified defined benefit plan (“Pension Plan”) for its officers.  The Pension Plan is noncontributory and provides benefits based on years of service and compensation during employment.  Pension expense is determined using various actuarial cost methods to estimate the total benefits ultimately payable to officers and allocates this cost to service periods.  The actuarial assumptions used to calculate pension costs are reviewed annually.  The Company made contributions to the Pension Plan of $1.1 million during the quarter ended April 30, 2011.  The Company expects to make contributions to the Pension Plan of approximately $3.3 million for the remainder of fiscal 2011.

 

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

 

 

 

Three Months Ended

 

 

 

April 30, 2011

 

May 1, 2010

 

Components of net periodic benefit costs:

 

 

 

 

 

Service cost

 

$

831

 

$

721

 

Interest cost

 

1,800

 

1,817

 

Net actuarial loss

 

492

 

594

 

Amortization of prior service cost

 

157

 

157

 

Net periodic benefit costs

 

$

3,280

 

$

3,289

 

 

Note 9.    Revolving Credit Agreement

 

At April 30, 2011, the Company maintained a $1.0 billion revolving credit facility (“credit agreement”) with JPMorgan Chase Bank (“JPMorgan”) as the lead agent for various banks, secured by the inventory of Dillard’s, Inc. operating subsidiaries.  The credit agreement expires December 12, 2012.

 

Borrowings under the credit agreement accrue interest starting at either JPMorgan’s Base Rate minus 0.5% or LIBOR plus 1.0% (1.21% at April 30, 2011) subject to certain availability thresholds as defined in the credit agreement.

 

Limited to 85% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $944.5 million at April 30, 2011.  No borrowings were outstanding at April 30, 2011.  Letters of credit totaling $85.8 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $859 million at April 30, 2011.  There are no financial covenant requirements under the credit agreement provided availability exceeds $100 million.  The Company pays an annual commitment fee to the banks of 0.25% of the committed amount less outstanding borrowings and letters of credit.

 

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Note 10.    Stock Repurchase Programs

 

February 2011 Stock Plan

 

In February 2011, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock (“February 2011 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions.  The February 2011 Stock Plan had no expiration date.  During the quarter ended April 30, 2011, the Company repurchased 6.0 million shares for $250.0 million at an average price of $41.93 per share, which completed the authorization under the February 2011 Stock Plan.

 

2010 Stock Plan

 

In August 2010, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock (“2010 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 Securities Exchange Act of 1934 or through privately negotiated transactions.  During the quarter ended April 30, 2011, the Company repurchased 0.4 million shares for $18.7 million at an average price of $42.19 per share, which completed the remaining authorization under the 2010 Stock Plan.

 

2007 Stock Plan

 

The Company was authorized by its Board of Directors in November 2007 to repurchase up to $200 million of its Class A Common Stock under an open-ended plan (“2007 Stock Plan”).  During the quarter ended May 1, 2010, the Company repurchased 4.2 million shares of stock for approximately $105.0 million at an average price of $24.88 per share.  At April 30, 2011, no authorization remained under the 2007 Stock Plan.

 

Note 11.    Income Taxes

 

The total amount of unrecognized tax benefits as of April 30, 2011 and May 1, 2010 was $8.4 million and $16.1 million, respectively, of which $5.6 million and $11.7 million, respectively, would, if recognized, affect the effective tax rate.  The Company classifies accrued interest expense and penalties relating to income tax in the condensed consolidated financial statements as income tax expense.  The total accrued interest and penalties in the condensed consolidated balance sheets as of April 30, 2011 and May 1, 2010 was $3.6 million and $6.3 million, respectively.  The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $0.5 million and $1.5 million.  No significant changes occurred in the tax years subject to examination by major tax jurisdictions during the quarter ended April 30, 2011.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

During the quarter ended April 30, 2011, income taxes included the recognition of tax benefits primarily due to federal tax credits and the decrease in net operating loss valuation allowances.  During the quarter ended May 1, 2010, income taxes included the recognition of tax benefits primarily due to federal tax credit refund claims.

