XNYS:DDS Dillards Inc Quarterly Report 10-Q Filing - 7/28/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended July 28, 2012

 

or

 

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

 

For the transition period from                      to                     .

 

Commission File Number:  1-6140

 

DILLARD’S, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

71-0388071

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS  72201

(Address of principal executive offices)

(Zip Code)

 

(501) 376-5200

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer 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 August 25, 2012

43,118,972

 

 

CLASS B COMMON STOCK as of August 25, 2012

4,010,929

 

 

 

 



Table of Contents

 

Index

 

DILLARD’S, INC.

 

 

 

Page

 

 

Number

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of July 28, 2012, January 28, 2012 and  July 30, 2011

3

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings for the Three and Six Months Ended July 28, 2012 and July 30, 2011

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended July 28, 2012 and July 30, 2011

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 28, 2012 and July 30, 2011

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 6.

Exhibits

28

 

 

 

SIGNATURES

28

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

 

 

 

July 28,

 

January 28,

 

July 30,

 

 

 

2012

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

162,533

 

$

224,272

 

$

179,525

 

Accounts receivable

 

33,414

 

28,708

 

19,571

 

Merchandise inventories

 

1,362,077

 

1,304,124

 

1,357,845

 

Other current assets

 

44,525

 

34,625

 

44,213

 

 

 

 

 

 

 

 

 

Total current assets

 

1,602,549

 

1,591,729

 

1,601,154

 

 

 

 

 

 

 

 

 

Property and equipment (net of accumulated depreciation and amortization of $2,352,658, $2,235,610 and $2,336,881)

 

2,388,107

 

2,440,266

 

2,514,543

 

Other assets

 

270,806

 

274,142

 

61,641

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,261,462

 

$

4,306,137

 

$

4,177,338

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable and accrued expenses

 

$

699,026

 

$

655,653

 

$

706,869

 

Current portion of long-term debt

 

75,857

 

76,789

 

49,209

 

Current portion of capital lease obligations

 

2,369

 

2,312

 

2,247

 

Other short-term borrowings

 

24,000

 

 

 

Federal and state income taxes including current deferred taxes

 

74,342

 

135,610

 

64,057

 

 

 

 

 

 

 

 

 

Total current liabilities

 

875,594

 

870,364

 

822,382

 

 

 

 

 

 

 

 

 

Long-term debt

 

614,785

 

614,785

 

696,314

 

Capital lease obligations

 

7,997

 

9,153

 

10,285

 

Other liabilities

 

246,620

 

245,218

 

206,127

 

Deferred income taxes

 

294,989

 

314,598

 

311,274

 

Subordinated debentures

 

200,000

 

200,000

 

200,000

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

1,227

 

1,225

 

1,225

 

Additional paid-in capital

 

837,401

 

828,796

 

827,939

 

Accumulated other comprehensive loss

 

(37,198

)

(39,034

)

(17,008

)

Retained earnings

 

3,228,474

 

3,107,344

 

2,742,624

 

Less treasury stock, at cost

 

(2,008,427

)

(1,846,312

)

(1,623,824

)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

2,021,477

 

2,052,019

 

1,930,956

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,261,462

 

$

4,306,137

 

$

4,177,338

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(Unaudited)

(In Thousands, Except Per Share Data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

1,487,925

 

$

1,441,747

 

$

3,037,244

 

$

2,910,945

 

Service charges and other income

 

37,257

 

34,430

 

73,950

 

65,127

 

 

 

 

 

 

 

 

 

 

 

 

 

1,525,182

 

1,476,177

 

3,111,194

 

2,976,072

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

987,802

 

963,523

 

1,944,715

 

1,863,548

 

Advertising, selling, administrative and general expenses

 

398,788

 

396,037

 

792,026

 

785,304

 

Depreciation and amortization

 

64,215

 

64,097

 

128,235

 

128,128

 

Rentals

 

8,641

 

12,139

 

16,906

 

23,569

 

Interest and debt expense, net

 

17,673

 

18,422

 

35,128

 

36,697

 

Gain on disposal of assets

 

(142

)

(2,363

)

(1,139

)

(2,391

)

Asset impairment and store closing charges

 

 

 

 

1,200

 

 

 

 

 

 

 

 

 

 

 

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

 

48,205

 

24,322

 

195,323

 

140,017

 

Income taxes

 

17,330

 

7,010

 

70,300

 

49,720

 

Income on and equity in losses of joint ventures

 

147

 

253

 

982

 

3,945

 

 

 

 

 