 

Note 12.    Income on Joint Venture

 

During the quarter ended April 30, 2011, the Company received a distribution of excess cash from a mall joint venture of $6.7 million and recorded a related gain of $4.2 million in income on and equity in losses of joint ventures.

 

Note 13.    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.

 

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

 

The fair value of the Company’s cash and cash equivalents and trade accounts receivable approximates their carrying values at April 30, 2011 due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt at April 30, 2011 was approximately $746 million.  The carrying value of the Company’s long-term debt at April 30, 2011 was approximately $746 million.  The fair value of the subordinated debentures at April 30, 2011 was approximately $194 million.   The carrying value of the subordinated debentures at April 30, 2011 was $200 million.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

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

 

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

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

Fair Value

 

Markets for

 

Observable

 

Unobservable

 

 

 

of Assets

 

Identical Items

 

Inputs

 

Inputs

 

(in thousands)

 

(Liabilities)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

 

 

 

 

 

 

 

As of April 30, 2011

 

$

26,348

 

$

 

$

 

$

26,348

 

As of January 29, 2011

 

27,548

 

 

 

 

 

27,548

 

 

 

 

 

 

 

 

 

 

 

As of May 1, 2010

 

$

31,748

 

$

 

$

 

$

31,748

 

As of January 30, 2010

 

33,956

 

 

 

33,956

 

 

During the quarter ended April 30, 2011, long-lived assets held for sale with a carrying value of $27.5 million were written down to their fair value of $26.3 million, resulting in an impairment charge of $1.2 million, which was included in earnings for the period.  During the quarter ended May 1, 2010, long-lived assets held for sale with a carrying value of $34.0 million were written down to their fair value of $31.7 million, resulting in an impairment charge of $2.2 million, which was included in earnings for the period.  The inputs used to calculate the fair value of these long-lived assets in both periods included selling prices from commercial real estate transactions for similar assets in similar markets that we estimated would be used by a market participant in valuing these assets.

 

Note 14.       Recently Issued Accounting Standards

 

Fair Value Measurements and Disclosures

 

In January 2010, the FASB issued ASU 2010-06, an update to Topic 820, Fair Value Measurements and Disclosures.  ASU 2010-06 provides an update specifically to Subtopic 820-10 that requires new disclosures including details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers and a gross presentation of activity within the Level 3 roll forward, presenting separately information about purchases, sales, issuances and settlements.  ASU 2010-06 is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward,

 

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which is required for interim and annual reporting periods beginning after December 15, 2010.  The adoption of ASU 2010-06 did not have a material impact on the Company’s condensed consolidated financial statements.

 

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

 

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

 

EXECUTIVE OVERVIEW

 

We began fiscal 2011 with improved operating results.  Leading with increased comparable store sales during our first quarter, we were able to improve gross margin, as we continued to focus on our core initiatives of disciplined inventory management, and also reduce our operating spending.  These key factors culminated in improved net income of $76.7 million compared to $48.8 million over the prior year comparable period, and combined with $268.7 million of stock repurchases during this first quarter of 2011, earnings per share grew to $1.31 per share compared to $0.68 per share for the prior year comparable period.

 

Included in net income for the quarter ended April 30, 2011 are:

 

·                  a $4.2 million pretax gain ($2.7 million after tax or $0.05 per diluted share) related to a distribution from a mall joint venture and

·                  a $1.2 million pretax charge ($0.8 million after tax or $0.01 per diluted share) for asset impairment and store closing charges related to the write-down of one property currently held for sale.

 

Included in net income for the quarter ended May 1, 2010 is:

 

·                  a $2.2 million pretax charge ($1.4 million after tax or $0.02 per share) for asset impairment and store closing charges related to the write-down of one property currently held for sale.

 

Highlights of the quarter ended April 30, 2011 included:

 

·                  Net income of $76.7 million, or $1.31 per diluted share, compared to $48.8 million, or $0.68 per diluted share, for the quarter ended May 1, 2010

·                  Repurchase of $268.7 million (6.4 million shares) of Class A Common Stock, completing the authorization under the 2010 and 2011 stock repurchase programs

·                  A comparable store sales increase of 2%

·                  Improved merchandise gross margin of 130 basis points of sales compared to the quarter ended May 1, 2010

·                  Operating expense savings of $4.4 million (60 basis points of sales) compared to the quarter ended May 1, 2010

 

As of April 30, 2011, we had working capital of $727.2 million, cash and cash equivalents of $147.3 million and $946.0 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $59.2 million for the first quarter of fiscal 2011.  We operated 308 Dillard’s locations, including 14 clearance centers, and an internet store as of April 30, 2011, a decrease of 3 stores from the same period last year.

 

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Table of Contents

 

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

 

 

 

April 30,
2011

 

May 1,
2010

 

Net sales (in millions)

 

$

1,469.2

 

$

1,453.6

 

Net sales trend

 

1

%

(1

)%

Gross profit (in millions)

 

$

570.3

 

$

539.3

 

Gross profit as a percentage of net sales

 

38.8

%

37.1

%

Cash flow from operations (in millions)

 

$

59.2

 

$

80.3

 

Total retail store count at end of period

 

308

 

311

 

Retail sales per square foot

 

$

27

 

$

27

 

Retail store sales trend

 

2

%

1

%

Comparable retail store sales trend

 

2

%

2

%

Comparable retail store inventory trend

 

4

%

(12

)%

Retail merchandise inventory turnover

 

2.7

 

2.7

 

 

General

 

Net sales.  Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company.  Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year.  Non-comparable store sales include:  sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; and sales in clearance centers.

 

Service charges and other income.  Service charges and other income include income generated through the long-term marketing and servicing alliance (“Alliance”) with GE Consumer Finance (“GE”), which owns and manages the Dillard’s branded proprietary credit cards.  Other income includes rental income, shipping and handling fees and lease income on leased departments.

 

Cost of sales.  Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific margin maintenance allowances and direct payroll for salon personnel.  Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.

 

Advertising, selling, administrative and general expenses.  Advertising, selling, administrative and general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses.  Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

 

Depreciation and amortization.  Depreciation and amortization expenses include depreciation and amortization on property and equipment.

 

Rentals.  Rentals include expenses for store leases and data processing and other equipment rentals.

 

Interest and debt expense, net.  Interest and debt expense includes interest, net of interest income, relating to the Company’s unsecured notes, mortgage notes, term note and subordinated debentures, amortization of financing costs and interest on capital lease obligations.

 

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Table of Contents

 

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.

 

Asset impairment and store closing charges.  Asset impairment and store closing charges consist of write-downs to fair value of under-performing or available-for-sale properties and exit costs associated with the closure of certain stores.  Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

 

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

 

Seasonality and Inflation

 

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season.  Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

 

We do not believe that inflation has had a material effect on our results during the periods presented; however, there can be no assurance that our business will not be affected by such in the future.  In response to recent economic volatility in Asia and to increasing fabric prices (including cotton) and overseas wages, we have sought solutions to help minimize the effects of these events on our operations during fiscal 2011 by (1) negotiating efficiencies through our longstanding relationships with our current suppliers, (2) considering alternative manufacturing sources, (3) redesigning our garments and incorporating other types of fibers where appropriate and (4) adjusting price points as necessary.  Consequently, we believe the effects of these currently known trends on our gross margins in fiscal 2011 will be minimal.