 

 

 

 

 

 

Net income

 

31,022

 

17,565

 

126,005

 

94,242

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

3,199,848

 

2,727,879

 

3,107,344

 

2,653,437

 

Cash dividends declared

 

(2,396

)

(2,820

)

(4,875

)

(5,055

)

 

 

 

 

 

 

 

 

 

 

Retained earnings at end of period

 

$

3,228,474

 

$

2,742,624

 

$

3,228,474

 

$

2,742,624

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.32

 

$

2.58

 

$

1.69

 

Diluted

 

$

0.63

 

$

0.32

 

$

2.53

 

$

1.66

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.05

 

$

0.05

 

$

0.10

 

$

0.09

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

31,022

 

$

17,565

 

$

126,005

 

$

94,242

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Amortization of retirement plan and other retiree benefit adjustments (net of tax of $522, $237, $1,044 and $475)

 

918

 

411

 

1,836

 

822

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

31,940

 

$

17,976

 

$

127,841

 

$

95,064

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

DILLARD’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

 

 

Six Months Ended

 

 

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

126,005

 

$

94,242

 

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

 

 

 

 

 

Depreciation and amortization of property and deferred financing costs

 

129,197

 

129,054

 

Gain on disposal of assets

 

(1,139

)

(2,391

)

Excess tax benefits from share-based compensation

 

(2,028

)

(9,958

)

Asset impairment and store closing charges

 

 

1,200

 

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(4,706

)

6,379

 

Increase in merchandise inventories

 

(57,953

)

(67,698

)

Increase in other current assets

 

(9,900

)

(1,675

)

Decrease in other assets

 

7,777

 

2,928

 

Increase in trade accounts payable and accrued expenses and other liabilities

 

44,417

 

19,930

 

Decrease in income taxes payable

 

(78,849

)

(46,981

)

 

 

 

 

 

 

Net cash provided by operating activities

 

152,821

 

125,030

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(86,740

)

(48,700

)

Proceeds from disposal of assets

 

7,883

 

12,595

 

Distribution from joint venture

 

 

2,481

 

 

 

 

 

 

 

Net cash used in investing activities

 

(78,857

)

(33,624

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal payments on long-term debt and capital lease obligations

 

(2,031

)

(1,924

)

Issuance cost of line of credit

 

(5,350

)

 

Increase in short-term borrowings

 

24,000

 

 

Cash dividends paid

 

(4,983

)

(4,713

)

Purchase of treasury stock

 

(153,099

)

(268,669

)

Proceeds from stock issuance

 

3,732

 

10,176

 

Excess tax benefits from share-based compensation

 

2,028

 

9,958

 

 

 

 

 

 

 

Net cash used in financing activities

 

(135,703

)

(255,172

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(61,739

)

(163,766

)

Cash and cash equivalents, beginning of period

 

224,272

 

343,291

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

162,533

 

$

179,525

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Accrued capital expenditures

 

$

3,408

 

$

2,800

 

Stock awards

 

2,847

 

2,762

 

Accrued treasury stock purchase

 

9,016

 

 

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

DILLARD’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.          Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included.  Operating results for the three and six months ended July 28, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2013 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 28, 2012 filed with the SEC on March 22, 2012.

 

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.

 

7



Table of Contents

 

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

 

(in thousands of dollars)

 

Retail
Operations

 

Construction

 

Consolidated

 

Three Months Ended July 28, 2012:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,456,025

 

$

31,900

 

$

1,487,925

 

Gross profit

 

498,717

 

1,406

 

500,123

 

Depreciation and amortization

 

64,164

 

51

 

64,215

 

Interest and debt expense (income), net

 

17,708

 

(35

)

17,673

 

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

 

48,028

 

177

 

48,205

 

Income on and equity in losses of joint ventures

 

147

 

 

147

 

Total assets

 

4,215,718

 

45,744

 

4,261,462

 

 

 

 

 

 

 

 

 

Three Months Ended July 30, 2011:

 

 

 

 

 

 

 

Net sales from external customers

 

$

1,425,590

 

$

16,157

 

$

1,441,747

 

Gross profit (loss)

 

478,988

 

(764

)

478,224

 

Depreciation and amortization

 

64,052

 

45

 

64,097

 

Interest and debt expense (income), net

 

18,460

 

(38

)

18,422

 

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

 

26,351

 

(2,029

)

24,322

 

Income on and equity in losses of joint ventures

 

253

 

 

253

 

Total assets

 

4,145,208

 

32,130

 

4,177,338

 