 

RESULTS OF OPERATIONS

 

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

 

 

 

Three Months Ended

 

 

 

April 30,

 

May 1,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

Service charges and other income

 

2.0

 

2.0

 

 

 

 

 

 

 

 

 

102.0

 

102.0

 

 

 

 

 

 

 

Cost of sales

 

61.2

 

62.9

 

Advertising, selling, administrative and general expenses

 

26.5

 

27.1

 

Depreciation and amortization

 

4.4

 

4.4

 

Rentals

 

0.8

 

0.9

 

Interest and debt expense, net

 

1.2

 

1.3

 

Gain on disposal of assets

 

(0.0

)

(0.0

)

Asset impairment and store closing charges

 

0.1

 

0.1

 

 

 

 

 

 

 

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

 

7.8

 

5.3

 

Income taxes

 

2.9

 

1.9

 

Income on and equity in losses of joint ventures

 

0.3

 

(0.0

)

 

 

 

 

 

 

Net income

 

5.2

%

3.4

%

 

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Table of Contents

 

Net Sales

 

 

 

Three Months Ended

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

1,455,510

 

$

1,428,851

 

$

26,659

 

Construction segment

 

13,688

 

24,745

 

(11,057

)

Total net sales

 

$

1,469,198

 

$

1,453,596

 

$

15,602

 

 

The percent change by category in the Company’s retail operations segment sales for the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010, as well as the percentage by segment and category to total net sales, is as follows:

 

 

 

% Change
2011-2010

 

% of
Net
Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

3.0

%

16

%

Ladies’ apparel and accessories

 

1.8

 

37

 

Juniors’ and children’s apparel

 

2.4

 

9

 

Men’s apparel and accessories

 

0.7

 

16

 

Shoes

 

5.4

 

16

 

Home and furniture

 

(6.4

)

5

 

 

 

 

 

99

 

Construction segment

 

 

 

1

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $26.7 million during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010, increasing 2% in both total and comparable stores.  Sales of shoes were up significantly over the prior year and sales of men’s apparel and accessories were up slightly.  All other merchandise categories experienced a moderate increase of sales between the periods with the exception of home and furniture which had a significant decline.

 

The number of sales transactions decreased 2% for the quarter ended April 30, 2011 over the prior year period while the average dollars per sales transaction were up moderately.  We recorded an allowance for sales returns of $10.4 million and $8.5 million for the quarters ended April 30, 2011 and May 1, 2010, respectively.

 

We continue to believe that in light of recent signs of modest economic improvement in the United States, we may continue to see some sales growth in the retail operations segment during the coming months; however, there is no guarantee of improved sales performance.  Any further deterioration in the United States economy could have an adverse affect on consumer confidence and consumer spending habits, which could result in reduced customer traffic and comparable store sales, higher inventory levels and markdowns and lower overall profitability.

 

Net sales from the construction segment decreased $11.1 million or 45% during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010.  We believe this decrease is primarily attributable to the negative impact that the weak recovery of the United States economy continues to have on demand for construction projects in private industry.

 

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Table of Contents

 

Service Charges and Other Income

 

 

 

Three Months Ended

 

 

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

% Change

 

Service charges and other income:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

 

 

 

 

 

 

 

 

Leased department income

 

$

2,310

 

$

2,201

 

$

109

 

5.0

%

Income from GE marketing and servicing alliance

 

21,131

 

20,194

 

937

 

4.6

 

Shipping and handling income

 

4,357

 

3,937

 

420

 

10.7

 

Other

 

1,739

 

2,368

 

(629

)

(26.6

)

 

 

29,537

 

28,700

 

837

 

2.9

 

Construction segment

 

21

 

365

 

(344

)

(94.2

)

Total service charges and other income

 

$

29,558

 

$

29,065

 

$

493

 

1.7

 

 

Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010 primarily due to decreased credit losses partially offset by reduced finance charge and late charge fee income related to recent credit regulation legislation.