 

 

 

 

 

 

 

 

Six Months Ended July 28, 2012:

 

 

 

 

 

 

 

Net sales from external customers

 

$

2,978,000

 

$

59,244

 

$

3,037,244

 

Gross profit

 

1,089,780

 

2,749

 

1,092,529

 

Depreciation and amortization

 

128,139

 

96

 

128,235

 

Interest and debt expense (income), net

 

35,199

 

(71

)

35,128

 

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

 

194,996

 

327

 

195,323

 

Income on and equity in losses of joint ventures

 

982

 

 

982

 

Total assets

 

4,215,718

 

45,744

 

4,261,462

 

 

 

 

 

 

 

 

 

Six Months Ended July 30, 2011:

 

 

 

 

 

 

 

Net sales from external customers

 

$

2,881,100

 

$

29,845

 

$

2,910,945

 

Gross profit (loss)

 

1,047,533

 

(136

)

1,047,397

 

Depreciation and amortization

 

128,037

 

91

 

128,128

 

Interest and debt expense (income), net

 

36,776

 

(79

)

36,697

 

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

 

142,692

 

(2,675

)

140,017

 

Income on and equity in losses of joint ventures

 

3,945

 

 

3,945

 

Total assets

 

4,145,208

 

32,130

 

4,177,338

 

 

Intersegment construction revenues of $9.9 million and $17.8 million for the three and six months ended July 28, 2012, respectively, and intersegment construction revenues of $9.5 million and $15.0 million for the three and six months ended July 30, 2011, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.

 

8



Table of Contents

 

Note 3.  Stock-Based Compensation

 

The Company has various stock option plans that provide for the granting of options to purchase shares of Class A Common Stock to certain key employees of the Company.  Exercise and vesting terms for options granted under the plans are determined at each grant date.  There were no stock options granted during the three and six months ended July 28, 2012 and July 30, 2011.

 

Stock option transactions for the three months ended July 28, 2012 are summarized as follows:

 

 

 

 

 

Weighted Average

 

Stock Options

 

Shares

 

Exercise Price

 

Outstanding, beginning of period

 

2,145,000

 

$

25.74

 

Granted

 

 

 

Exercised

 

45,000

 

25.74

 

Expired

 

 

 

Outstanding, end of period

 

2,100,000

 

$

25.74

 

Options exercisable at period end

 

2,100,000

 

$

25.74

 

 

During the three months ended July 28, 2012 and July 30, 2011, the intrinsic value of stock options exercised was $2.0 million and $20.9 million, respectively.  At July 28, 2012, the intrinsic value of outstanding and exercisable stock options was $83.3 million.

 

Note 4.  Asset Impairment and Store Closing Charges

 

There were no asset impairment and store closing charges recorded during the three and six months ended July 28, 2012 and three months ended July 30, 2011.

 

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

 

Following is a summary of the activity in the reserve established for store closing charges for the six months ended July 28, 2012:

 

(in thousands)

 

Balance
Beginning
of Period

 

Adjustments
and Charges*

 

Cash Payments

 

Balance
End of Period

 

Rent, property taxes and utilities

 

$

738

 

$

746

 

$

490

 

$

994

 

 


* included in rentals

 

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

 

9



Table of Contents

 

Note 5.  Earnings Per Share Data

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

31,022

 

$

17,565

 

$

126,005

 

$

94,242

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

48,288

 

54,262

 

48,834

 

55,862

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.64

 

$

0.32

 

$

2.58

 

$

1.69

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income

 

$

31,022

 

$

17,565

 

$

126,005

 

$

94,242

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

48,288

 

54,262

 

48,834

 

55,862

 

Dilutive effect of stock-based compensation

 

944

 

978

 

937

 

1,024

 

Total weighted average equivalent shares

 

49,232

 

55,240

 

49,771

 

56,886

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.63

 

$

0.32

 

$

2.53

 

$

1.66

 

 

Total stock options outstanding were 2,100,000 and 2,270,000 at July 28, 2012 and July 30, 2011, respectively.

 

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 July 28, 2012, letters of credit totaling $83.9 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 $1.1 million and $2.2 million during the three and six months ended July 28, 2012, respectively.  The Company expects to make contributions to the Pension Plan of approximately $2.3 million for the remainder of fiscal 2012.

 

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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

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

817

 

$

831

 

$

1,634

 

$

1,663

 

Interest cost

 

1,823

 

1,800

 

3,647

 

3,600

 

Net actuarial loss

 

1,283

 

492

 

2,566

 

984

 

Amortization of prior service cost

 

157

 

157

 

313

 

313

 

Net periodic benefit costs

 

$

4,080

 

$

3,280

 

$

8,160

 

$

6,560

 

 

Note 8.  Revolving Credit Agreement

 

At July 28, 2012, the Company maintained a $1.0 billion revolving credit facility (“credit agreement”) with J. P. Morgan Securities LLC (“JPMorgan”) and Wells Fargo Capital Finance, LLC as the lead agents for various banks, secured by the inventory of Dillard’s, Inc. operating subsidiaries.  The credit agreement expires April 11, 2017.

 

Borrowings under the credit agreement accrue interest at either JPMorgan’s Base Rate or LIBOR plus 1.5% (1.75% at July 28, 2012) 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 $902.9 million at July 28, 2012.  Borrowings of $24.0 million were outstanding and letters of credit totaling $83.9 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $795 million at July 28, 2012.  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 0.375% of the committed amount less outstanding borrowings and letters of credit.

 

Note 9.  Stock Repurchase Programs

 

2012 Stock Plan

 

In February 2012, 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 an open-ended plan (“2012 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 2012 Stock Plan has no expiration date.  During the three months ended July 28, 2012, the Company repurchased 2.1 million shares for $134.6 million at an average price of $64.52 per share.  At July 28, 2012, $115.4 million of authorization remained under the 2012 Stock Plan.

 

May 2011 Stock Plan

 

In May 2011, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended plan (“May 2011 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions.  During the six months ended July 28, 2012, the Company repurchased 439 thousand shares for $27.5 million at an average price of $62.71 per share, which completed the authorization under the May 2011 Stock Plan.

 

February 2011 Stock Plan

 

In February 2011, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended plan (“February 2011 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions.  During the six months ended July 30, 2011, the Company repurchased 6.0 million shares for $250.0 million at an average price of $41.93 per share, which completed the authorization under the February 2011 Stock Plan.

 

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Table of Contents

 

2010 Stock Plan

 

In August 2010, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended plan (“2010 Stock Plan”).  During the six months ended July 30, 2011, the Company repurchased 0.4 million shares for $18.7 million at an average price of $42.19 per share, which completed the remaining authorization under the 2010 Stock Plan.

 

Note 10.  Income Taxes

 

During the three months ended July 28, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.  Certain federal tax credits were not extended into fiscal 2012.  During the three months ended July 30, 2011, income tax expense differed from what would be computed using the statutory federal tax rate due to the effect of state and local income taxes offset by a benefit due to decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions and benefits for federal tax credits.

 

During the six months ended July 28, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by a benefit due to net decreases in unrecognized tax benefits primarily related to statute lapses.  Certain federal tax credits were not extended into fiscal 2012.  During the six months ended June 30, 2011 income tax expense differed from what would be computed using the statutory federal tax rate due to the effect of state and local income taxes offset by a benefit due to decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions and benefits for federal tax credits.

 

Note 11.  Income on Joint Venture

 

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

 

Note 12.  Gain on Disposal of Assets

 

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

 

During the three months ended July 30, 2011, the Company received proceeds of $11.0 million from the sale of an interest in a mall joint venture, resulting in a gain of $2.1 million that was recorded in gain on disposal of assets.

 

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.

 

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, accounts receivable and other short-term borrowings approximates their carrying values at July 28, 2012 due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt at July 28, 2012 was approximately $718 million.  The carrying value of the Company’s long-term debt at July 28, 2012 was $691 million.  The fair value of the Company’s subordinated debentures at July 28, 2012 was approximately $204 million.  The carrying value of the Company’s subordinated debentures at July 28, 2012 was $200 million.

 

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Table of Contents

 

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 July 28, 2012

 

$

12,689

 

$

 

$

 

$

12,689

 

As of January 28, 2012

 

17,348

 

 

 

17,348

 

 

 

 

 

 

 

 

 

 

 

As of July 30, 2011

 

$

26,348

 

$

 

$

 

$

26,348

 

As of January 29, 2011

 

27,548

 

 

 

27,548

 

 

During the six months ended July 28, 2012, the Company sold two former retail store locations with carrying values totaling $4.6 million.

 

During the six months ended July 30, 2011, long-lived assets held for sale with a carrying value of $27.5 million were written down to their fair value of $26.3 million, resulting in an impairment charge of $1.2 million, which was included in earnings for the period.  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 Disclosure

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS.  This update was effective for interim and annual periods beginning after December 15, 2011 and was to be applied prospectively.  The adoption of this standard did not have a significant impact on the Company’s financial statements.