 

Gross Profit (Loss)

 

 

 

Three Months Ended

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

Change

 

Gross profit (loss):

 

 

 

 

 

 

 

Retail operations segment

 

$

569,684

 

$

540,307

 

$

29,377

 

Construction segment

 

628

 

(972

)

1,600

 

Total gross profit

 

$

570,312

 

$

539,335

 

$

30,977

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Retail operations segment

 

39.1

%

37.8

%

1.3

%

Construction segment

 

4.6

 

(3.9

)

8.5

 

Total gross profit as a percentage of net sales

 

38.8

 

37.1

 

1.7

 

 

Gross profit improved 170 basis points of sales during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010.  Gross profit from retail operations improved 130 basis points of sales during the same comparable periods as a result of the Company’s continuing inventory management measures leading to reduced markdown activity.  These improvements include notable changes to the cadence of merchandise receipts to shorten the time span between receipt of product and point of sale to help reduce markdown risk and to keep customers engaged with a more continuous flow of fresh merchandise selections.  Inventory in comparable stores increased 4% as of April 30, 2011 compared to May 1, 2010 as management has planned more aggressively in light of improved sales trends.  A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million for the quarter ended April 30, 2011.

 

Most merchandise categories experienced moderate improvements in gross margin during the quarter ended April 30, 2011 compared to May 1, 2010, while home and furniture improved significantly, ladies’ apparel and accessories improved slightly and cosmetics was flat.

 

Gross profit from the construction segment increased 850 basis points of sales during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010.  This improvement was primarily due to a $2.2 million loss recorded in the prior year on certain electrical contracts stemming from job delays due to bad weather and job underperformance.

 

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Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

% Change

 

SG&A:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

388,054

 

$

392,445

 

$

(4,391

)

(1.1

)%

Construction segment

 

1,213

 

1,197

 

16

 

1.3

 

Total SG&A

 

$

389,267

 

$

393,642

 

$

(4,375

)

(1.1

)%

 

 

 

 

 

 

 

 

 

 

SG&A as a percentage of segment net sales

 

 

 

 

 

 

 

 

 

Retail operations segment

 

26.7

%

27.5

%

 

 

 

 

Construction segment

 

8.9

 

4.8

 

 

 

 

 

Total SG&A as a percentage of net sales

 

26.5

 

27.1

 

 

 

 

 

 

The decline in SG&A during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010 primarily resulted from decreased net advertising expenditures ($3.0 million).

 

Rentals

 

 

 

Three Months Ended

 

 

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

% Change

 

Rentals:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

11,417

 

$

12,991

 

$

(1,574

)

(12.1

)%

Construction segment

 

13

 

23

 

(10

)

(43.5

)

Total rentals

 

$

11,430

 

$

13,014

 

$

(1,584

)

(12.2

)%

 

The decrease in rental expense for the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010 is primarily due to a decrease in the amount of equipment leased by the Company.

 

Interest and Debt Expense, Net

 

 

 

Three Months Ended

 

 

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

% Change

 

Interest and debt expense (income), net:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

18,316

 

$

18,899

 

$

(583

)

(3.1

)%

Construction segment

 

(41

)

(43

)

2

 

4.7

 

Total interest and debt expense, net

 

$

18,275

 

$

18,856

 

$

(581

)

(3.1

)%

 

The decrease in net interest and debt expense for the quarter ended April 30, 2011 is primarily attributable to higher investment income and lower average debt levels.  Total weighted average debt decreased approximately $3.7 million during the quarter ended April 30, 2011 compared to the quarter ended May 1, 2010.

 

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Table of Contents

 

Asset Impairment and Store Closing Charges

 

 

 

Three Months Ended

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

Asset impairment and store closing charges:

 

 

 

 

 

 

 

Retail operations segment

 

$

1,200

 

$

2,208

 

$

(1,008

)

Construction segment

 

 

 

 

Total asset impairment and store closing charges

 

$

1,200

 

$

2,208

 

$

(1,008

)

 

During the quarter ended April 30, 2011, the Company recorded a pretax charge of $1.2 million for asset impairment and store closing costs.  The charge was for the write-down of one property currently held for sale.

 

During the quarter ended May 1, 2010, the Company recorded a pretax charge of $2.2 million for asset impairment and store closing costs.  The charge was for the write-down of one property currently held for sale.