 

Presentation of Comprehensive Income

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, to make the presentation of items within other comprehensive income (“OCI”) more prominent.  The new standard requires companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders’ equity.  This new update was effective for interim and annual periods beginning after December 15, 2011 and was applied retrospectively.  The adoption of this standard changed the order and placement where certain financial statement items are presented but did not have any other impact on the Company’s financial statements.

 

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Table of Contents

 

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-5 which deferred the requirement from the June 2011 guidance that related to the presentation of reclassification adjustments.  The amendment will allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.

 

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Table of Contents

 

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

 

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended January 28, 2012.

 

EXECUTIVE OVERVIEW

 

For the fourth consecutive quarter, Dillard’s produced record operating results.  Comparable store sales were up for the eighth consecutive quarter, supporting a gross margin improvement from retail operations of 70 basis points of sales while operating spending was down by the same rate.  Net income increased 76.6% over the prior year second quarter to $31.0 million, or $0.63 per share — our highest historical second fiscal quarter earnings per share — compared to $17.6 million, or $0.32 per share.

 

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

 

Highlights of the quarter ended July 28, 2012 included:

 

·                  a 3% increase in comparable store sales,

·                  gross margin from retail operations improvement of 70 basis points of sales,

·                  advertising, selling, administrative and general expenses improvement of 70 basis points of sales,

·                  net income of $31.0 million, a 76.6% increase over the prior year second quarter,

·                  repurchase of $134.6 million (2.1 million shares) of Class A Common Stock, and

·                  record second quarter earnings per share of $0.63 per share, a 96.9% increase over the prior year second quarter.

 

As of July 28, 2012, we had working capital of $727.0 million, cash and cash equivalents of $162.5 million and $914.6 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $152.8 million for the six months ended July 28, 2012.  We operated 303 total stores, including 18 clearance centers, and one internet store, as of July 28, 2012, a decrease of two stores from the same period last year.

 

Key Performance Indicators

 

We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:

 

 

 

Three Months Ended

 

 

 

July 28,
2012

 

July 30,
2011

 

Net sales (in millions)

 

$

1,487.9

 

$

1,441.7

 

Net sales trend

 

3

%

4

%

Gross profit (in millions)

 

$

500.1

 

$

478.2

 

Gross profit as a percentage of net sales

 

33.6

%

33.2

%

Cash flow from operations (in millions)*

 

$

152.8

 

$

125.0

 

Total store count at end of period

 

303

 

305

 

Retail sales per square foot

 

$

28

 

$

27

 

Retail store sales trend

 

2

%

5

%

Comparable retail store sales trend

 

3

%

6

%

Comparable retail store inventory trend

 

0

%

3

%

Retail merchandise inventory turnover

 

2.7

 

2.7

 

 


*Cash flow from operations data is for the six months ended July 28, 2012 and July 30, 2011.

 

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Table of Contents

 

General

 

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

 

Service charges and other income.  Service charges and other income include income generated through the long-term marketing and servicing alliance (“Alliance”) with GE Consumer Finance (“GE”), which owns and manages the Dillard’s branded proprietary credit 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), 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 expense includes depreciation and amortization on property and equipment.

 

Rentals.  Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.

 

Interest and debt expense, net.  Interest and debt expense includes interest, net of interest income, relating to the Company’s unsecured notes, mortgage notes, term note, subordinated debentures and borrowings under the Company’s credit facility.  Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on capital lease obligations.

 

Gain on disposal of assets.  Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an interest in a mall joint venture, if any.

 

Asset impairment and store closing charges.  Asset impairment and store closing charges consist of write-downs to fair value of under-performing or held 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.

 

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Table of Contents

 

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

 

RESULTS OF OPERATIONS

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Service charges and other income

 

2.5

 

2.3

 

2.4

 

2.3

 

 

 

102.5

 

102.3

 

102.4

 

102.3

 

Cost of sales

 

66.4

 

66.8

 

64.0

 

64.0

 

Advertising, selling, administrative and general expenses

 

26.8

 

27.5

 

26.1

 

27.0

 

Depreciation and amortization

 

4.3

 

4.4

 

4.2

 

4.4

 

Rentals

 

0.6

 

0.8

 

0.6

 

0.8

 

Interest and debt expense, net

 

1.2

 

1.3

 

1.1

 

1.3

 

Gain on disposal of assets

 

(0.0

)

(0.2

)

(0.0

)

(0.1

)