 

Income Taxes

 

The total amount of unrecognized tax benefits as of April 30, 2011 and May 1, 2010 was $8.4 million and $16.1 million, respectively, of which $5.6 million and $11.7 million, respectively, would, if recognized, affect the effective tax rate.  The Company classifies accrued interest expense and penalties relating to income tax in the condensed consolidated financial statements as income tax expense.  The total accrued interest and penalties in the condensed consolidated balance sheets as of April 30, 2011 and May 1, 2010 was $3.6 million and $6.3 million, respectively.  The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $0.5 million and $1.5 million.  No significant changes occurred in the tax years subject to examination by major tax jurisdictions during the quarter ended April 30, 2011.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

 

The Company’s estimated federal and state income tax rate, inclusive of income on or equity in losses of joint ventures, was approximately 35.8% for both quarters ended April 30, 2011 and May 1, 2010.  During the quarter ended April 30, 2011, income taxes included the recognition of tax benefits primarily due to federal tax credits and the decrease in net operating loss valuation allowances.  During the quarter ended May 1, 2010, income taxes included the recognition of tax benefits primarily due to federal tax credit refund claims.

 

Our income tax rate for the remainder of fiscal 2011 is dependent upon results of operations and may change if the results for fiscal 2011 are different from current expectations.  Our income tax rate may also change based on the way in which we finalize the tax structure of the real estate investment trust formed in January 2011.  We currently estimate that our effective rate for the remainder of fiscal 2011 will approximate 36%.

 

Income on Joint Venture

 

During the quarter ended April 30, 2011, the Company’s retail operations segment received a distribution of excess cash from a mall joint venture of $6.7 million and recorded a related gain of $4.2 million in income on and equity in losses of joint ventures.

 

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FINANCIAL CONDITION

 

Financial Position Summary

 

(in thousands of dollars)

 

April 30, 2011

 

January 29, 2011

 

$ Change

 

% Change

 

Cash and cash equivalents

 

$

147,266

 

$

343,291

 

$

(196,025

)

(57.1

)%

Long-term debt, including current portion

 

745,970

 

746,412

 

(442

)

(0.1

)

Subordinated debentures

 

200,000

 

200,000

 

 

 

Stockholders’ equity

 

1,904,863

 

2,086,720

 

(181,857

)

(8.7

)

 

 

 

 

 

 

 

 

 

 

Current ratio

 

1.74

 

2.05

 

 

 

 

 

Debt to capitalization

 

33.2

%

31.2

%

 

 

 

 

 

(in thousands of dollars)

 

April 30, 2011

 

May 1, 2010

 

$ Change

 

% Change

 

Cash and cash equivalents

 

$

147,266

 

$

305,296

 

$

(158,030

)

(51.8

)%

Long-term debt, including current portion

 

745,970

 

748,883

 

(2,913

)

(0.4

)

Subordinated debentures

 

200,000

 

200,000

 

 

 

Stockholders’ equity

 

1,904,863

 

2,247,748

 

(342,885

)

(15.3

)

 

 

 

 

 

 

 

 

 

 

Current ratio

 

1.74

 

2.12

 

 

 

 

 

Debt to capitalization

 

33.2

%

29.7

%

 

 

 

 

 

Net cash flows from operations decreased to $59.2 million during the quarter ended April 30, 2011 compared to $80.3 million for the quarter ended May 1, 2010.  This $21.1 million decrease is primarily attributable to a decrease of $45.9 million related to changes in working capital items, primarily of changes in inventories as the Company responds to improved sales trends.  This decrease was partially offset by higher net income, as adjusted for non-cash items, of $24.8 million for the quarter ended April 30, 2011 as compared to the quarter ended May 1, 2010.

 

GE owns and manages Dillard’s branded proprietary credit card business under the Alliance that expires in fiscal 2014.  The Alliance provides for certain payments to be made by GE to the Company, including a revenue sharing and marketing reimbursement.  The Company received income of approximately $21.1 million and $20.2 million from GE during the quarters ended April 30, 2011 and May 1, 2010, respectively.  While future cash flows under this Alliance are difficult to predict, the Company expects income from the Alliance to improve moderately during fiscal 2011 compared to fiscal 2010.  The amount the Company receives is dependent on the level of sales on GE accounts, the level of balances carried on the GE accounts by GE customers, payment rates on GE accounts, finance charge rates and other fees on GE accounts, the level of credit losses for the GE accounts as well as GE’s funding costs.