Asset impairment and store closing charges

 

0.0

 

0.0

 

0.0

 

0.1

 

 

 

 

 

 

 

 

 

 

 

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

 

3.2

 

1.7

 

6.4

 

4.8

 

Income taxes

 

1.1

 

0.5

 

2.3

 

1.7

 

Income on and equity in losses of joint ventures

 

0.0

 

0.0

 

0.0

 

0.1

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2.1

%

1.2

%

4.1

%

3.2

%

 

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Table of Contents

 

Net Sales — Three Month Comparison

 

 

 

Three Months Ended

 

 

 

 

 

July 28,

 

July 30,

 

 

 

(in thousands of dollars)

 

2012

 

2011

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

1,456,025

 

$

1,425,590

 

$

30,435

 

Construction segment

 

31,900

 

16,157

 

15,743

 

Total net sales

 

$

1,487,925

 

$

1,441,747

 

$

46,178

 

 

The percent change by category in the Company’s retail operations segment sales for the three months ended July 28, 2012 compared to the three months ended July 30, 2011 as well as the percentage by segment and category to total net sales for the three months ended July 28, 2012 is as follows:

 

 

 

Three Months

 

 

 

% Change
2012-2011

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

3.4

%

14

%

Ladies’ apparel

 

0.3

 

25

 

Ladies’ accessories and lingerie

 

7.9

 

15

 

Juniors’ and children’s apparel

 

(0.8

)

8

 

Men’s apparel and accessories

 

0.3

 

17

 

Shoes

 

3.7

 

14

 

Home and furniture

 

(1.6

)

5

 

 

 

 

 

98

 

Construction segment

 

97.4

 

2

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $30.4 million or 2% during the three months ended July 28, 2012 compared to the three months ended July 30, 2011 while sales in comparable stores increased 3% between the same periods.  Sales of ladies’ accessories and lingerie increased significantly over the prior year period, and sales of shoes and cosmetics increased moderately.  Sales of men’s apparel and accessories and ladies’ apparel were essentially flat between the periods.  Sales of juniors’ and children’s apparel decreased slightly over the prior year period, and sales of home and furniture decreased moderately.

 

The number of sales transactions decreased 3% for the three months ended July 28, 2012 over the comparable prior year period while the average dollars per sales transaction increased 6%.  We recorded an allowance for sales returns of $7.6 million and $8.6 million as of July 28, 2012 and July 30, 2011, respectively.

 

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

 

During the three months ended July 28, 2012, net sales from the construction segment increased $15.7 million or 97% compared to the three months ended July 30, 2011 due to an increase in new construction projects.  We believe that we will continue to see some sales growth in the construction segment during fiscal 2012; however, there is no guarantee of improved sales performance.  The backlog of awarded construction contracts at July 28, 2012 totaled $92.7 million.

 

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Table of Contents

 

Net Sales — Six Month Comparison

 

 

 

Six Months Ended

 

 

 

 

 

July 28,

 

July 30,

 

 

 

(in thousands of dollars)

 

2012

 

2011

 

$ Change

 

Net sales:

 

 

 

 

 

 

 

Retail operations segment

 

$

2,978,000

 

$

2,881,100

 

$

96,900

 

Construction segment

 

59,244

 

29,845

 

29,399

 

Total net sales

 

$

3,037,244

 

$

2,910,945

 

$

126,299

 

 

The percent change by category in the Company’s retail operations segment sales for the six months ended July 28, 2012 compared to the six months ended July 30, 2011 as well as the percentage by segment and category to total net sales for the six months ended July 28, 2012 is as follows:

 

 

 

Six Months

 

 

 

% Change
2012-2011

 

% of
Net Sales

 

Retail operations segment

 

 

 

 

 

Cosmetics

 

4.3

%

15

%

Ladies’ apparel

 

2.0

 

24

 

Ladies’ accessories and lingerie

 

7.4

 

14

 

Juniors’ and children’s apparel

 

0.3

 

8

 

Men’s apparel and accessories

 

2.8

 

17

 

Shoes

 

4.8

 

15

 

Home and furniture

 

(1.0

)

5

 

 

 

 

 

98

 

Construction segment

 

98.5

 

2

 

Total

 

 

 

100

%

 

Net sales from the retail operations segment increased $96.9 million or 3% during the six months ended July 28, 2012 compared to the six months ended July 30, 2011 while sales in comparable stores increased 4% between the same periods.  Sales of shoes and ladies’ accessories and lingerie increased significantly over the prior year period, and sales of cosmetics, ladies’ apparel and men’s apparel and accessories increased moderately.  Sales of juniors’ and children’s apparel were essentially flat between the periods, and sales of home and furniture declined slightly.