 

Capital expenditures were $17.0 million and $8.4 million for the quarters ended April 30, 2011 and May 1, 2010, respectively.  The current year expenditures were primarily for the remodeling of existing stores and equipment upgrades, including installation of the Company’s new internet fulfillment center located in Maumelle, Arkansas which is expected to be fully functional by early fiscal 2012.  Capital expenditures for fiscal 2011 are expected to be approximately $150 million compared to actual expenditures of $98.2 million during fiscal 2010.  There are no planned new store openings for fiscal 2011.

 

No stores were closed during the quarter ended April 30, 2011.  We closed our Highland Mall location in Austin, Texas (190,000 square feet) in May 2011.  We have announced the upcoming closures of our Decatur Mall location in Decatur, Alabama (128,000 square feet) and our Westminster Mall location in Westminster, Colorado (159,000 square feet), both of which are expected to close in the second quarter of fiscal 2011.  We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

 

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During the quarter ended April 30, 2011, the Company received a distribution of excess cash from a mall joint venture of $6.7 million and recorded a related gain of $4.2 million in income on and equity in losses of joint ventures.

 

The Company had cash on hand of approximately $147 million as of April 30, 2011.  As part of our overall liquidity management strategy and for peak working capital requirements, the Company has a $1.0 billion credit facility.  Limited to 85% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $944.5 million at April 30, 2011.  No borrowings were outstanding at April 30, 2011.  Letters of credit totaling $85.8 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $859 million at April 30, 2011.

 

Cash used in financing activities for the quarter ended April 30, 2011 totaled $240.7 million compared to cash used of $108.4 million for the quarter ended May 1, 2010.  This decrease in cash flow was primarily due to the repurchase of Company stock.

 

During the quarter ended April 30, 2011, the Company repurchased 6.4 million shares of stock for $268.7 million (including the accrual of $21.6 million of share repurchase that had not settled as of April 30, 2011) at an average price of $41.95 per share under its 2010 and February 2011 Stock Plans.  During the quarter ended May 1, 2010, the Company repurchased 4.2 million shares of stock for $105.0 million at an average price of $24.88 per share under its 2007 Stock Plan.  At April 30, 2011, no authorization remained under any stock plan.

 

In May 2011, the Company announced that the Board of Directors authorized the repurchase of up to $250 million of the Company’s Class A Common Stock under a new stock plan (“May 2011 Stock Plan”).  This authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions.  The May 2011 Stock Plan has no expiration date.

 

During fiscal 2011, the Company expects to finance its capital expenditures and its working capital requirements, including required debt repayments and stock repurchases, from cash on hand, cash flows generated from operations and utilization of the credit facility.  The Company expects peak borrowings under the credit facility during fiscal 2011 to be minimal.  Depending on conditions in the capital markets and other factors, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.

 

There have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7,  Management’s Discussion and Analysis of Financial Condition and Results of Operations,  in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

The Company has not created, and is not party to, any special-purpose entities or off-balance-sheet arrangements for the purpose of raising capital, incurring debt or operating the Company’s business.  The Company does not have any off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources.

 

NEW ACCOUNTING STANDARDS

 

Fair Value Measurements and Disclosures

 

In January 2010, the FASB issued ASU 2010-06, an update to Topic 820, Fair Value Measurements and Disclosures.  ASU 2010-06 provides an update specifically to Subtopic 820-10 that requires new disclosures including details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers and a gross presentation of activity within the Level 3 roll forward, presenting separately information about purchases, sales, issuances and settlements.  ASU 2010-06 is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward, which is required for interim and annual reporting periods beginning after December 15, 2010.  The adoption of ASU 2010-06 did not have a material impact on the Company’s condensed consolidated financial statements.