 

The number of sales transactions decreased 3% for the six months ended July 28, 2012 compared to the six months ended July 30, 2011 while the average dollars per sales transaction increased 6%.

 

Storewide sales penetration of exclusive brand merchandise for the six months ended July 28, 2012 was 21.9% compared to 22.1% during the six months ended July 30, 2011.

 

During the six months ended July 28, 2012, net sales from the construction segment increased $29.4 million or 99% compared to the six months ended July 30, 2011 due to an increase in new construction contracts.

 

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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)

 

July 28,
2012

 

July 30,
2011

 

July 28,
2012

 

July 30,
2011

 

$ Change
2012-2011

 

$ Change
2012-2011

 

Service charges and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail operations segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased department income

 

$

2,370

 

$

2,424

 

$

4,858

 

$

4,734

 

$

(54

)

$

124

 

Income from GE marketing and servicing alliance

 

26,243

 

24,086

 

51,430

 

45,217

 

2,157

 

6,213

 

Shipping and handling income

 

4,355

 

4,169

 

8,707

 

8,526

 

186

 

181

 

Other

 

4,254

 

3,746

 

8,901

 

6,625

 

508

 

2,276

 

 

 

37,222

 

34,425

 

73,896

 

65,102

 

2,797

 

8,794

 

Construction segment

 

35

 

5

 

54

 

25

 

30

 

29

 

Total service charges and other income

 

$

37,257

 

$

34,430

 

$

73,950

 

$

65,127

 

$

2,827

 

$

8,823

 

 

Service charges and other income is composed primarily of income from the Alliance with GE.  Income from the Alliance increased during the three and six months ended July 28, 2012 compared to the three and six months ended July 30, 2011 primarily due to decreased credit losses and increases in finance charge and late charge fee income.

 

Gross Profit

 

(in thousands of dollars)

 

July 28, 2012

 

July 30, 2011

 

$ Change

 

% Change

 

Gross profit:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

498,717

 

$

478,988

 

$

19,729

 

4.1

%

Construction segment

 

1,406

 

(764

)

2,170

 

>100.0

 

Total gross profit

 

$

500,123

 

$

478,224

 

$

21,899

 

4.6

%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

1,089,780

 

$

1,047,533

 

$

42,247

 

4.0

%

Construction segment

 

2,749

 

(136

)

2,885

 

>100.0

 

Total gross profit

 

$

1,092,529

 

$

1,047,397

 

$

45,132

 

4.3

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28, 2012

 

July 30, 2011

 

July 28, 2012

 

July 30, 2011

 

Gross profit as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

34.3

%

33.6

%

36.6

%

36.4

%

Construction segment

 

4.4

 

(4.7

)

4.6

 

(0.5

)

Total gross profit as a percentage of net sales

 

33.6

 

33.2

 

36.0

 

36.0

 

 

Gross profit improved 40 basis points of sales during the three months ended July 28, 2012 compared to the three months ended July 30, 2011, and gross profit remained flat during the six months ended July 28, 2012 compared to the six months ended July 30, 2011.

 

During the three months ended July 28, 2012 compared to the three months ended July 30, 2011, gross profit from retail operations improved 70 basis points of sales as a result of decreased markdowns and increased markups.  Gross margin improved significantly in home and furniture and improved slightly in juniors’ and children’s apparel, men’s apparel and accessories and ladies’ accessories and lingerie.  Gross margin was flat in cosmetics, shoes and ladies’ apparel.

 

During the six months ended July 28, 2012 compared to the six months ended July 30, 2011, gross profit from retail operations improved 20 basis points of sales as a result of increased markups partially offset by increased

 

20



Table of Contents

 

markdowns.  Gross margin was flat in most merchandise categories with the exception of ladies’ apparel and ladies’ accessories and lingerie, both of which improved slightly.

 

Inventory in comparable stores was flat at July 28, 2012 compared to July 30, 2011.  A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $4 million for the three and six months ended July 28, 2012, respectively.

 

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

 

Gross profit from the construction segment increased by $2.2 million (910 basis points of sales) and $2.9 million (510 basis points of sales) during the three and six months ended July 28, 2012 compared to the three and six months ended July 30, 2011, respectively.  The improvement in both periods was due to increased revenue and improved fee percentages on new contracts as well as a $1.2 million loss that was recorded during the three months ended July 30, 2011 on an electrical contract that was completed in 2011.