 

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Table of Contents

 

FORWARD-LOOKING INFORMATION

 

This report contains certain forward-looking statements.  The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995:  (a) statements including words such as “may,” “will,” “could,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company’s future occurrences, plans and objectives, including statements regarding management’s expectations and forecasts for the remainder of fiscal 2011 and fiscal 2012.  The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance.  The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions.   Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company’s stores are located and the effect of these factors on the buying patterns of the Company’s customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company’s future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar  nature.   The Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended January 29, 2011, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

 

Item 4.  Controls and Procedures

 

The Company has established and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  The Company’s management, with the participation of our CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the fiscal quarter covered by this quarterly report, and based on that evaluation, the Company’s CEO and CFO have concluded that these disclosure controls and procedures were effective.

 

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended April 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

On June 10, 2009, a lawsuit was filed in the Circuit Court of Pulaski County, Arkansas styled Billy K. Berry, Derivatively on behalf of Dillard’s, Inc. v. William Dillard II et al, Case Number CV-09-4227-2 (the “Berry” case). The lawsuit generally seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On February 18, 2010, the Circuit Court entered an “Order of Dismissal with Prejudice and Final Judgment” dismissing the case as to all parties defendant.  The Circuit Court’s judgment was affirmed by the Arkansas Court of Appeals.  Plaintiff has appealed the decision of the Court of Appeals to the Arkansas Supreme Court where it is currently pending.  The named officers and directors will continue to contest these allegations vigorously.

 

On May 27, 2009, a lawsuit was filed in the United States District Court for the Eastern District of Arkansas styled Steven Harben, Derivatively on Behalf of Nominal Defendant Dillard’s, Inc. v. William Dillard II et al, Case Number 4:09-IV-395.  The lawsuit generally seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders.  On September 30, 2010, the court dismissed the lawsuit in its entirety with prejudice but granted plaintiff’s request to stay final judgment pending the exhaustion of all appeals in the Berry case, discussed above.  It is not known whether the court will amend its Order upon exhaustion of the Berry appeals.  If so, the named officers and directors intend to contest these allegations vigorously.

 

From time to time, the Company is involved in other litigation relating to claims arising out of the Company’s operations in the normal course of business.  This may include litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities.  As of June 3, 2011, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.

 

Item 1A.  Risk Factors

 

There have been no material changes in the information set forth under caption “Item 1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Period

 

(a) Total Number 
of Shares 
Purchased

 

(b) Average Price 
Paid per Share

 

(c)Total Number of 
Shares Purchased 
as Part of Publicly 
Announced Plans 
or Programs

 

(d) Approximate 
Dollar Value of 
Shares that May 
Yet Be Purchased 
Under the Plans or 
Programs

 

January 30, 2011 through February 26, 2011

 

466,000

 

$

42.18

 

466,000

 

$

249,011,514

 

February 27, 2011 through April 2, 2011

 

4,075,222

 

40.30

 

4,075,222

 

84,769,163

 

April 3, 2011 through April 30, 2011

 

1,864,025

 

45.48

 

1,864,025

 

 

Total

 

6,405,247

 

$

41.95

 

6,405,247

 

$

 

 

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Table of Contents

 

During the quarter ended April 30, 2011, the Company completed the remaining authorization under the 2010 Stock Plan and February 2011 Stock Plan.  In May 2011, the Company’s Board of Directors authorized the repurchase of up to $250 million of the Company’s Class A Common Stock under the May 2011 Stock Plan.

 

Item 6.  Exhibits

 

Number

 

Description

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

101.INS*

 

XBRL Instance Document

101.SCH*

 

XBRL Taxonomy Extension Schema Document

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

DILLARD’S, INC.

 

(Registrant)

 

 

 

 

Date:  

June 3, 2011

 

/s/ James I. Freeman

 

James I. Freeman

 

Senior Vice President & Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

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