 

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

 

(in thousands of dollars)

 

July 28, 2012

 

July 30, 2011

 

$ Change

 

% Change

 

SG&A:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

397,551

 

$

394,780

 

$

2,771

 

0.7

%

Construction segment

 

1,237

 

1,257

 

(20

)

(1.6

)

Total SG&A

 

$

398,788

 

$

396,037

 

$

2,751

 

0.7

%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

789,600

 

$

782,834

 

$

6,766

 

0.9

%

Construction segment

 

2,426

 

2,470

 

(44

)

(1.8

)

Total SG&A

 

$

792,026

 

$

785,304

 

$

6,722

 

0.9

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 28, 2012

 

July 30, 2011

 

July 28, 2012

 

July 30, 2011

 

SG&A as a percentage of segment net sales:

 

 

 

 

 

 

 

 

 

Retail operations segment

 

27.3

%

27.7

%

26.5

%

27.2

%

Construction segment

 

3.9

 

7.8

 

4.1

 

8.3

 

Total SG&A as a percentage of net sales

 

26.8

 

27.5

 

26.1

 

27.0

 

 

SG&A improved 70 basis points of sales during the three months ended July 28, 2012 compared to the three months ended July 30, 2011 while total SG&A dollars increased $2.8 million.  The dollar increase was most noted in services purchased ($3.6 million), payroll and payroll related taxes ($2.5 million) and insurance ($1.9 million) partially offset by decreased net advertising expenditures ($3.7 million) and utilities ($2.6 million).

 

SG&A improved 90 basis points of sales during the six months ended July 28, 2012 compared to the six months ended July 30, 2011 while total SG&A dollars increased $6.7 million.  The dollar increase was most noted in services purchased ($6.2 million), payroll and payroll related taxes ($5.7 million) and insurance ($5.2 million) partially offset by decreased net advertising expenditures ($9.6 million) and utilities ($4.7 million).

 

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

 

21



Table of Contents

 

Rentals

 

(in thousands of dollars)

 

July 28, 2012

 

July 30, 2011

 

$ Change

 

% Change

 

Rentals:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

8,629

 

$

12,133

 

$

(3,504

)

(28.9

)%

Construction segment

 

12

 

6

 

6

 

100.0

 

Total rentals

 

$

8,641

 

$

12,139

 

$

(3,498

)

(28.8

)%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

16,880

 

$

23,550

 

$

(6,670

)

(28.3

)%

Construction segment

 

26

 

19

 

7

 

36.8

 

Total rentals

 

$

16,906

 

$

23,569

 

$

(6,663

)

(28.3

)%

 

The decrease in rental expense for the three and six months ended July 28, 2012 compared to the three and six months ended July 30, 2011 was primarily due to a reduction in the amount of equipment leased by the Company.

 

We believe that rental expense will continue to decline significantly during fiscal 2012, with a current projected reduction of $14 million from fiscal 2011, primarily as a result of the expiration of certain equipment leases.

 

Interest and Debt Expense, Net

 

(in thousands of dollars)

 

July 28, 2012

 

July 30, 2011

 

$ Change

 

% Change

 

Interest and debt expense (income), net:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

17,708

 

$

18,460

 

$

(752

)

(4.1

)%

Construction segment

 

(35

)

(38

)

3

 

7.9

 

Total interest and debt expense, net

 

$

17,673

 

$

18,422

 

$

(749

)

(4.1

)%

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

35,199

 

$

36,776

 

$

(1,577

)

(4.3

)%

Construction segment

 

(71

)

(79

)

8

 

10.1

 

Total interest and debt expense, net

 

$

35,128

 

$

36,697

 

$

(1,569

)

(4.3

)%

 

The decrease in net interest and debt expense for the three and six months ended July 28, 2012 compared to the three and six months ended July 30, 2011 is primarily attributable to lower average debt levels.  Total weighted average debt decreased approximately $96.4 million and $80.7 million for the three and six months ended July 28, 2012 compared to the three and six months ended July 30, 2011, respectively.

 

Gain on Disposal of Assets

 

(in thousands of dollars)

 

July 28, 2012

 

July 30, 2011

 

$ Change

 

 

 

Gain (loss) on disposal of assets:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

Retail operations segment

 

$

141

 

$

2,363

 

$

(2,222

)

 

 

Construction segment

 

1

 

 

1

 

 

 

Total gain on disposal of assets

 

$

142

 

$

2,363

 

$

(2,221

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended