XOTC:BLKIB Belk Inc Class B Annual Report 10-K Filing - 1/28/2012

Effective Date 1/28/2012

XOTC:BLKIB (Belk Inc Class B): Fair Value Estimate
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XOTC:BLKIB (Belk Inc Class B): Fair Value Uncertainty
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended January 28, 2012

OR

¨   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 000-26207

BELK, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   56-2058574
(State of incorporation)   (IRS Employer Identification No.)
2801 West Tyvola Road, Charlotte, North Carolina   28217-4500
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code:

(704) 357-1000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

 

    

Title of each class

    
 

Class A Common Stock, $0.01 per share

 
 

Class B Common Stock, $0.01 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      Yes  ¨        No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      Yes  ¨        No  þ

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      Yes  þ    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).       Yes  þ        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      þ

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨   Accelerated filer  þ   Non-accelerated filer  ¨   Smaller reporting company  ¨
  (Do not check if smaller reporting company)

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

The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and directors are “affiliates” of the Registrant) as of July 30, 2011 (based on the price at which the common equity was last sold on July 7, 2011, the date closest to the last business day of the Company’s most recently completed second fiscal quarter) was $447,017,400. 45,197,702 shares of common stock were outstanding as of March 30, 2012, comprised of 44,050,389 shares of the Registrant’s Class A Common Stock, par value $0.01, and 1,147,313 shares of the Registrant’s Class B Common Stock, par value $0.01.

Documents Incorporated By Reference

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 30, 2012 are incorporated herein by reference in Part III.

 

 

 


Table of Contents

BELK, INC

TABLE OF CONTENTS

 

Item No.

   Page No.  
 

Part I

  
1.  

Business

     2   
1A.  

Risk Factors

     8   
1B.  

Unresolved Staff Comments

     12   
2.  

Properties

     12   
3.  

Legal Proceedings

     13   
4.  

Mine Safety Disclosures

     13   
 

Part II

  
5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      14   
6.  

Selected Financial Data

     15   
7.  

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

     15   
7A.  

Quantitative and Qualitative Disclosures About Market Risk

     27   
8.  

Financial Statements and Supplementary Data

     28   
9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     59   
9A.  

Controls and Procedures

     59   
9B.  

Other Information

     61   
 

Part III

  
10.  

Directors, Executive Officers and Corporate Governance

     61   
11.  

Executive Compensation

     61   
12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      61   
13.  

Certain Relationships and Related Transactions, and Director Independence

     61   
14.  

Principal Accountant Fees and Services

     62   
  Part IV   
15.  

Exhibits and Financial Statement Schedules

     62   

 

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PART I

 

Item 1. Business

General

Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the largest privately owned mainline department store business in the United States, with 303 stores in 16 states, as of the fiscal year ended January 28, 2012. Located primarily in the southern United States, the Company generated revenues of $3.7 billion for the fiscal year 2012, and together with its predecessors, has been successfully operating department stores since 1888. Belk is committed to providing its customers a compelling shopping experience and merchandise that reflects “Modern. Southern. Style.”

The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. Fiscal years 2012, 2011 and 2010 ended on January 28, 2012, January 29, 2011 and January 30, 2010, respectively.

Belk stores seek to provide customers the convenience of one-stop shopping, with an appealing merchandise mix and extensive offerings of brands, styles, assortments and sizes. Belk stores sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, fine jewelry, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.

Although the Company operates 93 stores that exceed 100,000 square feet in size, the majority of Belk stores range in size from 60,000 to 100,000 square feet. Most of the Belk stores are anchor tenants in major regional malls or in open-air shopping centers in medium and smaller markets. In the aggregate, the Belk stores occupy approximately 22.8 million square feet of selling space.

Management of Belk’s store operations is organized into three regional operating divisions, with offices in Raleigh, NC, Atlanta, GA and Birmingham, AL, respectively. Each unit is headed by a division chair and a director of stores. Division offices execute centralized initiatives at the individual stores, and their primary activities relate to providing management and support for the personnel, operations and maintenance of the Belk stores in their regions. These divisions are not considered segments for financial reporting purposes.

Belk Stores Services, Inc., a subsidiary of Belk, Inc., and its subsidiary Belk Administration Company, along with Belk International, Inc., a subsidiary of Belk, Inc., and its subsidiary, Belk Merchandising Company, LLC (collectively “BSS”), coordinate the operations of Belk stores on a company-wide basis. BSS provides a wide range of services to the Belk division offices and stores, such as merchandising, merchandise planning and allocation, advertising and sales promotion, information systems, human resources, public relations, accounting, real estate and store planning, credit, legal, tax, distribution and purchasing.

The Company was incorporated in Delaware in 1997. The Company’s principal executive offices are located at 2801 West Tyvola Road, Charlotte, North Carolina 28217-4500, and its telephone number is (704) 357-1000.

Business Strategy

Belk adopted a new mission and vision as part of its re-branding launch in the third quarter of fiscal year 2011. The mission is “to satisfy the modern Southern lifestyle like no one else, so that our customers get the fashion they desire and the value they deserve.” The vision is “for the modern Southern woman to count on Belk first. For her, for her family, for life.”

The Company seeks to maximize its sales opportunities by providing quality merchandise assortments of fashion goods that differentiate its stores from competitors. Belk merchants and buyers monitor fashion merchandising trends, shop domestic and international markets and leverage relationships with key vendors in order to provide the latest seasonal assortments of most-wanted styles and brands of merchandise. Through merchandise planning and allocation, the Company tailors its assortments to meet the particular needs of

 

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customers in each market. The Company conducts customer research and participates in market studies on an ongoing basis in order to obtain information and feedback from customers that will enable it to better understand their merchandise needs and service preferences.

The Company’s marketing and sales promotion strategy seeks to attract customers to shop at Belk by keeping them informed of the latest fashion trends, merchandise offerings, and sales promotions through a combination of advertising and interactive media, including direct mail, circulars, broadcast, Internet, social media (including Facebook, Twitter and YouTube) and in-store special events. Belk uses its proprietary database to communicate directly to key customer constituencies with special offers designed to appeal to these specific audiences. The sales promotions are designed to promote attractive merchandise brands and styles at compelling price values with adequate inventories planned and allocated to ensure that stores will be in stock on featured merchandise.

Belk strives to attract and retain talented, well-qualified associates who provide a high level of friendly, personal service to enhance the customer’s shopping experience. Belk associates are trained to be knowledgeable about the merchandise they sell, approach customers promptly, help when needed, and provide quick checkout. The Company desires to be an inclusive Company that embraces diversity among its associates, customers, and vendors. Its ongoing diversity program includes a number of company-wide initiatives aimed at increasing the diversity of its management and associate teams, increasing its spend with diverse vendors, creating awareness of diversity issues, and demonstrating the Company’s respect for, and responsiveness to, the rapidly changing cultural and ethnic diversity in Belk markets.

Belk has also planned investments in key strategic initiatives totaling approximately $600 million over a five-year period that began in fiscal year 2011. The Company is investing in store remodels; eCommerce; information technology; branding, marketing and advertising; merchandise planning and processes; service improvements and improved sourcing practices.

Growth Strategy

The Company has focused its growth strategy in the last several years on remodeling and expanding existing stores, developing new merchandising concepts in targeted demand centers, and expanding its online capabilities. The Company will, however, continue to explore new store opportunities in markets where the Belk name and reputation are well known and where Belk can distinguish its stores from the competition. The Company will also consider closing stores in markets where more attractive locations become available or where the Company does not believe there is potential for long term growth and success. In addition, the Company periodically reviews and adjusts its space requirements to create greater operating efficiencies and convenience for the customer.

In fiscal 2012, the Company completed major remodel projects in seven stores, opened one new store as a replacement for an existing store and completed expansions of three stores. In addition, the Company also completed 56 shoe and jewelry department remodels. The new store and store expansions include:

New Store

 

Location

   Size (Selling
Sq.  Ft.)
     Opening
Date
     New or Existing
Market
 

Corinth, MS

     50,000         10/12/11         Existing   

Store Expansions

 

Location

   Expanded Size
(Selling Sq. Ft)
     Completion Date  

Statesboro, GA (Statesboro Mall)

     87,960         10/12/11   

Monroe, NC (Monroe Crossing)

     85,188         10/12/11   

Richlands, VA (Claypool Hill Mall)

     43,397         7/27/11   

 

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In fiscal year 2013, the Company plans to complete four store expansions and open two stores as replacements for existing stores. The Company also intends to continue remodeling existing stores and rolling out new merchandising concepts in targeted demand centers.

Merchandising

Belk stores feature quality name brand and private label merchandise in moderate to better price ranges, providing fashion, selection and value to customers. The merchandise mix is targeted to middle and upper income customers shopping for their families and homes, and includes a wide selection of fashion apparel, accessories and shoes for women, men and children, as well as cosmetics, home furnishings, housewares, gift and guild, jewelry, and other types of department store merchandise. The goal is to position Belk stores as the leaders in their markets in providing modern, fashionable assortments with depth in style, selection and value.

Consumer research conducted by the Company has identified significant sales opportunities with customers seeking modern and trendy merchandise. As a result, a focus is being placed on expanding assortments of this type of merchandise across all categories. The Company is also seeking to enhance its value proposition to customers through its merchandise offerings, pricing and sales promotion strategies, rewards card programs, and its returns policy and positive customer service reputation.

Belk stores offer complete assortments of many national brands. The Company has enjoyed excellent long-term relationships with many top apparel and cosmetics suppliers and is often the sole distributor of desirable apparel, accessories and cosmetic lines in its markets. Belk stores also offer exclusive private brands in selected merchandise categories that are designed and manufactured to provide compelling fashion assortments that meet customers’ needs and set Belk apart from competitors through their styling, quality and price. The Company’s private brands include Madison, ND-New Directions, ND Weekend, Via Neroli, Kim Rogers, J. Khaki, Pro Tour, Saddlebred, Red Camel, Nursery Rhyme, Belk Silverworks, Be Inspired, Biltmore™ For Your Home, Home Accents and Cook’s Tools.

In the fourth quarter of fiscal year 2010, Belk began a strategic initiative to strengthen its merchandising and planning organization. The Company is investing in additional staffing and enhanced merchandise information systems in order to improve buying and planning processes. The initiative seeks to enable Belk to better meet customers’ shopping needs by effectively tailoring merchandise assortments by market area.

In fiscal year 2007, the Company established its own fine jewelry business, with buying and administrative offices at the corporate office in Charlotte and a state of the art repair and distribution center located in Ridgeland, Mississippi. The shops replaced the Company’s former leased fine jewelry operations and offer expanded assortments of high quality diamond jewelry, rubies, emeralds and other fine gemstones, and top brands of fine watches and jewelry. During fiscal year 2012, the Company opened three new fine jewelry shops and was operating 149 fine jewelry shops in its stores under the “Belk and Co. Fine Jewelers” name as of the fiscal year end.

Marketing and Branding

The Company employs strategic marketing initiatives to develop and enhance the equity of the Belk brand and to create and strengthen “one-to-one” relationships with customers. The Company’s marketing strategy involves a combination of mass media print and broadcast advertising, direct marketing, Internet marketing, comprehensive store visual merchandising, and signing and in-store special events, such as trunk shows, celebrity and designer appearances, Charity Sale, Educator Appreciation Day, Healthcare Appreciation Day and Senior Day.

In the third quarter of fiscal year 2011, Belk launched a company-wide re-branding and corporate marketing initiative that included a new logo and tag line, “Modern. Southern. Style.” and the installation of new logo signs in all stores. The corporate identity re-launch was supported by an extensive re-branding, advertising and public relations campaign that included market-wide television and print advertising, circulars, direct mail and social media, all of which promoted Belk’s new graphic elements and brand messages. During fiscal year 2012, the Company became the title sponsor of the annual college football bowl held at Bank of America Stadium in Charlotte, NC. More than 58,000 football fans attended the debut game between teams from North Carolina State University and the University of Louisville, which was televised nationally on ESPN.

 

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eCommerce

The Company continues to grow its eCommerce business and expand capabilities on the belk.com website. The belk.com website features a wide assortment of home and gift merchandise, fashion apparel, accessories, shoes and cosmetics. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands. The website also includes expanded information about the Company, including its history, career opportunities, community involvement, diversity and sustainability initiatives, a Company newsroom, its Securities and Exchange Commission (“SEC”) filings, and more.

In fiscal year 2012, the Company strengthened its eCommerce business with systems improvements, expansion of merchandise assortments, increased multimedia marketing and implementation of new social community engagement strategies. The Company’s 142,000 square foot eCommerce fulfillment center in Pineville, NC was expanded by 117,000 square feet in the fourth quarter of fiscal year 2011. Additionally, in February 2012, the Company entered into a lease for a 515,000 square foot fulfillment center in Jonesville, SC, which is planned to begin operations in June 2012.

Gift Cards

The Company’s gift card program provides a convenient option for customer gift-giving and enables stores to issue electronic credits to customers in lieu of cash refunds for merchandise returned without sales receipts. Several types of gift cards are available, each featuring a distinctive design and appeal. During fiscal year 2012, the Company continued to expand its efforts to offer Belk gift cards for sale outside of Belk stores mainly in select grocery store outlets through partnerships with regional and national grocery store chains.

Salons and Spas

As of the end of fiscal year 2012, the Company owned and operated 23 hair styling salons in various store locations, 17 of which also offer spa services. The hair salons offer the latest hair styling services as well as wide assortments of top brand name beauty products, including Aveda, Bumble and Bumble and Redken. The spas offer massage therapy, full skincare, nail and pedicure services and other specialized body treatments. Eight of the salons and spas operate under the name “Carmen! Carmen! Prestige Salon and Spa at Belk,” two under the name “Richard Joseph Studio Salon/Spa at Belk,” and the balance under the name “Belk Salon and Spa.”

Belk Gift Registry

The Company’s gift registry offers a wide assortment of bridal merchandise that can be registered for and purchased online at belk.com or in local Belk stores and shipped directly to the customer or gift recipient. Brides and engaged couples can conveniently create their gift registry and make selections through the belk.com website, or they can go to a Belk store where a certified professional bridal consultant can provide assistance using the store’s online gift registry kiosk. In the Belk stores that have kiosks, brides and engaged couples can use a portable scanning device, which enables them to quickly and easily enter information on their gift selections directly into the registry system.

Belk Proprietary Charge Programs

In fiscal year 2012, Belk and GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance, continued to plan and execute enhanced marketing programs designed to recognize and reward Belk card customers, attract profitable new customers and increase sales from existing card customers. The Company’s customer loyalty program (“Belk Rewards Card Loyalty Program”) issues certificates for discounts on future purchases to Belk Rewards Card customers based on their spending levels. The rewards program is cumulative, issuing a $10 certificate for every 400 points earned in a calendar year. Belk Rewards Card customers whose purchases total $600 or more in a calendar year qualify for a Belk Premier Rewards Card that entitles them to unlimited free gift wrapping and basic alterations, an interest-free Flex Pay Plan account and notifications of special savings and sales events. Customers who spend more than $1,500 annually at Belk qualify for a Belk Elite Rewards Card that offers additional benefits, including a specially designed black Elite credit card, triple points events, a 20% off birthday shopping pass, points that never expire, quarterly Pick Your Own Sale Days and free shipping coupons.

 

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Systems and Technology

The Company substantially increased its investments in technology and information systems during fiscal year 2012 to support sales and merchandising initiatives, reduce costs, improve core business processes and support its overall business strategy. Key systems initiatives included the launch of an enterprise solution to support the Company’s strategic merchandising and retail technology program, significant enhancements to the belk.com website and its fulfillment capabilities, and several store technology infrastructure enhancement projects. The Company also strengthened its analytical capabilities by completing implementation of a new data warehouse. These foundational investments are a key component of the Company’s strategy to deliver a seamless omni-channel experience to customers. Belk expects to continue to invest in its information systems and new technology in fiscal year 2013 in order to expand its business and provide improved decision making tools that enable management to react quickly to changing sales trends, improve merchandise mix, distribute merchandise based on individual market needs and manage inventory levels based on customer demand.

Inventory Management and Logistics

The Company currently operates four distribution facilities that receive and process merchandise for delivery to Belk stores and belk.com customers. A 410,000 square foot distribution center in Blythewood, SC services the stores located in the northern and eastern areas of the Company’s footprint, a 174,000 square foot distribution center at the Greater Jackson Industrial Park in Byram, MS services the central and western areas; an 8,300 square foot distribution center in Ridgeland, MS services the Company’s fine jewelry operations; and a 259,000 square foot fulfillment center in Pineville, NC services orders from the belk.com website. In fiscal year 2013, the Company plans to begin operations of a fulfillment center in Jonesville, SC that will also service orders from the belk.com website. The Company’s “store ready” merchandise receiving processes enable stores to receive and process merchandise shipments and move goods to the sales floor quickly and efficiently. The expansion of the Blythewood, SC distribution center in the fourth quarter of fiscal year 2011 enabled the Company to expand its “fluid load” process to include additional stores in fiscal year 2012, which resulted in a one million mile reduction in the Company’s store delivery network.

Revitalizing Our Customer Care

In fiscal year 2012, the Company launched a 36-month initiative aimed at fostering a dynamic selling environment in stores by reducing or eliminating non-selling tasks. The first phase of the project focuses on support re-engineering to improve in-store support processes such as increasing dock efficiencies and processing all inbound freight in a timely manner. Phase two includes achieving customer service excellence by developing associates’ selling skills and behaviors, and the final phase will focus on the implementation of a new workforce management and scheduling system.

Strategic Sourcing

The Company initiated a strategic sourcing program in fiscal year 2011 designed to streamline and adopt best practices for its sourcing and procurement processes for non-retail goods and supplies. The program also aims to eliminate costs associated with previous non-retail procurement processes.

Sustainability

The Company continued implementation of sustainability initiatives aimed at fulfilling its commitment to be a good steward of the environment by eliminating waste, conserving energy, using resources more responsibly and embracing and promoting sustainable practices. Current initiatives encompass recycling of cardboard, hangers and plastic, increasing energy efficiency, implementing sustainability in store construction, reduction of product packaging materials, and use of solar energy. During fiscal 2012, the Company conducted its first Employee Environment giving campaign in partnership with EarthShare and participated in the Environmental Defense Fund’s Climate Corps Program to identify potential energy efficiency opportunities. Additionally, the Company’s corporate office building in Charlotte, NC received the Energy Star certification, two Sustainability Fair events were held at the corporate office, and an external sustainability website was launched on belk.com.

 

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Philanthropy

In fiscal year 2012, the Company and its associates, customers and vendors contributed over $18.3 million to local communities. Of that amount, the Company funded $5.1 million to over 200 nonprofit organizations, with a focus on education, breast cancer research and awareness, and community strengthening. The remainder of the funding included associate, vendor and customer dollars raised in Belk-led charitable initiatives, including the semi-annual Belk Charity Sale, local United Way campaigns and the Susan G. Komen for the Cure campaign.

Non-Retail Businesses

Several of the Company’s subsidiaries engage in businesses that indirectly or directly support the operations of the retail department stores. The non-retail businesses include United Electronic Services (“UES”), a division of the Company, which provides equipment maintenance services to Belk stores and third parties.

Industry and Competition

The Company operates department stores in the highly competitive retail industry. Management believes that the principal competitive factors for retail department store operations include merchandise selection, quality, value, customer service and convenience. The Company believes its stores are strong competitors in all of these areas. The Company’s primary competitors are traditional department stores, mass merchandisers, national apparel chains, individual specialty apparel stores and direct merchant firms, including J.C. Penney Company, Inc., Dillard’s, Inc., Kohl’s Corporation, Macy’s, Inc., Sears Holding Corporation, Target Corporation and Wal-Mart Stores, Inc.

Trademarks and Service Marks

Belk Stores Services, Inc. owns all of the principal trademarks and service marks now used by the Company, including “belk.” These marks are registered with the United States Patent and Trademark Office. The term of each of these registrations is generally ten years, and they are generally renewable indefinitely for additional ten-year periods, so long as they are in use at the time of renewal. Most of the trademarks, trade names and service marks employed by the Company are used in its private brands program. The Company intends to vigorously protect its trademarks and service marks and initiate appropriate legal action whenever necessary.

Seasonality and Quarterly Fluctuations

Due to the seasonal nature of the retail business, the Company has historically experienced, and expects to continue to experience, seasonal fluctuations in its revenues, operating income and net income. A disproportionate amount of the Company’s revenues and a substantial amount of operating and net income are realized during the fourth quarter, which includes the holiday selling season. Working capital requirements also fluctuate during the year, increasing somewhat in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday selling season when the Company carries higher inventory levels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

Associates

As of the end of fiscal year 2012, the Company had approximately 23,000 full-time and part-time associates. Because of the seasonal nature of the retail business, the number of associates fluctuates from time to time and is highest during the holiday shopping period in November and December. The Company as a whole considers its relations with associates to be good. None of the associates of the Company are represented by unions or subject to collective bargaining agreements.

Where You Can Find More Information

The Company makes available free of charge through its website, www.belk.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.

 

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Item 1A. Risk Factors

Certain statements made in this report, and other written or oral statements made by or on our behalf, may constitute “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. You can identify these forward-looking statements through our use of words such as “may,” “will,” “intend,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or other similar words.

Forward-looking statements include information concerning possible or assumed future results from merchandising, marketing and advertising in our stores and through the Internet, general economic conditions, the success of our re-branding and our ability to be competitive in the retail industry, our ability to execute profitability and efficiency strategies, our ability to execute growth strategies, anticipated benefits from our strategic initiatives to strengthen our merchandising and planning organizations, anticipated benefits from our belk.com website and our eCommerce fulfillment centers, the expected benefit of new systems and technology, anticipated benefits from our acquisitions and the anticipated benefit under our Program Agreement with GE. These forward-looking statements are subject to certain risks and uncertainties that may cause our actual results to differ significantly from the results we discuss in such forward-looking statements.

We believe that these forward-looking statements are reasonable. However, you should not place undue reliance on such statements. Any such forward-looking statements are qualified by the following important risk factors and other risks which may be disclosed from time to time in our filings that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them.

Economic, political and business conditions could negatively affect our financial condition and results of operations.

Economic, political and business conditions, nationally and in our market areas, are beyond our control. These factors influence our forecasts and impact actual performance. Factors include rates of economic growth, interest rates, inflation or deflation, consumer credit availability, levels of consumer debt and bankruptcies, tax rates and policy, unemployment trends, a health pandemic, catastrophic events, potential acts of terrorism and threats of such acts and other matters that influence consumer confidence and spending. Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. The downturn in the economy during fiscal years 2009 and 2010, and the continuing uncertain economic climate in fiscal years 2011 and 2012 have affected, and will continue to affect for an undetermined period of time, consumer purchases of our merchandise. The precise future impact and duration of these economic conditions are uncertain, but they could continue to adversely impact our financial condition and results of operations.

Our sales and operating results depend on accurately anticipating customer demands.

Our business depends upon the ability to anticipate the demands and expectations of our customers for a wide variety of merchandise and services. We routinely make predictions about the merchandise mix, quality, style, service, convenience and credit availability of our customers. If we do not accurately anticipate changes in buying, charging and payment behavior among our customers, or consumer tastes, preferences, spending patterns and other lifestyle decisions, we may be faced with excess inventories for some products and/or missed opportunities for others. Excess inventories can result in lower gross margins due to greater than anticipated discounts and markdowns that might be necessary to reduce inventory levels. Low inventory levels can adversely affect the fulfillment of customer demand and diminish sales and brand loyalty. Our inability to identify and respond to lifestyle and customer preferences and buying trends could have an adverse impact on our business, and our failure to accurately predict inventory demands could adversely impact our results of operations.

Unseasonable and extreme weather conditions in our market areas may adversely affect our business.

Apparel comprises a majority of our sales. If the weather in our market areas is unseasonably warm or cold for an extended period of time, it can affect the timing of apparel purchases by our customers and result in an

 

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inventory imbalance. In addition, frequent or unusually heavy snow or ice storms, hurricanes or tropical rain storms in our market areas may decrease customer traffic in our stores and adversely affect our business.

The seasonal nature of our business could have a material adverse effect on our financial results and cash flows.

We experience seasonal fluctuations in quarterly net income, as is typical in the retail industry. A significant portion of our revenues are generated during the holiday season in the fourth fiscal quarter. Because we order merchandise in advance of our peak season, we carry a significant amount of inventory during that time. A decrease in the availability of working capital needed in the months before the peak period could impact our ability to build up an appropriate level of merchandise in our stores. If we do not order the merchandise mix demanded by our customers or if there is a decrease in customer spending during the peak season, we may be forced to rely on markdowns or promotional sales to dispose of the inventory, which could have a material adverse effect on our financial results and cash flows.

The retail industry is highly competitive, which could adversely impact our revenues and profitability.

We face competition from other department and specialty stores and other retailers, including luxury goods retailers, general merchandise stores, Internet retailers, mail order retailers and off-price and discount stores in the highly competitive retail industry. Although we offer extensive Internet purchasing options and on-line gift registry for our customers, we rely on in-store sales for a substantial majority of our revenues. Competition is characterized by many factors, including price, merchandise mix, quality, style, service, convenience, credit availability and advertising. We have expanded and continue to expand into new markets served by our competitors. We have also expanded our eCommerce capabilities in the past few years. We face the entry of new competitors into or expansion of existing competitors in our existing markets, all of which further increase the competitive environment and cause downward pressure on prices and reduced margins, which could adversely impact our revenues and profitability. In addition, a significant shift in consumer buying patterns from in-store purchases to Internet purchases could negatively impact our revenues.

We may not be able to develop and implement effective advertising, marketing and promotional campaigns.

We spend significant amounts on advertising, marketing and promotional campaigns. Our business depends on effective marketing to generate high customer traffic in our stores and through on-line sales. If our advertising, marketing and promotional efforts are not effective, it could negatively impact our operating results.

Variations in the amount of vendor allowances received could adversely impact our operating results.

We receive vendor allowances for advertising, payroll and margin maintenance that are a strategic part of our operations. A reduction in the amount of cooperative advertising allowances would likely cause us to consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase/decrease our expenditures and/or revenue. Decreased payroll reimbursements would either cause payroll costs to rise, negatively impacting operating income, or cause us to reduce the number of employees, which may cause a decline in sales. A decline in the amount of margin maintenance allowances would either increase cost of sales, which would negatively impact gross margin and operating income, or cause us to reduce merchandise purchases, which may cause a decline in sales.

If we do not successfully operate our information technology systems and our fulfillment facilities, our financial performance could be adversely affected.

In fiscal year 2009, we launched a substantially updated and redesigned website that enhanced customers’ online shopping capabilities, offered expanded merchandise assortments and enabled customers to access a broader range of our information online, including current sales promotions, special events and corporate information. Additionally, we have begun a process of transforming our technology infrastructure. In fiscal year 2011, we expanded our online capabilities, increased multimedia marketing, implemented social community engagement strategies and expanded our Pineville, NC fulfillment facility. In fiscal year 2013, we plan to begin operations in a fulfillment center in Jonesville, SC that will also service orders from the belk.com website.

 

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If we do not successfully meet the challenges of enhancing our technology, operating the website consistently, and managing our social community engagement and efficiently operating our fulfillment centers, our financial performance could be adversely affected. In addition, if customers are not receptive to our eCommerce offerings, revenues and profitability could be adversely impacted.

Our ability to manage multiple initiatives simultaneously could impact our operating results.

The Company is currently managing a number of significant change initiatives, such as systems enhancements, changes in our merchandising and planning processes, store process improvements, strategic sourcing, store remodels and others. If we are unable to successfully coordinate and execute these initiatives while managing the other areas of our business, our results could be adversely affected.

Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.

Our merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors, including the vendor’s ability to secure adequate financing and obtain access to products in a timely and efficient manner, could be a significant challenge, especially with respect to goods sourced outside the United States.

Political or financial instability, trade restrictions, tariffs, transport capacity, costs and other factors relating to foreign trade are beyond our control, and we may experience supply problems or untimely delivery of merchandise as a result. If we are not able to source merchandise at an acceptable price and in a timely manner, it could negatively impact our results.

Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of goods and negatively impact our financial results.

We have experienced inflation in some of our merchandise costs due to increases in raw materials, fuel and labor costs. The cost of cotton, which is a key raw material in many of our products, has had the most significant increases in the recent past. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Inflation has not to date had a material negative impact on our sales or profitability, but an inability to mitigate future cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability; while any related pricing actions might cause a decline in our sales volume. Additionally, any decrease in the availability of raw materials could impair the ability of our suppliers to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

Changes in the income and cash flow from our long-term marketing and servicing alliance related to our proprietary credit cards could impact operating results and cash flows.

In fiscal year 2006, we sold our proprietary credit card business to, and entered into a 10-year strategic alliance with, GE to operate our private label credit card business. Sales of merchandise and services are facilitated by these credit card operations. We receive income from GE relating to the credit card operations based on a variety of variables, but primarily from the amount of purchases made through the proprietary credit cards. The income we receive from this alliance and the timing of receipt of payments will vary based on changes in customers’ credit card use, and GE’s ability to extend credit to our customers, all of which can vary based on changes in federal and state banking and consumer protection laws and from a variety of economic, legal, social, and other factors that we cannot control.

If we do not manage expenses appropriately, our results of operations could be adversely affected.

Our performance depends on appropriate management of our expense structure, including our selling, general and administrative costs. If we fail to meet our anticipated cost structure based on our anticipated sales level or to appropriately reduce expenses during a weak sales environment, our results of operations could be adversely affected.

 

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Capital investments in store growth and remodels may not produce the returns we anticipate.

Our ability to identify strategic opportunities to open new stores, or to remodel or expand existing stores, will depend in part upon general economic conditions and the availability of existing retail stores or store sites on acceptable terms. It will also depend on our ability to successfully execute our retailing concept in new markets and geographic regions and to design and implement remodeling plans and new merchandising concepts. In addition, we will need to identify, hire and retain a sufficient number of qualified personnel to work in our new and remodeled stores. Increases in real estate, construction and development costs, consolidation or viability of prospective developers and the availability of financing to potential developers could limit our growth opportunities. If consumers are not receptive to us in new markets or regions or to our remodels and expansions in existing markets, our financial performance could be adversely affected.

If customers do not accept our new brand, our re-branding initiative could adversely affect our financial performance.

In October 2010, we launched a re-branding campaign which included a change in our logo and extensive advertising and promotional activity in connection with our new brand and tagline. We invested approximately $70 million in advertising, supplies and capital, and changed exterior and interior signing on all of our stores. If customers do not accept our new brand, our sales, performance and customer relationships could be adversely affected.

If our logistics or distribution processes do not operate effectively, our business could be disrupted.

We currently operate distribution centers in South Carolina and Mississippi that service all of our stores and a fulfillment center in North Carolina that processes belk.com customer orders. Additionally, we will begin operating another fulfillment center in South Carolina during fiscal year 2013. The efficient operation of our business is dependent on receiving and distributing merchandise in a cost-effective and timely manner. We also rely on information systems to effectively manage sales, distribution, merchandise planning and allocation functions. We are continuing to implement software technology to assist with these functions. If we do not effectively operate the distribution network or if information systems fail to perform as expected, our business could be disrupted.

A security breach that results in the unauthorized disclosure of Company, employee or customer information could adversely affect our business, reputation and financial condition.

The protection of our customer, employee and company data is critical to the Company. In addition, customers have a high expectation that the Company will adequately protect their personal information. The regulatory environment surrounding information security and privacy is increasingly demanding, with new and constantly changing requirements across our business units. A significant breach of customer, employee or company data associated with Belk, whether by one of our employees or by a third party, could damage our reputation, our brand and our relationship with our customers and result in lost sales, fines and lawsuits. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in disruption of our operations.

We rely on third party vendors for certain business support.

Some business support processes are outsourced to third parties. We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, including secure data transfers between us and third-party vendors; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting.

Loss of our key management, or an inability to attract such management and other personnel, could adversely impact our business.

We depend on our senior executive officers to run our business. The loss of any of these officers could materially adversely affect our operations. Competition for qualified employees is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could adversely impact our business.

 

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Changes in federal, state or local laws and regulations could expose us to legal risks and adversely affect our results of operations.

Our business is subject to a wide array of laws and regulations. While our management believes that our associate relations are good, significant legislative changes that impact our relationship with our associates could increase our expenses and adversely affect our results of operations. Examples of possible legislative changes impacting our relationship with our associates include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to legal risk, including government enforcement action and class action civil litigation. Changes in the regulatory environment regarding other topics such as privacy and information security, product safety or environmental protection, among others, could also cause our expenses to increase and adversely affect our results of operations.

Covenants in our debt agreements impose some financial restrictions on us.

Our debt agreements contain certain restrictive financial covenants, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. Our failure to comply with these covenants could adversely affect capital resources, financial condition and liquidity. As of January 28, 2012, we were in compliance with our debt covenants; however, if we fail to comply with our debt covenants, we could be forced to settle outstanding debt obligations, negatively impacting cash flows, and our ability to obtain future financing.

If we do not effectively integrate and operate acquired businesses, our financial performance may be adversely affected.

In fiscal year 2006, we acquired Proffitt’s and McRae’s stores from Saks Incorporated and in fiscal year 2007, we acquired Parisian stores from Saks Incorporated. In fiscal year 2007, we also acquired assets of Migerobe, Inc. and in fiscal year 2008, took over the operation of formerly leased fine jewelry operations in a number of our stores. We may make further acquisitions in the future. In order to realize the planned efficiencies from our acquisitions, we must effectively integrate and operate these stores and departments. Our operating challenges and management responsibilities increase as we grow. To successfully integrate and operate acquired businesses, we face a number of challenges, including entering markets in which we have no direct prior experience; maintaining uniform standards, controls, procedures and policies in the newly-acquired stores and departments; extending technologies and personnel; and effectively supplying the newly-acquired stores and departments.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

Store Locations

As of the end of fiscal year 2012, the Company operated a total of 303 retail stores, with approximately 22.8 million selling square feet, in the following 16 states:

 

Alabama — 22

   Louisiana — 4    Oklahoma — 3

Arkansas — 7

   Maryland — 2    South Carolina —37

Florida — 28

   Mississippi —16    Tennessee — 23

Georgia — 47

   Missouri — 1    Texas — 13

Kentucky — 6

   North Carolina —70    Virginia — 20
      West Virginia — 4

 

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Belk stores are located in regional malls (154), strip shopping centers (97), “power” centers (26) and “lifestyle” centers (24). Additionally, there are two freestanding stores. Approximately 83% of the gross square footage of the typical Belk store is devoted to selling space to ensure maximum operating efficiencies. New and renovated stores feature the latest in retail design, including updated exteriors and interiors. The interiors are designed to create an exciting, comfortable and convenient shopping environment for customers. They include the latest lighting and merchandise fixtures, as well as quality decorative floor and wall coverings and other special decor. The store layout is designed for ease of shopping, and store signage is used to help customers identify and locate merchandise.

As of the end of fiscal year 2012, the Company owned 77 store buildings, leased 166 store buildings under operating leases and owned 74 store buildings under ground leases. The typical operating lease has an initial term of between 15 and 20 years, with four renewal periods of five years each, exercisable at the Company’s option. The typical ground lease has an initial term of 20 years, with a minimum of four renewal periods of five years each, exercisable at the Company’s option.

Non-Store Facilities

The Company also owns or leases the following distribution and fulfillment centers, division offices and headquarters facilities:

 

Belk Property

   Location    Own/Lease

Belk, Inc. Corporate Offices Condominium

   Charlotte, NC    Lease

Belk Central Distribution Center

   Blythewood, SC    Lease

Belk Distribution Center

   Byram, MS    Own

Belk, Inc. Fine Jewelry Distribution Center

   Ridgeland, MS    Lease

Belk, Inc. eCommerce Fulfillment Center

   Pineville, NC    Lease

Belk, Inc. eCommerce Fulfillment Center

   Jonesville, SC    Lease

Other

The Company owns or leases various other real properties, including primarily former store locations. Such property is not material, either individually or in the aggregate, to the Company’s consolidated financial position or results of operations.

 

Item 3. Legal Proceedings

In the ordinary course of business, the Company is subject to various legal proceedings and claims. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on its consolidated financial position or results of operations.

 

Item 4. Mine Safety Disclosures

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

In fiscal year 2012, there was no established public trading market for either the Belk Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) or the Belk Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”). There were limited and sporadic quotations of bid and ask prices for the Class A Common Stock and the Class B Common Stock on the Over the Counter Bulletin Board and on the OTC Market, in the OTCQB Tier (formally known as the “Pink Sheets”), under the symbols “BLKIA” and “BLKIB,” respectively. As of March 30, 2012, there were approximately 547 holders of record of the Class A Common Stock and 274 holders of record of the Class B Common Stock.

On March 28, 2012, the Company declared a regular dividend of $0.75 on each share of the Class A and Class B Common Stock outstanding on that date. On March 30, 2011, the Company declared a regular dividend of $0.55, and on April 1, 2010, the Company declared a regular dividend of $0.40 and a special one-time additional dividend of $0.40 on each share of the Class A and Class B Common Stock outstanding on those dates. The amount of dividends paid out with respect to fiscal year 2013 and each subsequent year will be determined at the sole discretion of the Board of Directors based upon the Company’s results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. For a discussion of the Company’s debt facilities and their restrictions on dividend payments, see “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There were no purchases of issuer equity securities during the fourth quarter of fiscal year 2012.

 

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Item 6. Selected Financial Data

The following selected financial data are derived from the consolidated financial statements of the Company.

 

    Fiscal Year Ended  
    January 28,
2012
    January 29,
2011
    January 30,
2010
    January 31,
2009
    February 2,
2008
 
    (in thousands, except per share amounts)  

SELECTED STATEMENT OF INCOME DATA:

         

Revenues

  $ 3,699,592      $ 3,513,275      $ 3,346,252      $ 3,499,423      $ 3,824,803   

Cost of goods sold

    2,461,515        2,353,536        2,271,925        2,430,332        2,636,888   

Goodwill impairment

                         326,649          

Depreciation and amortization expense

    122,761        140,239        158,388        165,267        159,945   

Operating income (loss)

    300,910        245,981        147,441        (232,643     198,117   

Income (loss) before income taxes

    250,098        195,871        97,190        (283,281     138,644   

Net income (loss)

    183,148        127,628        67,136        (212,965     95,740   

Basic net income (loss) per share

    4.04        2.72        1.39        (4.35     1.92   

Diluted net income (loss) per share

    4.02        2.71        1.39        (4.35     1.92   

Cash dividends per share

    0.550        0.800        0.200        0.400        0.400   

SELECTED BALANCE SHEET DATA:

         

Accounts receivable, net(1)

    39,431        31,119        22,427        34,043        65,987   

Merchandise inventory

    887,029        808,503        775,342        828,497        932,777   

Working capital

    845,418        924,450        986,234        808,031        750,547   

Total assets

    2,514,216        2,389,631        2,582,575        2,503,588        2,851,315   

Long-term debt and capital lease obligations

    523,679        539,239        688,856        693,190        722,141   

Stockholders’ equity

    1,236,230        1,156,272        1,094,295        1,032,027        1,388,726   

SELECTED OPERATING DATA:

         

Number of stores at end of period

    303        305        305        307        303   

Comparable store net revenue increase (decrease)

    5.5     5.1     (4.6 )%      (8.7 )%      (1.1 )% 

(on a 52 versus 52 week basis)

         

 

(1)

The Company previously presented amounts due from vendors on a gross basis due to systems constraints and the lack of available information in fiscal year 2009 and prior. In fiscal years 2012, 2011, and 2010, the Company has presented amounts due from vendors on a net basis, and revised amounts presented in the fiscal year 2009 balance sheet for comparability purposes. This transaction caused a reduction in accounts receivable for fiscal years 2012, 2011, 2010 and 2009.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the largest privately owned mainline department store business in the United States, with 303 stores in 16 states, primarily in the southern United States as of the end of fiscal year 2012. The Company generated revenues of $3.7 billion for the fiscal year ended January 28, 2012, and together with its predecessors, has been successfully operating department stores since 1888 by seeking to provide superior service and merchandise that meets customers’ needs for fashion, value and quality.

The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. Fiscal years 2012, 2011 and 2010 ended on January 28, 2012, January 29, 2011 and January 30, 2010, respectively.

The Company’s total revenues increased 5.3% in fiscal year 2012 to $3.7 billion. Comparable store sales increased 5.5% as a result of effective execution of key strategic initiatives that included investments in

 

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merchandising, rebranding, eCommerce, store remodels and service improvements. Merchandising categories with the highest growth rate for the year included ladies shoes, children’s and home. The Company calculates comparable store revenue as sales from stores that have reached the one-year anniversary of their opening as of the beginning of the fiscal year and eCommerce revenues, but excludes closed stores. Stores undergoing remodeling, expansion or relocation remain in the comparable store revenue calculation. Definitions and calculations of comparable store revenue differ among companies in the retail industry. Net income was $183.1 million or $4.04 per basic share and $4.02 per diluted share in fiscal year 2012 compared to net income of $127.6 million or $2.72 per basic share and $2.71 per diluted share in fiscal year 2011. The increase in net income reflects higher sales and improved margin, improved expense leverage and the release of a deferred tax valuation allowance.

Management believes that consumers will remain focused on value in fiscal year 2013. The Company intends to continue to be flexible in sales and inventory planning and in expense management in order to react to changes in consumer demand. The Company did experience mid-single digit increases in the merchandise costs of our goods during fiscal year 2012 resulting primarily from increased raw material costs, but also from increased labor and energy costs. The Company managed the effect of the cost increases through sourcing strategies, product design and pricing actions so that margins for fiscal year 2012 were not materially affected.

Belk stores seek to provide customers the convenience of one-stop shopping, with an appealing merchandise mix and extensive offerings of brands, styles, assortments and sizes. Belk stores sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, fine jewelry, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.

The Company seeks to be the leading department store in its markets by selling merchandise to customers that meet their needs for fashion, selection, value, quality and service. To achieve this goal, Belk’s business strategy focuses on quality merchandise assortments, effective marketing and sales promotional strategies, attracting and retaining talented, well-qualified associates to deliver superior customer service, and operating efficiently with investments in information technology and process improvement.

The Company operates retail department stores in the highly competitive retail industry. Management believes that the principal competitive factors for retail department store operations include merchandise selection, quality, value, customer service and convenience. The Company believes its stores are strong competitors in all of these areas. The Company’s primary competitors are traditional department stores, mass merchandisers, national apparel chains, individual specialty apparel stores and direct merchant firms, including J.C. Penney Company, Inc., Dillard’s, Inc., Kohl’s Corporation, Macy’s, Inc., Sears Holding Corporation, Target Corporation and Wal-Mart Stores, Inc.

The Company has focused its growth strategy in the last several years on remodeling and expanding existing stores, developing new merchandising concepts in targeted demand centers, and expanding its online capabilities. The Company will, however, continue to explore new store opportunities in markets where the Belk name and reputation are well known and where Belk can distinguish its stores from the competition. In fiscal year 2012, the net store selling square footage remained consistent due to three store closings, offset by one store opening and three store expansions.

eCommerce

The Company continues to grow its eCommerce business and expand capabilities on the belk.com website. The belk.com website features a wide assortment of fashion apparel, accessories and shoes, plus a large selection of cosmetics, home and gift merchandise. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands.

In fiscal year 2012, the Company strengthened its eCommerce business with systems improvements, expansion of merchandise assortments, increased multimedia marketing and implementation of new social community engagement strategies. The Company’s 142,000 square foot eCommerce center in Pineville, NC was expanded by 117,000 square feet in the fourth quarter of fiscal year 2011. Additionally, in February 2012, the Company entered into a lease for a 515,000 square foot fulfillment center in Jonesville, SC, which is planned to begin operations in June 2012.

 

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Results of Operations

The following table sets forth, for the periods indicated, the percentage relationship to revenues of certain items in the Company’s consolidated statements of income and other pertinent financial and operating data.

 

     Fiscal Year Ended  
     January 28,
2012
    January 29,
2011
    January 30,
2010
 

SELECTED FINANCIAL DATA

      

Revenues

     100.0     100.0     100.0

Cost of goods sold

     66.5        67.0        67.9   

Selling, general and administrative expenses

     25.4        26.0        26.5   

Gain on sale of property and equipment

     0.1        0.2        0.1   

Asset impairment and exit costs

     0.1        0.2        1.2   

Pension curtailment charge

                   0.1   

Operating income

     8.1        7.0        4.4   

Interest expense

     1.4        1.4        1.5   

Income tax expense

     1.8        1.9        0.9   

Net income

     5.0        3.6        2.0   

SELECTED OPERATING DATA:

      

Selling square footage (in thousands)

     22,800        22,800        23,400   

Store revenues per selling square foot

   $ 162      $ 154      $ 143   

Comparable store net revenue increase (decrease)

     5.5     5.1     (4.6 )% 

Number of stores

      

Opened

     1        1        3   

Combined stores

                     

Closed

     (3     (1     (5

Total — end of period

     303        305        305   

The Company’s store and eCommerce operations have been aggregated into one operating segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.

The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.

 

Merchandise Areas

   Fiscal Year
2012
    Fiscal Year
2011
    Fiscal Year
2010
 

Women’s

     34     35     36

Cosmetics, Shoes and Accessories

     34     33     33

Men’s

     17     17     16

Home

     9     9     9

Children’s

     6     6     6
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Comparison of Fiscal Years Ended January 28, 2012 and January 29, 2011

Revenues.    In fiscal year 2012, the Company’s revenues increased 5.3%, or $0.2 billion, to $3.7 billion from $3.5 billion in fiscal year 2011. The increase was primarily attributable to a 5.5% increase in revenues from comparable stores, partially offset by a $6.8 million decrease in revenues due to closed stores.

 

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Cost of Goods Sold.    Cost of goods sold was $2.5 billion, or 66.5% of revenues in fiscal year 2012 compared to $2.4 billion, or 67.0% of revenues in fiscal year 2011. The increase in cost of goods sold of $108.0 million was primarily due to the increase in revenues. The decrease in cost of goods sold as a percentage of revenues was primarily attributable to reduced markdown activity, as well as reduced occupancy costs due to the closure of three leased locations, coupled with increasing revenues.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses (“SG&A”) were $938.0 million, or 25.4% of revenues in fiscal year 2012 compared to $914.1 million, or 26.0% of revenues for fiscal year 2011. The increase in SG&A expenses was primarily due to an increase in payroll, benefits, and advertising expense, partially offset by a reduction in depreciation expense for fiscal year 2012. The SG&A expense rate decreased due to the 5.5% increase in comparable store revenues combined with a decrease in depreciation expense, partially offset by an incremental increase in payroll and benefits expense as a percentage of revenues.

Gain on sale of property and equipment.    Gain on sale of property and equipment was $3.1 million for fiscal year 2012 compared to $6.4 million for fiscal year 2011. The fiscal year 2012 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as a $1.2 million gain on the nonmonetary exchange of a retail location. The fiscal year 2011 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as $2.3 million for gains on the sale of three former retail locations.

Asset Impairment and Exit Costs.    In fiscal year 2012, the Company recorded a $3.5 million charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date. In fiscal year 2011, the Company recorded $5.9 million in asset impairment charges primarily to adjust two retail locations’ net book values to fair value. The Company also recorded a $3.5 million charge for real estate holding costs, offset by a $3.5 million revision to a previously estimated lease buyout reserve.

Interest Expense.    In fiscal year 2012, the Company’s interest expense decreased $0.5 million to $50.2 million from $50.7 million for fiscal year 2011. The decrease was primarily due to a decrease in total debt for a majority of fiscal year 2012 as a result of the $125.0 million discretionary payment towards the bank term loan made on November 23, 2010.

Interest Income.    In fiscal year 2012, the Company’s interest income decreased to $0.3 million from $0.6 million in fiscal year 2011. The decrease was primarily due to lower short-term investments and lower market interest rates in fiscal year 2012 as compared to fiscal year 2011.

Income tax expense.    Income tax expense for fiscal year 2012 was $67.0 million, or 26.8%, compared to $68.2 million, or 34.8%, for the same period in fiscal year 2011. The effective tax rate decreased primarily as a result of a $20.2 million deferred state tax valuation allowance that was released during fiscal year 2012.

Comparison of Fiscal Years Ended January 29, 2011 and January 30, 2010

Revenues.    In fiscal year 2011, the Company’s revenues increased 5.0%, or $0.2 billion, to $3.5 billion from $3.3 billion in fiscal year 2010. The increase was primarily attributable to a 5.1% increase in revenues from comparable stores and a $5.8 million increase in revenues from new stores, partially offset by a $12.0 million decrease in revenues due to closed stores.

Cost of Goods Sold.    Cost of goods sold was $2.4 billion, or 67.0% of revenues in fiscal year 2011 compared to $2.3 billion, or 67.9% of revenues in fiscal year 2010. The increase in cost of goods sold of $81.6 million was primarily due to the increase in revenues. The decrease in cost of goods sold as a percentage of revenues was primarily attributable to reduced markdown activity, partially offset by an increase in buying expenses related to the Company’s merchandising initiatives for fiscal year 2011.

 

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Selling, General and Administrative Expenses.    SG&A expenses were $914.1 million, or 26.0% of revenues in fiscal year 2011 compared to $886.3 million, or 26.5% of revenues for fiscal year 2010. The increase in SG&A expenses was primarily due to an increase in branding and other strategic initiatives, advertising, and performance based compensation, partially offset by reductions in depreciation and pension expense for fiscal year 2011. The decrease in the SG&A expense rate is primarily the result of the decrease in depreciation and pension expense, coupled with increasing revenues.

Gain on sale of property and equipment.    Gain on sale of property and equipment was $6.4 million for fiscal year 2011 compared to $2.0 million for fiscal year 2010. The fiscal year 2011 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as $2.3 million for gains on the sale of three former retail locations. The fiscal year 2010 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, offset by a $0.6 million loss on the abandonment of property and equipment.

Asset Impairment and Exit Costs.    In fiscal year 2011, the Company recorded $5.9 million in asset impairment charges primarily to adjust two retail locations’ net book values to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. The Company also recorded a $3.5 million charge for real estate holding costs, offset by a $3.5 million revision to a previously estimated lease buyout reserve. In fiscal year 2010, the Company recorded $38.5 million in impairment charges primarily to adjust eight retail locations’ net book values to fair value, a $1.0 million charge for real estate holding costs and other store closing costs, and $0.4 million in exit costs comprised primarily of severance costs associated with the outsourcing of certain information technology functions.

Pension curtailment charge.    A one-time pension curtailment charge of $2.7 million in the third quarter of fiscal year 2010 resulted from the decision to freeze the Company’s defined benefit plan, effective December 31, 2009, for those remaining participants whose benefits were not previously frozen in fiscal year 2006.

Interest Expense.    In fiscal year 2011, the Company’s interest expense decreased $0.6 million to $50.7 million from $51.3 million for fiscal year 2010. The decrease was primarily due to weighted average interest rates being lower in fiscal year 2011 compared to fiscal year 2010, and a $150.0 million net decrease in long-term debt excluding capital leases during fiscal year 2011.

Interest Income.    In fiscal year 2011, the Company’s interest income decreased $0.5 million, or 44.6%, to $0.6 million from $1.0 million in fiscal year 2010. The decrease was primarily due to significantly lower market interest rates in fiscal year 2011 as compared to fiscal year 2010.

Income tax expense.    Income tax expense for fiscal year 2011 was $68.2 million, or 34.8%, compared to $30.1 million, or 30.9%, for the same period in fiscal year 2010. The effective tax rate increased primarily as a result of lower corporate owned life insurance income and charitable stock contributions for fiscal year 2011, coupled with a $98.7 million increase in income before income taxes.

Seasonality and Quarterly Fluctuations

Due to the seasonal nature of the retail business, the Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenues, operating income and net income. A disproportionate amount of the Company’s revenues and a substantial amount of operating and net income are realized during the fourth quarter, which includes the holiday selling season. If for any reason the Company’s revenues were below seasonal norms during the fourth quarter, the Company’s annual results of operations could be adversely affected. The Company’s inventory levels generally reach their highest levels in anticipation of increased revenues during these months.

 

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The following table illustrates the seasonality of revenues by quarter as a percentage of the full year for the fiscal years indicated.

 

     2012     2011     2010  

First quarter

     22.9     22.9     22.7

Second quarter

     22.5        22.4        22.7   

Third quarter

     21.4        21.2        21.8   

Fourth quarter

     33.2        33.5        32.8   

The Company’s quarterly results of operations could also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, expansions and remodels.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash on hand of $456.3 million as of January 28, 2012, cash flows from operations, and borrowings under debt facilities, which consist of a $350.0 million credit facility, $475.0 million in senior notes, and a $17.8 million state bond facility.

The credit facility, which matures in November 2015, allows for up to $250.0 million of outstanding letters of credit. The credit facility charges interest based upon certain Company financial ratios and the interest spread was calculated at January 28, 2012 using LIBOR plus 150 basis points, or 1.80%. The credit facility contains restrictive covenants including leverage and fixed charge coverage ratios. The Company’s calculated leverage ratio dictates the LIBOR spread that will be charged on outstanding borrowings in the subsequent quarter. The leverage ratio is calculated by dividing adjusted debt, which is the sum of the Company’s outstanding debt and rent expense multiplied by a factor of eight, by pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. At January 28, 2012, the maximum leverage covenant ratio allowed under the credit facility was 4.0, and the calculated leverage ratio was 2.15. The Company was in compliance with all covenants as of January 28, 2012 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future. As of January 28, 2012, the Company had $37.4 million of standby letters of credit outstanding under the credit facility, and availability under the credit facility was $312.6 million.

On January 25, 2012, the Company made a $125.0 million discretionary payment to extinguish the term loan outstanding under the credit facility, utilizing $25.0 million of cash on hand, and $100.0 million from 5.21% fixed rate, 10-year notes issued by the Company on January 25, 2012. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.9 million related to the term loan and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income.

The senior notes have restrictive covenants that are similar to the Company’s credit facility, and had the following terms as of January 28, 2012:

 

Amount

(in millions)

      

Type of Rate

    

Rate

    

Maturity Date

  $  80.0 (a)       Variable        1.38 %(b)     July 2012
  20.0         Fixed        5.05    July 2012
  100.0         Fixed        5.31    July 2015
  125.0         Fixed        6.20    August 2017
  50.0         Fixed        5.70    November 2020
  100.0         Fixed        5.21    January 2022

 

 

              
  $475.0                

 

 

              

 

(a)

The Company’s exposure to derivative instruments was limited to one interest rate swap as of January 28, 2012, an $80.0 million notional amount swap, which has a fixed interest rate of 5.2% and expires in fiscal year 2013. It has been designated as a cash flow hedge against variability in future interest rate payments on the $80.0 million floating rate senior note.

 

(b)

Stated variable interest rate is based on three-month LIBOR plus 80.0 basis points.

 

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Additionally, the Company has a $17.8 million, 20-year variable rate, 0.20% at January 28, 2012, state bond facility which matures in October 2025.

The debt facilities place certain restrictions on mergers, consolidations, acquisitions, sales of assets, indebtedness, transactions with affiliates, leases, liens, investments, dividends and distributions, exchange and issuance of capital stock and guarantees, and require maintenance of minimum financial ratios, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. These ratios are calculated exclusive of non-cash charges, such as fixed asset, goodwill and other intangible asset impairments.

The Company utilizes derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements are used to reduce the potential impact of increases in interest rates on variable rate debt. The difference between the fixed rate leg and the variable rate leg of the swap, to be paid or received, is accrued and recognized as an adjustment to interest expense. Additionally, the change in the fair value of a swap designated as a cash flow hedge is marked to market through accumulated other comprehensive income.

Management believes that cash on hand of $456.3 million as of January 28, 2012, cash flows from operations and existing credit facilities will be sufficient to cover working capital needs, stock repurchases, dividends, capital expenditures, pension contributions and debt service requirements for the next twelve months and foreseeable future.

The Company has planned investments totaling approximately $600 million over a five-year period that began in fiscal year 2011 for key strategic initiatives including store improvements; information technology; eCommerce; branding, marketing and advertising; merchandise planning and processes; improved sourcing practices; and customer care.

Net cash provided by operating activities was $251.9 million for fiscal year 2012 compared to $189.2 million for fiscal year 2011. The increase in cash provided by operating activities for fiscal year 2012 was principally due to a $55.5 million increase in net income for the current period, a $33.8 million decrease in income taxes paid in fiscal year 2012 primarily as a result of higher estimated tax payments made during fiscal year 2011, partially offset by the increase in inventory to support current sales trends.

Net cash used by investing activities increased $61.2 million to $134.9 million for fiscal year 2012 from $73.8 million for fiscal year 2011. The increase in cash used by investing activities primarily resulted from increased purchases of property and equipment of $61.4 million.

The Company’s capital expenditures of $143.8 million during fiscal year 2012 were comprised primarily of amounts related to store remodeling and expansion projects, as well as eCommerce and information technology enhancements. The Company has increased the amount of its anticipated capital expenditures for fiscal year 2013 primarily due to information technology and eCommerce enhancements.

Net cash used by financing activities decreased $133.9 million to $114.1 million for fiscal year 2012 from $248.0 million for fiscal year 2011. The decrease in cash used by financing activities primarily relates to the $100.0 million issuance of fixed rate notes, a $75.0 million decrease in discretionary payments made on amounts outstanding under the credit facility, and a $13.0 million decrease in dividends paid.

 

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Contractual Obligations and Commercial Commitments

To facilitate an understanding of the Company’s contractual obligations and commercial commitments, the following data is provided:

 

     Payments Due by Period  
     Total      Within 1
Year
     1 - 3 Years      3 - 5 Years      After 5 Years  
     (dollars in thousands)  

Contractual Obligations

              

Long-Term Debt

   $ 492,780       $ 100,000       $       $ 100,000       $ 292,780   

Estimated Interest Payments on Debt(a)

     152,614         25,617         44,714         36,023         46,260   

Capital Lease Obligations

     30,899         8,164         14,970         5,402         2,363   

Operating Leases(b)

     528,938         71,469         123,107         89,672         244,690   

Purchase Obligations(c)

     138,969         71,724         55,306         11,939           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Cash Obligations

   $ 1,344,200       $ 276,974       $ 238,097       $ 243,036       $ 586,093   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Amount of Commitment Expiration per Period  
     Total
Amounts
Committed
     Within
1 Year
     1 - 3 Years      3 - 5 Years      After 5 Years  
     (dollars in thousands)  

Other Commercial Commitments

              

Standby Letters of Credit

   $ 37,376       $ 37,376       $       $       $   

Import Letters of Credit

     1,967         1,967                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial Commitments

   $ 39,343       $ 39,343       $       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Interest rates used to compute estimated interest payments utilize the stated rate for fixed rate debt and projected interest rates for variable rate debt. Projected rates range from 1.80% to 5.96% over the term of the variable rate debt agreements.

 

(b)

Lease payments consist of base rent only and do not include amounts for percentage rents, real estate taxes, insurance and other expenses related to those locations.

 

(c)

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty, such as merchandise purchase orders, have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts.

Obligations under the deferred compensation and postretirement benefit plans are not included in the contractual obligations table. The Company’s deferred compensation and postretirement plans are not funded in advance. Deferred compensation and other non-qualified plan payments during fiscal years 2012 and 2011 totaled $7.5 million each. Postretirement benefit payments during fiscal years 2012 and 2011 totaled $2.6 million each.

Obligations under the Company’s defined benefit pension plan are not included in the contractual obligations table. Under the current requirements of the Pension Protection Act of 2006 (“PPA”), the Company is required to fund the net pension liability over the subsequent seven years. The net pension liability under PPA is calculated based on certain assumptions at January 1, of each year, that are subject to change based on economic conditions (and any regulatory changes) in the future. The Company expects to contribute sufficient amounts to the pension plan so that the PPA guidelines are exceeded.

As of January 28, 2012, the total uncertain tax position liability was approximately $23.5 million, including tax, penalty and interest. The Company is not able to reasonably estimate the timing of these tax related future

 

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cash flows and has excluded these liabilities from the table. At this time, the Company does not expect a material change to its gross unrecognized tax benefit during fiscal year 2013.

Also excluded from the contractual obligations table are payments the Company may make for employee medical costs and workers compensation, general liability and automobile claims.

Off-Balance Sheet Arrangements

The Company has not provided any financial guarantees as of January 28, 2012. The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.

New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This guidance will be effective at the beginning of fiscal year 2013. The Company does not expect the adoption to have a material impact on the consolidated financial statements.

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders' equity. The total of comprehensive income, the components of net income, and the components of other comprehensive income must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance will be effective at the beginning of fiscal year 2013.

Impact of Inflation or Deflation

Although the Company expects that operations will be influenced by general economic conditions, including rising food, fuel and energy prices, management does not believe that inflation has had a material effect on the Company’s results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.

The Company did experience mid-single digit increases in the merchandise costs of our goods during fiscal year 2012 resulting primarily from increased raw material costs, but also from increased labor and energy costs. The Company managed the effect of the cost increases through sourcing strategies, product design and pricing actions so that margins for fiscal year 2012 were not materially affected.

Critical Accounting Policies

Management’s discussion and analysis discusses the results of operations and financial condition as reflected in the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. As discussed in the Company’s notes to the consolidated financial statements, the preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation, vendor allowances, property and equipment, rent expense, useful lives of depreciable assets, recoverability of long-lived assets, including intangible assets, store closing reserves, customer loyalty programs, income taxes, derivative financial instruments, credit income, the calculation of pension and postretirement obligations, self-insurance reserves and stock based compensation.

 

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Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See the Company’s notes to the consolidated financial statements for a discussion of the Company’s significant accounting policies.

While the Company believes that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the Company cannot guarantee that its estimates and assumptions will be accurate, which could require the Company to make adjustments to these estimates in future periods.

The following critical accounting policies are used in the preparation of the consolidated financial statements:

Inventory Valuation.    Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate markdowns currently can result in an overstatement of inventory under the lower of cost or market principle.

Vendor Allowances.    The Company receives allowances from its vendors through a variety of programs and arrangements, including markdown reimbursement programs. These vendor allowances are generally intended to offset the Company’s costs of selling the vendors’ products in its stores. Allowances are recognized in the period in which the Company completes its obligations under the vendor agreements. Most incentives are deducted from amounts owed to the vendor at the time the Company completes its obligations to the vendor or shortly thereafter.

The following summarizes the types of vendor incentives and the Company’s applicable accounting policies:

 

  Ÿ  

Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to SG&A expenses in the period that the advertising expense is incurred.

 

  Ÿ  

Markdown allowances — Represents reimbursement for the cost of markdowns to the selling price of the vendor’s merchandise. Amounts are recognized as a reduction to cost of goods sold in the later of the period that the merchandise is marked down or the reimbursement is negotiated. Amounts received prior to recognizing the markdowns are recorded as a reduction to the cost of inventory.

 

  Ÿ  

Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expense in the period that the payroll cost is incurred.

Property and Equipment, net.    Property and equipment owned by the Company are stated at cost less accumulated depreciation and amortization. Property and equipment leased by the Company under capital leases are stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are recorded utilizing straight-line and in certain circumstances accelerated methods, typically over the shorter of estimated asset lives or related lease terms. The Company amortizes leasehold improvements over the shorter of the estimated asset life or expected lease term that would include cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the date the assets are placed in service, to be reasonably assured. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.

 

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Intangibles.    Intangible assets are accounted for in accordance with ASC 350, “Intangibles—Goodwill and Other.” This statement requires that intangible assets with indefinite lives should not be amortized, but should be tested for impairment on an annual basis, or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Leasehold intangibles, which represent the excess of fair value over the carrying value (assets) or the excess of carrying value over fair value (liabilities) of acquired leases, are amortized on a straight-line basis over the remaining terms of the lease agreements. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears to be reasonably assured. The lease intangibles are included in other current assets and accrued liabilities for the current portions and other assets and other noncurrent liabilities for the noncurrent portions. Customer relationships, which represent the value of customer relationships obtained in acquisitions or purchased, are amortized on a straight-line basis over their estimated useful life and are included in other assets. The carrying value of intangible assets is reviewed by the Company’s management to assess the recoverability of the assets when facts and circumstances indicate that the carrying value may not be recoverable.

Rent Expense.    The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Developer incentives are recognized as a reduction to occupancy costs over the lease term. The lease term commences on the date when the Company gains control of the property.

Useful Lives of Depreciable Assets.    The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.

Recoverability of Long-Lived Assets.    In accordance with ASC 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.

Store Closing Reserves.    The Company reduces the carrying value of property and equipment to fair value for owned locations or recognizes a reserve for future obligations for leased facilities at the time the Company ceases using property and/or equipment. The reserve includes future minimum lease payments and common area maintenance and taxes for which the Company is obligated under operating lease agreements. Additionally, the Company makes certain assumptions related to potential subleases and lease terminations. These assumptions are based on management’s knowledge of the market and other relevant experience. However, significant changes in the real estate market and the inability to enter into the subleases or obtain lease terminations within the estimated time frame may result in increases or decreases to these reserves.

Customer Loyalty Programs.    The Company utilizes a customer loyalty program that issues certificates for discounts on future purchases to proprietary charge card customers based on their spending levels. The certificates are classified as a reduction to revenue as they are earned by the customers. The Company maintains a reserve liability for the estimated future redemptions of the certificates. The estimated impact on revenues of a 10% change in program utilization would be $2.3 million.

Pension and Postretirement Obligations.    The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate, investment earnings, as well as

 

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the remaining service period of active employees. The Company calculates the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.

The Company selected an investment earnings assumption of 7.5% to determine its fiscal year 2012 expense. The Company believes that this assumption was appropriate given the composition of its plan assets and historical market returns thereon. The estimated effect of a 0.25% increase or decrease in the investment earnings assumption would decrease or increase pension expense by approximately $0.9 million. The Company has selected an investment earnings assumption of 7.25% for fiscal year 2013.

The Company selected a discount rate assumption of 5.50% to determine its fiscal year 2012 expense. The Company believes that this assumption is appropriate given the composition of its plan obligations and the interest rate environment as of the measurement date. The estimated effect of a 0.25% increase or decrease in the discount rate assumption would have decreased or increased fiscal year 2012 pension expense by approximately $0.3 million. The Company has decreased its discount rate assumption to 4.375% for fiscal year 2013.

The Company expects to contribute sufficient amounts to the pension plan so that the PPA guidelines are exceeded, and over the next five years, the pension plan becomes fully funded if (baseline) interest rate and asset return assumptions are realized. The Company elected to contribute $59.0 million to its Pension Plan in fiscal years 2012 and 2011. The Company expects to contribute $1.3 million and $2.1 million to its non-qualified defined benefit Supplemental Executive Retirement Plan and postretirement plan, respectively, in fiscal year 2013.

Self Insurance Reserves.    The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. Management believes that the Company’s loss reserves are adequate but actual losses may differ from the amounts provided.

The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with industry accepted loss analysis standards are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided.

Income Taxes.    Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. In accordance with ASC 740, “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).

 

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Derivative Financial Instruments.    The Company utilizes derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements are used to reduce the potential impact of increases in interest rates on variable rate long-term debt. The difference between the fixed rate leg and the variable rate leg of each swap, to be paid or received, is accrued and recognized as an adjustment to interest expense. Additionally, the changes in the fair value of swaps designated as cash flow hedges are marked to market through accumulated other comprehensive income. Swaps that are not designated as hedges are marked to market through gain (loss) on investments.

Stock Based Compensation.    The Company accounts for stock based compensation under the guidelines of ASC 718, “Compensation — Stock Compensation.” ASC 718 requires the Company to account for stock based compensation by using the grant date fair value of share awards and the estimated number of shares that will ultimately be issued in conjunction with each award.

Finance Income.    In connection with the program agreement (“Program Agreement”) signed with GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance, in fiscal year 2006, the Company is paid a percentage of net private label credit card account sales. These payments under the 10-year credit card Program Agreement between Belk and GE, which expires June 30, 2016, are recorded as an offset to SG&A expenses in the consolidated statements of income. This Program Agreement sets forth among other things the terms and conditions under which GE will issue credit cards to Belk’s customers. Under the Program Agreement, the Company will be paid a percentage of net credit sales for future credit card sales, for which Belk is required to perform certain duties and receive fees.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates on its variable rate debt. The Company uses interest rate swaps to manage the interest rate risk associated with its borrowings and to manage the Company’s allocation of fixed and variable rate debt. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged derivative instruments. The Company’s net exposure to interest rate risk is based on the difference between the outstanding variable rate debt and the notional amount of its designated interest rate swaps. At January 28, 2012, the Company had $97.8 million of variable rate debt, and an $80.0 million notional amount swap, which has a fixed interest rate of 5.2% and expires in fiscal year 2013. The effect on the Company’s annual interest expense of a one-percent change in interest rates would be approximately $0.2 million.

A discussion of the Company’s accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements.

 

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Item 8. Financial Statements and Supplementary Data

 

     Page  

Report of Independent Registered Public Accounting Firm

     29   

Consolidated Statements of Income

     30   

Consolidated Balance Sheets

     31   

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

     32   

Consolidated Statements of Cash Flows

     33   

Notes to Consolidated Financial Statements

     34   

 

28


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Belk, Inc.:

We have audited the accompanying consolidated balance sheets of Belk, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended January 28, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belk, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Belk, Inc.’s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 10, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/    KPMG LLP

Charlotte, North Carolina

April 10, 2012

 

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Table of Contents

BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

 

     Fiscal Year Ended  
     January 28,
2012
    January 29,
2011
    January 30,
2010
 

Revenues

   $ 3,699,592      $ 3,513,275      $ 3,346,252   

Cost of goods sold (including occupancy, distribution and buying expenses)

     2,461,515        2,353,536        2,271,925   

Selling, general and administrative expenses

     938,008        914,078        886,263   

Gain on sale of property and equipment

     3,143        6,416        2,011   

Asset impairment and exit costs

     2,302        6,096        39,915   

Pension curtailment charge

                   2,719   
  

 

 

   

 

 

   

 

 

 

Operating income

     300,910        245,981        147,441   

Interest expense

     (50,218     (50,679     (51,321

Interest income

     328        569        1,027   

Loss on extinguishment of debt

     (922              

Gain on investments

                   43   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     250,098        195,871        97,190   

Income tax expense

     66,950        68,243        30,054   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 183,148      $ 127,628      $ 67,136   
  

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 4.04      $ 2.72      $ 1.39   
  

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 4.02      $ 2.71      $ 1.39   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

      

Basic

     45,355,941        46,921,875        48,450,401   

Diluted

     45,579,987        47,011,533        48,452,460   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BELK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

     January 28,
2012
    January 29,
2011
 

Assets

  

Current assets:

    

Cash and cash equivalents

   $ 456,272      $ 453,403   

Short-term investments

            6,150   

Accounts receivable, net

     39,431        31,119   

Merchandise inventory

     887,029        808,503   

Prepaid income taxes, expenses and other current assets

     22,362        18,869   
  

 

 

   

 

 

 

Total current assets

     1,405,094        1,318,044   

Property and equipment, net

     993,122        951,120   

Deferred income taxes

     83,034        83,698   

Other assets

     32,966        36,769   
  

 

 

   

 

 

 

Total assets

   $ 2,514,216      $ 2,389,631   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity   

Current liabilities:

    

Accounts payable

   $ 216,438      $ 196,622   

Accrued liabilities

     186,820        161,844   

Accrued income taxes

     20,684        10,926   

Deferred income taxes

     27,570        19,776   

Current installments of long-term debt and capital lease obligations

     108,164        4,426   
  

 

 

   

 

 

 

Total current liabilities

     559,676        393,594   

Long-term debt and capital lease obligations, excluding current installments

     415,515        534,813   

Interest rate swap liability

            5,388   

Retirement obligations and other noncurrent liabilities

     302,795        299,564   
  

 

 

   

 

 

 

Total liabilities

     1,277,986        1,233,359   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock

              

Common stock, 400 million shares authorized and 44.9 and 46.3 million shares

    

issued and outstanding as of January 28, 2012 and January 29, 2011, respectively.

     449        463   

Paid-in capital

     364,590        409,201   

Retained earnings

     1,045,509        887,953   

Accumulated other comprehensive loss

     (174,318     (141,345
  

 

 

   

 

 

 

Total stockholders’ equity

     1,236,230        1,156,272   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,514,216      $ 2,389,631   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(in thousands)

 

     Common
Stock
Shares
    Common
Stock
Amount
    Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance at January 31, 2009

     48,753      $ 488      $ 456,858      $ 741,579      $ (166,898   $ 1,032,027   

Comprehensive income:

            

Net income

                          67,136               67,136   

Unrealized gain on investments, net of $287 income taxes

                                 482        482   

Unrealized gain on interest rate swap, net of $259 income taxes

                                 521        521   

Defined benefit expense, net of $4,078 income taxes

                                 7,688        7,688   

Pension curtailment charge, net of $941 income taxes

                                 1,778        1,778   
            

 

 

 

Total comprehensive income

               77,605   
            

 

 

 

Cash dividends

                          (9,752            (9,752

Issuance of stock-based compensation

                   (115                   (115

Stock-based compensation expense

                   180                      180   

Common stock issued

     33               300                      300   

Repurchase and retirement of common stock

     (500     (5     (5,945                   (5,950
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 30, 2010

     48,286        483        451,278        798,963        (156,429     1,094,295   

Comprehensive income:

            

Net income

                          127,628               127,628   

Unrealized gain on interest rate swap, net of $669 income taxes

                                 1,346        1,346   

Defined benefit expense, net of $7,370 income taxes

                                 13,738        13,738   
            

 

 

 

Total comprehensive income

               142,712   
            

 

 

 

Cash dividends

                          (38,638            (38,638

Issuance of stock-based compensation

                   (43                   (43

Stock-based compensation expense

                   8,823                      8,823   

Common stock issued

     36               539                      539   

Repurchase and retirement of common stock

     (1,978     (20     (51,396                   (51,416
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 29, 2011

     46,344        463        409,201        887,953        (141,345     1,156,272   

Comprehensive income:

            

Net income

                          183,148               183,148   

Unrealized gain on interest rate swap, net of $1,379 income taxes

                                 2,323        2,323   

Defined benefit expense, net of $20,952 income taxes

                                 (35,296     (35,296
            

 

 

 

Total comprehensive income

               150,175   
            

 

 

 

Cash dividends

                          (25,592            (25,592

Issuance of stock-based compensation

                   (2,212                   (2,212

Stock-based compensation expense

                   11,981                      11,981   

Common stock issued

     204        2        600                      602   

Repurchase and retirement of common stock

     (1,632     (16     (54,980                   (54,996
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 28, 2012

     44,916      $ 449      $ 364,590      $ 1,045,509      $ (174,318   $ 1,236,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Fiscal Year Ended  
     January 28,
2012
    January 29,
2011
    January 30,
2010
 

Cash flows from operating activities:

      

Net income

   $ 183,148      $ 127,628      $ 67,136   

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

      

Asset impairment and exit costs

     2,302        6,096        39,915   

Deferred income tax expense (benefit)

     30,458        33,453        (9,982

Depreciation and amortization expense

     122,761        140,239        158,388   

Stock-based compensation expense

     16,849        10,466        180   

Pension curtailment charge

                   2,719   

(Gain) loss on sale of property and equipment

     (514     (3,787     618   

Amortization of deferred gain on sale and leaseback

     (2,629     (2,629     (2,629

Gain on sale of investments

                   (43

Investment securities contribution expense

                   1,889   

Amortization of deferred debt issuance costs

     1,025        1,559        1,625   

(Increase) decrease in:

      

Accounts receivable, net

     (8,245     (7,981     11,616   

Merchandise inventory

     (78,526     (33,161     53,155   

Prepaid income taxes, expenses and other assets

     (3,062     4,789        2,736   

Increase (decrease) in:

      

Accounts payable and accrued liabilities

     39,620        (11,984     52,746   

Accrued income taxes

     9,758        (24,849     35,182   

Retirement obligations and other liabilities

     (61,013     (50,598     (27,856
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     251,932        189,241        387,395   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (143,844     (82,409     (42,326

Proceeds from sales of property and equipment

     2,780        5,448        140   

Proceeds from sales of short-term investments

     6,150        3,200        900   
  

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (134,914     (73,761     (41,286
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from issuance of long-term debt

     100,000        50,000          

Principal payments on long-term debt and capital lease obligations

     (130,817     (204,605     (4,496

Dividends paid

     (25,592     (38,638     (9,752

Repurchase and retirement of common stock

     (54,996     (51,416     (5,950

Stock compensation tax benefit (expense)

     816        41        (64

Cash paid for withholding taxes in lieu of stock-based compensation shares

     (3,301     (84     (51

Deferred financing costs

     (509     (3,305       

Proceeds from financing costs

     250                 
  

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     (114,149     (248,007     (20,313
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     2,869        (132,527     325,796   

Cash and cash equivalents at beginning of period

     453,403        585,930        260,134   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 456,272      $ 453,403      $ 585,930   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

      

Income taxes paid (refunded)

   $ 26,476      $ 60,232      $ (6,846

Interest paid, net of capitalized interest

     30,453        30,791        33,432   

Supplemental schedule of noncash investing and financing activities:

      

Increase (decrease) in property and equipment through accrued purchases

     5,205        1,379        (7,525

Increase (decrease) in investment securities through short-term investments

            (6,850     6,850   

Increase in property and equipment through assumption of capital leases

     14,321        4,990          

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Belk, Inc. and its subsidiaries (collectively, the “Company” or “Belk”) operate retail department stores in 16 states primarily in the southern United States. All intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. Fiscal years 2012, 2011 and 2010 ended on January 28, 2012, January 29, 2011 and January 30, 2010, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are required as part of determining stock-based compensation, depreciation, amortization and recoverability of long-lived and intangible assets, valuation of inventory, establishing store closing and other reserves, self-insurance reserves and calculating retirement obligations and expense.

Revenues

The Company’s store and eCommerce operations have been aggregated into one operating segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.

The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.

 

Merchandise Areas

   Fiscal Year 2012   Fiscal Year 2011   Fiscal Year 2010

Women’s

   34%   35%   36%

Cosmetics, Shoes and Accessories

   34%   33%   33%

Men’s

   17%   17%   16%

Home

   9%   9%   9%

Children’s

   6%   6%   6%
  

 

 

 

 

 

Total

   100%   100%   100%
  

 

 

 

 

 

Revenues include sales of merchandise and the net revenue received from leased departments of $2.3 million each for fiscal years 2012, 2011 and 2010. Sales from retail operations are recorded at the time of delivery and reported net of sales taxes and merchandise returns. The reserve for returns is calculated as a percentage of sales based on historical return percentages.

The Company utilizes a customer loyalty program that issues certificates for discounts on future purchases to proprietary charge card customers based on their spending levels. The certificates are classified as a reduction to revenue as they are earned by the customers. The Company maintains a reserve liability for the estimated future redemptions of the certificates.

Cost of Goods Sold

Cost of goods sold is comprised principally of the cost of merchandise as well as occupancy, distribution and buying expenses. Occupancy expenses include rent, utilities and real estate taxes. Distribution expenses include all costs associated with distribution facilities. Buying expenses include payroll and travel expenses associated with the corporate merchandise buying function.

 

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Table of Contents

BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses are comprised principally of payroll and benefits for retail and corporate employees, depreciation, advertising and other administrative expenses. SG&A expenses are reduced by proceeds from the 10-year credit card program agreement (“Program Agreement”), which expires June 30, 2016, between Belk and GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance. This Program Agreement sets forth among other things the terms and conditions under which GE will issue credit cards to Belk’s customers. The Company is paid a percentage of net credit sales, as defined by the Program Agreement. Belk is required to perform certain duties, including receiving and remitting in-store payments on behalf of GE and receiving fees for these activities. These amounts totaled $78.8 million, $71.1 million and $67.0 million in fiscal years 2012, 2011 and 2010, respectively.

Gift Cards

The Company issues gift cards which do not contain provisions for expiration or inactivity fees. At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the gift card. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise. The estimated values of gift cards expected to go unused are recognized as a reduction to SG&A expenses in proportion to actual gift card redemptions as the remaining gift card values are redeemed, when there is no requirement for remitting balances to government agencies under unclaimed property laws.

Advertising

Advertising costs, net of co-op recoveries from merchandise vendors, are expensed in the period in which the advertising event takes place and amounted to $152.0 million, $143.2 million and $123.5 million in fiscal years 2012, 2011 and 2010, respectively.

Recoverability of Long-Lived Assets

In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.

Cash Equivalents

Cash equivalents include liquid investments with an original maturity of 90 days or less.

Short-term Investments

Short-term investments consist of investments whose original maturity is greater than 90 days. At January 29, 2011, the Company held an auction rate security (“ARS”) of $6.2 million in short-term investments, which represents the amount called at par by the issuer during the first quarter of fiscal year 2012.

Merchandise Inventory

Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins

 

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Table of Contents

BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

are calculated by applying a cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate markdowns can result in an overstatement of inventory under the lower of cost or market principle.

Property and Equipment, Net

Property and equipment owned by the Company are stated at historical cost less accumulated depreciation and amortization. Property and equipment leased by the Company under capital leases are stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are recorded utilizing straight-line and in certain circumstances accelerated methods, typically over the shorter of estimated asset lives or related lease terms. The Company amortizes leasehold improvements over the shorter of the estimated asset life or expected lease term that would include cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the date the assets are placed in service, to be reasonably assured. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.

Intangibles

Intangible assets are accounted for in accordance with ASC 350, “Intangibles—Goodwill and Other.” This statement requires that intangible assets with indefinite lives should not be amortized, but should be tested for impairment on an annual basis, or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Leasehold intangibles, which represent the excess of fair value over the carrying value (assets) or the excess of carrying value over fair value (liabilities) of acquired leases, are amortized on a straight-line basis over the remaining terms of the lease agreements. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears to be reasonably assured. The lease intangibles are included in other current assets and accrued liabilities for the current portions and other assets and other noncurrent liabilities for the noncurrent portions. Customer relationships, which represent the value of customer relationships obtained in acquisitions or purchased, are amortized on a straight-line basis over their estimated useful life and are included in other assets. The carrying value of intangible assets is reviewed by the Company’s management to assess the recoverability of the assets when facts and circumstances indicate that the carrying value may not be recoverable.

Rent Expense

The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Developer incentives are recognized as a reduction to occupancy costs over the lease term. The lease term commences on the date when the Company gains control of the property.

Vendor Allowances

The Company receives allowances from its vendors through a variety of programs and arrangements, including markdown reimbursement programs. These vendor allowances are generally intended to offset the

 

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Table of Contents

BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Company’s costs of selling the vendors’ products in our stores. Allowances are recognized in the period in which the Company completes its obligations under the vendor agreements. Most incentives are deducted from amounts owed to the vendor at the time the Company completes its obligations to the vendor or shortly thereafter.

The following summarizes the types of vendor incentives and the Company’s applicable accounting policies:

 

  Ÿ  

Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to SG&A expenses in the period that the advertising expense is incurred.

 

  Ÿ  

Markdown allowances — Represents reimbursement for the cost of markdowns to the selling price of the vendor’s merchandise. Amounts are recognized as a reduction to cost of goods sold in the later of the period that the merchandise is marked down or the reimbursement is negotiated. Amounts received prior to recognizing the markdowns are recorded as a reduction to the cost of inventory.

 

  Ÿ  

Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expenses in the period that the payroll cost is incurred.

Pension and Postretirement Obligations

The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate, investment earnings, as well as the remaining service period of active employees. The Company calculates the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.

Stock Based Compensation

The Company accounts for stock based compensation under the guidelines of ASC 718, “Compensation — Stock Compensation.” ASC 718 requires the Company to account for stock based compensation by using the grant date fair value of share awards and the estimated number of shares that will ultimately be issued in conjunction with each award.

Self Insurance Reserves

The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. Management believes that the Company’s loss reserves are adequate but actual losses may differ from the amounts provided.

The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with industry accepted loss analysis standards are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided.

Income Taxes

Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax

 

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positions. In accordance with ASC 740, “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).

Derivative Financial Instruments

The Company utilizes derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements are used to reduce the potential impact of increases in interest rates on variable rate long-term debt. The difference between the fixed rate leg and the variable rate leg of each swap, to be paid or received, is accrued and recognized as an adjustment to interest expense. Additionally, the changes in the fair value of swaps designated as cash flow hedges are marked to market through accumulated other comprehensive income. Swaps that are not designated as hedges are marked to market through gain (loss) on investments.

As of January 28, 2012, the Company has one interest rate swap for an $80.0 million notional amount, which has a fixed rate of 5.2% and expires in fiscal year 2013. It has been designated as a cash flow hedge against variability in future interest rate payments on the $80.0 million floating rate senior note.

(2)    Intangibles

Intangible assets are accounted for in accordance with ASC 350, “Intangibles – Goodwill and Other.” This statement requires that intangible assets with indefinite lives not be amortized, but should be tested for impairment on an annual basis, or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

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Amortizing intangibles are comprised of the following:

 

     January 28,
2012
    January 29,
2011
 
     (in thousands)  

Amortizing intangible assets:

    

Favorable lease intangibles

   $ 9,960      $ 9,960   

Accumulated amortization — favorable lease intangibles

     (4,056     (3,368

Credit card and customer list intangibles

     18,746        18,746   

Accumulated amortization — credit card and customer list intangibles

     (14,080     (12,913

Other intangibles

     5,652        7,852   

Accumulated amortization — other intangibles

     (4,332     (6,131
  

 

 

   

 

 

 

Net amortizing intangible assets

   $ 11,890      $ 14,146   
  

 

 

   

 

 

 

Amortizing intangible liabilities:

    

Unfavorable lease intangibles

   $ (26,347   $ (26,347

Accumulated amortization — unfavorable lease intangibles

     8,332        6,394   
  

 

 

   

 

 

 

Net amortizing intangible liabilities

   $ (18,015   $ (19,953
  

 

 

   

 

 

 

The Company recorded net amortization expense related to amortizing intangibles of $0.3 million, $1.6 million and $2.0 million in fiscal years 2012, 2011 and 2010, respectively.

(3)    Asset Impairment and Exit Costs

In fiscal year 2012, the Company recorded a $3.5 million net charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date.

In fiscal year 2011, the Company recorded $5.9 million in asset impairment charges primarily to adjust two retail locations’ net book values to fair value. The Company also recorded a $3.5 million charge for real estate holding costs, offset by a $3.5 million revision to a previously estimated lease buyout reserve.

As of January 28, 2012 and January 29, 2011, the remaining reserve balance for post-closing real estate lease obligations was $2.5 million and $8.9 million, respectively. These balances are presented within accrued liabilities and other noncurrent liabilities on the consolidated balance sheets. The Company does not anticipate incurring significant additional exit costs in connection with the store closings. The following is a summary of post-closing real estate lease obligations activity:

 

     January 28,
2012
    January 29,
2011
 
     (in thousands)  

Balance, beginning of year

   $ 8,895      $ 8,821   

Charges and adjustments

     (1,189     1,857   

Utilization / payments

     (5,248     (1,783
  

 

 

   

 

 

 

Balance, end of year

   $ 2,458      $ 8,895   
  

 

 

   

 

 

 

 

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(4)    Accumulated Other Comprehensive Loss

The following table sets forth the components of accumulated other comprehensive loss:

 

     January 28,
2012
    January 29,
2011
 
     (in thousands)  

Unrealized loss on interest rate swap, net of $740 and $2,119 of income taxes as of January 28, 2012 and January 29, 2011, respectively.

   $ (945   $ (3,268

Defined benefit plans, net of $104,300 and $83,348 of income taxes as of January 28, 2012 and January 29, 2011, respectively.

     (173,373     (138,077
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (174,318   $ (141,345
  

 

 

   

 

 

 

(5)    Accounts Receivable, Net

Accounts receivable, net consists of:

 

     January 28,
2012
     January 29,
2011
 
     (in thousands)  

Accounts receivable from vendors

   $ 17,871       $ 12,322   

Credit card accounts receivable

     17,734         16,428   

Other receivables

     3,826         2,369   
  

 

 

    

 

 

 

Accounts receivable, net

   $ 39,431       $ 31,119   
  

 

 

    

 

 

 

(6)    Investments

Held-to-maturity securities as of January 29, 2011 consisted of a $6.2 million ARS classified as a short-term investment, which represents the amount called at par by the issuer during the first quarter of fiscal year 2012. As of January 29, 2011, the amortized cost and fair value of the ARS was $6.2 million.

(7)    Property and Equipment, net

Details of property and equipment, net are as follows:

 

     Estimated Lives      January 28,
2012
    January 29,
2011
 
     (in years)      (in thousands)  

Land

      $ 45,706      $ 51,173   

Buildings

     primarily 15-31.5         1,115,919        1,071,126   

Furniture, fixtures and equipment

     3-20         1,195,695        1,117,326   

Property under capital leases

     5-20         78,150        63,943   

Construction in progress

        25,895        1,977   
     

 

 

   

 

 

 
        2,461,365        2,305,545   

Less accumulated depreciation and amortization

        (1,468,243     (1,354,425
     

 

 

   

 

 

 

Property and equipment, net

      $ 993,122      $ 951,120   
     

 

 

   

 

 

 

The Company recorded depreciation and amortization related to property and equipment of $122.5 million, $138.6 million and $156.4 million in fiscal years 2012, 2011 and 2010, respectively. Accumulated amortization of assets under capital lease was $48.0 million and $44.4 million as of January 28, 2012 and January 29, 2011, respectively.

 

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(8)    Sale of Properties

During fiscal year 2012, the Company sold two former retail locations for $2.7 million and exchanged one that resulted in a gain of $1.2 million.

During fiscal year 2011, the Company sold three former retail locations for $4.6 million that resulted in gains on sale of property of $2.3 million.

(9)    Accrued Liabilities

Accrued liabilities are comprised of the following:

 

     January 28,      January 29,  
     2012      2011  
     (in thousands)  

Salaries, wages and employee benefits

   $ 44,817       $ 44,665   

Gift card liability

     34,592         32,143   

Accrued capital expenditures

     12,039         3,219   

Taxes, other than income

     18,381         17,973   

Rent

     7,721         7,518   

Sales returns allowance

     12,826         10,950   

Interest

     7,524         7,664   

Store closing reserves

     1,041         2,020   

Self insurance reserves

     7,576         7,494   

Advertising

     13,935         5,118   

Other

     26,368         23,080   
  

 

 

    

 

 

 

Accrued Liabilities

   $ 186,820       $ 161,844   
  

 

 

    

 

 

 

(10)    Borrowings

Long-term debt and capital lease obligations consist of the following:

 

     January 28,
2012
    January 29,
2011
 
     (in thousands)  

Credit facility term loan

   $      $ 125,000   

Senior notes

     475,000        375,000   

Capital lease agreements through August 2020

     30,899        21,459   

State bond facility

     17,780        17,780   
  

 

 

   

 

 

 
     523,679        539,239   

Less current installments

     (108,164     (4,426
  

 

 

   

 

 

 

Long-term debt and capital lease obligations, excluding current installments

   $ 415,515      $ 534,813   
  

 

 

   

 

 

 

As of January 28, 2012, the annual maturities of long-term debt and capital lease obligations over the next five years are $108.2 million, $9.0 million, $6.0 million, $104.1 million, and $1.3 million, respectively. The Company made interest payments of $30.5 million, $30.8 million and $33.4 million, of which $0.6 million, $0.2 million, and $0.5 million was capitalized into property and equipment during fiscal years 2012, 2011 and 2010, respectively.

The Company’s borrowings consist primarily of a $350.0 million credit facility, $475.0 million in senior notes, and a $17.8 million state bond facility.

 

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The credit facility, which matures in November 2015, allows for up to $250.0 million of outstanding letters of credit. The credit facility charges interest based upon certain Company financial ratios and the interest spread was calculated at January 28, 2012 using LIBOR plus 150 basis points, or 1.80%. The credit facility contains restrictive covenants including leverage and fixed charge coverage ratios. The Company’s calculated leverage ratio dictates the LIBOR spread that will be charged on outstanding borrowings in the subsequent quarter. The leverage ratio is calculated by dividing adjusted debt, which is the sum of the Company’s outstanding debt and rent expense multiplied by a factor of eight, by pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. At January 28, 2012, the maximum leverage covenant ratio allowed under the credit facility was 4.0, and the calculated leverage ratio was 2.15. The Company was in compliance with all covenants as of January 28, 2012 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future. As of January 28, 2012, the Company had $37.4 million of standby letters of credit outstanding under the credit facility, and availability under the credit facility was $312.6 million.

On January 25, 2012, the Company made a $125.0 million discretionary payment to extinguish the term loan outstanding under the credit facility, utilizing $25.0 million of cash on hand, and $100.0 million from 5.21% fixed rate, 10-year notes issued by the Company on January 25, 2012. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.9 million related to the term loan and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income.

The senior notes have restrictive covenants that are similar to the Company’s credit facility, and had the following terms as of January 28, 2012:

 

Amount

(in millions)

    

Type of Rate

  

Rate

 

Maturity Date

  $  80.0 (a)     Variable    1.38%(b)   July 2012
  20.0       Fixed    5.05%   July 2012
  100.0       Fixed    5.31%   July 2015
  125.0       Fixed    6.20%   August 2017
  50.0       Fixed    5.70%   November 2020
    100.0       Fixed    5.21%   January 2022

 

 

         
  $475.0           

 

 

         

 

(a)

The Company’s exposure to derivative instruments was limited to one interest rate swap as of January 28, 2012, an $80.0 million notional amount swap, which has a fixed interest rate of 5.2% and expires in fiscal year 2013. It has been designated as a cash flow hedge against variability in future interest rate payments on the $80.0 million floating rate senior note.

 

(b)

Stated variable interest rate is based on three-month LIBOR plus 80.0 basis points.

Additionally, the Company has a $17.8 million, 20-year variable rate, 0.20% at January 28, 2012, state bond facility which matures in October 2025.

The debt facilities place certain restrictions on mergers, consolidations, acquisitions, sales of assets, indebtedness, transactions with affiliates, leases, liens, investments, dividends and distributions, exchange and issuance of capital stock and guarantees, and require maintenance of minimum financial ratios, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. These ratios are calculated exclusive of non-cash charges, such as fixed asset, goodwill and other intangible asset impairments.

The Company utilizes derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements are used to reduce the potential impact of increases

 

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in interest rates on variable rate debt. The difference between the fixed rate leg and the variable rate leg of the swap, to be paid or received, is accrued and recognized as an adjustment to interest expense. Additionally, the change in the fair value of a swap designated as a cash flow hedge is marked to market through accumulated other comprehensive income.

(11)    Retirement Obligations and Other Noncurrent Liabilities

Retirement obligations and other noncurrent liabilities are comprised of the following:

 

     January 28,
2012
     January 29,
2011
 
     (in thousands)  

Pension liability

   $ 96,343       $ 99,343   

Deferred compensation plans

     32,297         32,241   

Post-retirement benefits

     22,806         20,458   

Supplemental executive retirement plans

     25,941         24,033   

Deferred gain on sale/leaseback

     20,811         23,440   

Unfavorable lease liability

     16,078         18,015   

Deferred rent

     29,751         28,621   

Self-insurance reserves

     12,363         11,170   

Developer incentive liability

     9,615         9,008   

Income tax reserves

     22,017         19,120   

Other noncurrent liabilities

     14,773         14,115   
  

 

 

    

 

 

 

Retirement obligations and other noncurrent liabilities

   $ 302,795       $ 299,564   
  

 

 

    

 

 

 

(12)    Leases

The Company leases some of its stores, warehouse facilities and equipment. The majority of these leases will expire over the next 15 years. The leases usually contain renewal options at the lessee’s discretion and provide for payment by the lessee of real estate taxes and other expenses and, in certain instances, contingent rentals determined on the basis of a percentage of sales in excess of stipulated minimums.

Future minimum lease payments under non-cancelable leases, net of future minimum sublease rental income under non-cancelable subleases, as of January 28, 2012 were as follows:

 

Fiscal Year

   Capital     Operating  
     (in thousands)  

2013

   $ 9,794      $ 71,469   

2014

     10,058        65,265   

2015

     6,684        57,842   

2016

     4,441        48,424   

2017

     1,589        41,248   

After 2017

     2,613        244,690   
  

 

 

   

 

 

 

Total

     35,179        528,938   

Less sublease rental income

            (10,164
  

 

 

   

 

 

 

Net rentals

     35,179      $ 518,774   
    

 

 

 

Less imputed interest

     (4,280  
  

 

 

   

Present value of minimum lease payments

     30,899     

Less current portion

     (8,164  
  

 

 

   

Noncurrent portion of the present value of minimum lease payments

   $ 22,735     
  

 

 

   

 

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Sublease rental income primarily relates to the portion of the Company’s headquarters building located in Charlotte, NC that was sold and leased back by the Company during fiscal year 2008, a portion of which was subsequently subleased by the Company to other third parties.

Net rental expense for all operating leases consists of the following:

 

     Fiscal Year Ended  
     January 28,     January 29,     January 30,  
     2012     2011     2010  
     (in thousands)  

Buildings:

      

Minimum rentals

   $ 73,102      $ 74,141      $ 76,218   

Contingent rentals

     3,844        3,239        2,614   

Sublease rental income

     (2,144     (2,326     (2,383

Equipment

     1,773        1,988        2,133   
  

 

 

   

 

 

   

 

 

 

Total net rental expense

   $ 76,575      $ 77,042      $ 78,582   
  

 

 

   

 

 

   

 

 

 

(13)    Income Taxes

Federal and state income tax expense (benefit) was as follows:

 

     Fiscal Year Ended  
     January 28,     January 29,      January 30,  
     2012     2011      2010  
     (in thousands)  

Current:

       

Federal

   $ 28,413      $ 32,758       $ 36,438   

State

     8,079        2,032         3,598   
  

 

 

   

 

 

    

 

 

 
     36,492        34,790         40,036   
  

 

 

   

 

 

    

 

 

 

Deferred:

       

Federal

     58,274        29,792         (9,437

State

     (7,584     3,661         (545

Valuation allowance release

     (20,232               
  

 

 

   

 

 

    

 

 

 
     30,458        33,453         (9,982
  

 

 

   

 

 

    

 

 

 

Income taxes

   $ 66,950      $ 68,243       $ 30,054   
  

 

 

   

 

 

    

 

 

 

A reconciliation between income taxes and income tax expense computed using the federal statutory income tax rate of 35% is as follows:

 

     Fiscal Year Ended  
     January 28,     January 29,     January 30,  
     2012     2011     2010  
     (in thousands)  

Income tax at the statutory federal rate

   $ 87,534      $ 68,555      $ 34,016   

State income taxes, net of federal

     3,195        3,930        744   

Increase in cash surrender value of officers’ life insurance

     (4,624     (4,178     (4,619

Net increase (decrease) in uncertain tax positions

     1,285        (485     735   

Change in valuation allowances for prior years

     (20,232              

Other

     (208     421        (822
  

 

 

   

 

 

   

 

 

 

Income taxes

   $ 66,950      $ 68,243      $ 30,054   
  

 

 

   

 

 

   

 

 

 

 

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Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consist of:

 

     January 28,     January 29,  
     2012     2011  
     (in thousands)  

Deferred tax assets:

    

Prepaid pension costs

   $ 34,372      $ 24,517   

Benefit plan costs

     33,862        31,740   

Store closing and other reserves

     22,696        20,620   

Inventory capitalization

     6,669        6,123   

Tax carryovers

     15,129        14,308   

Interest rate swaps

     628        2,007   

Prepaid rent

     11,304        10,995   

Goodwill

     49,515        55,384   

Intangibles

     6,684        12,451   

Other

     10,732        8,909   
  

 

 

   

 

 

 

Gross deferred tax assets

     191,591        187,054   

Less valuation allowance

     (390     (20,996
  

 

 

   

 

 

 

Deferred tax assets, net of valuation allowance

     191,201        166,058   
  

 

 

   

 

 

 

Deferred tax liabilities

    

Property and equipment

     75,523        52,716   

Intangibles

     4,615        6,495   

Inventory

     53,571        42,597   

Other

     2,028        328   
  

 

 

   

 

 

 

Gross deferred tax liabilities

     135,737        102,136   
  

 

 

   

 

 

 

Net deferred tax assets

   $ 55,464      $ 63,922   
  

 

 

   

 

 

 

Due to economic conditions in prior years, the Company believed that it was more likely than not that the benefit from state net operating loss and credit carryforwards, and net deferred tax assets for state income tax purposes, would not be realized, and established a valuation allowance on these deferred tax assets in fiscal year 2009. Based upon operating results over recent years, as well as an assessment of expected future results of operations during the quarter ended January 28, 2012, it was determined that it is more likely than not that certain deferred tax assets will be utilized. As a result, the majority of our valuation allowance was released, recognizing a tax benefit of $20.2 million. The release of the valuation allowance was determined in accordance with the provisions of ASC 740, “Income Taxes,” which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable.

The analysis performed to assess the realizability of the state deferred tax asset included an evaluation, as of January 28, 2012, of the level of historical pre-tax income for the affected subsidiaries, after adjustment for non-recurring items, in recent years; the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable state laws; and the amount and timing of future taxable income. This analysis indicated it is more likely than not that the deferred tax asset recorded will be realized.

 

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The valuation allowance was $21.0 million at January 29, 2011. The $21.0 million beginning of year balance was reduced by the release of $20.2 million, with the remaining $0.4 million relating to expired net operating losses and other items recorded as a reduction of income tax expense.

As of January 28, 2012, the Company has net operating loss carryforwards for state income tax purposes of $323.2 million. The state carryforwards expire at various intervals through fiscal year 2033 but primarily in fiscal years 2024 through 2028. The Company also has state job credits of $1.2 million, which are available to offset future taxable income, in the applicable states, if any. These credits expire between fiscal years 2016 and 2023. In addition, the Company has alternative minimum tax net operating loss carryforwards of $0.9 million which are available to reduce future alternative minimum taxable income, and are not subject to expiration.

The state net operating loss carryforwards from filed returns included uncertain tax positions taken in prior years. State net operating loss carryforwards as shown on the Company’s tax returns are larger than the state net operating losses for which a deferred tax asset is recognized for financial statement purposes.

As of January 28, 2012, the total gross unrecognized tax benefit was $22.8 million. Of this total, $4.8 million represents the amount of unrecognized tax benefits (net of the federal benefit on state issues) that, if recognized, would favorably affect the effective income tax rate in a future period. A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:

 

     January 28,     January 29,  
     2012     2011  
     (in thousands)  

Balance, beginning of year

   $ 23,575      $ 18,958   

Additions for tax positions from prior years

     364        1,245   

Reductions for tax positions from prior years

     (4,637     (227

Additions for tax positions related to the current year

     3,454        3,599   
  

 

 

   

 

 

 

Balance, end of year

   $ 22,756      $ 23,575   
  

 

 

   

 

 

 

The Company reports interest related to unrecognized tax benefits in interest expense, and penalties related to unrecognized tax benefits in income tax expense. Total accrued interest and penalties for unrecognized tax benefits (net of tax benefit) as of January 28, 2012 was $1.6 million, after recognition of a $0.5 million benefit during fiscal year 2012.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax matters with the IRS for tax years through 2007 and is currently under audit for tax years 2008 and 2009. All material state and local income tax matters have been concluded for tax years through 2005.

At this time, the Company does not expect a material change to its gross unrecognized tax benefit over the next 12 months.

(14)    Pension, SERP and Postretirement Benefits

The Company has a defined benefit pension plan, the Belk Pension Plan, which prior to fiscal year 2010 had been partially frozen and closed to new participants. Pension benefits were suspended for fiscal year 2010, and effective December 31, 2009, the Pension Plan was frozen for those remaining participants whose benefits were not previously frozen.

The Company has a non-qualified defined benefit Supplemental Executive Retirement Plan, (“Old SERP”), which provides retirement and death benefits to certain qualified executives. Old SERP has been closed to new executives and has been replaced by the 2004 Supplemental Executive Retirement Plan (“2004 SERP”), a non-qualified defined contribution plan.

 

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The Company also provides postretirement medical and life insurance benefits to certain employees, and was closed to new participants in 2002. The Company accounts for postretirement benefits by recognizing the cost of these benefits over an employee’s estimated term of service with the Company, in accordance with ASC 715, “Compensation — Retirement Benefits.”

The change in the projected benefit obligation, change in plan assets, funded status, amounts recognized and unrecognized, net periodic benefit cost and actuarial assumptions are as follows:

 

     Pension Benefits     Old SERP Benefits     Postretirement Benefits  
     January 28,     January 29,     January 28,     January 29,     January 28,     January 29,  
     2012     2011     2012     2011     2012     2011  
     (in thousands)  

Change in projected benefit obligation:

            

Benefit obligation at beginning of year

   $ 477,167      $ 466,741      $ 11,805      $ 11,352      $ 23,035      $ 24,808   

Service cost

                   103        73        106        150   

Interest cost

     25,492        26,069        620        618        1,201        1,360   

Actuarial (gains) losses

     74,827        11,347        1,986        1,117        3,934        (651

Benefits paid

     (28,055     (26,990     (1,325     (1,355     (2,648     (2,632
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

     549,431        477,167        13,189        11,805        25,628        23,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

            

Fair value of plan assets at beginning of year

     377,824        294,078                               

Actual return on plan assets

     44,319        51,736                               

Contributions to plan

     59,000        59,000        1,325        1,355        2,648        2,632   

Benefits paid

     (28,055     (26,990     (1,325     (1,355     (2,648     (2,632
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

     453,088        377,824                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded Status

     (96,343     (99,343     (13,189     (11,805     (25,628     (23,035

Unrecognized net transition obligation

                                 196        456   

Unrecognized net loss

     269,377        218,670        4,290        2,560        3,807        (263
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net prepaid (accrued)

   $ 173,034      $ 119,327      $ (8,899   $ (9,245   $ (21,625   $ (22,842
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees. Due to the pension plan freeze in the third quarter of fiscal year 2010, the Company began using the average remaining life of the participants in the pension plan rather than the average remaining service life of the Company’s active employees.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Amounts recognized in the consolidated balance sheets consist of the following:

 

     Pension Benefits     Old SERP Benefits     Postretirement Benefits  
     January 28,     January 29,     January 28,     January 29,     January 28,     January 29,  
     2012     2011     2012     2011     2012     2011  
     (in thousands)  

Accrued liabilities

   $      $      $ 1,268      $ 1,230      $ 2,825      $ 2,579   

Deferred income tax assets

     101,231        82,342        1,522        873        1,547        133   

Retirement obligations and other noncurrent liabilities

     96,343        99,343        11,921        10,575        22,806        20,458   

Accumulated other comprehensive loss

     (168,146     (136,328     (2,768     (1,687     (2,459     (62

 

     Pension Benefits      Old SERP Plan      Postretirement Benefits  
     January 28,      January 29,      January 28,      January 29,      January 28,      January 29,  
     2012      2011      2012      2011      2012      2011  
     (in thousands)  

Obligation and funded status at

                 

January 28, 2012 and January 29, 2011, respectively:

                 

Projected benefit obligation

   $ 549,431       $ 477,167       $ 13,189       $ 11,805       $ 25,628       $ 23,035   

Accumulated benefit obligation

     549,431         477,167         11,969         10,861         N/A         N/A   

Fair value of plan assets

     453,088         377,824                                   

Amounts recognized in accumulated other comprehensive loss consist of:

 

     Pension Benefits     Old SERP Benefits     Postretirement Benefits  
     January 28,     January 29,     January 28,     January 29,     January 28,     January 29,  
     2012     2011     2012     2011     2012     2011  
     (in thousands)  

Net actuarial loss

   $ (168,146   $ (136,328   $ (2,768   $ (1,687   $ (2,351   $ 210   

Transition obligation

                                 (108     (272
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (168,146   $ (136,328   $ (2,768   $ (1,687   $ (2,459   $ (62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Activity related to plan assets and benefit obligations recognized in accumulated other comprehensive loss are as follows:

 

    Pension Benefits     Old SERP Benefits     Postretirement Benefits  
    January 28,
2012
    January 29,
2011
    January 28,
2012
    January 29,
2011
    January 28,
2012
    January 29,
2011
 
    (in thousands)  

Adjustment to minimum liability

  $ (36,755   $ 9,236      $ (1,242   $ (734   $ (2,474   $ 426   

Amortization of unrecognized items:

           

Net transition obligation

                                164        171   

Net losses

    4,937        4,563        161        95        (87     (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ (31,818   $ 13,799      $ (1,081   $ (639   $ (2,397   $ 578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The weighted-average assumptions used to determine benefit obligations at the January 28, 2012 and January 29, 2011 measurement dates were as follows:

 

    Pension Plan     Old SERP Plan     Postretirement Plan  
    Measurement Date     Measurement Date     Measurement Date  
    1/28/2012     1/29/2011     1/28/2012     1/29/2011     1/28/2012     1/29/2011  

Discount rates

    4.375     5.500     4.375     5.500     4.375     5.500

Rates of compensation increase

    N/A        N/A        4.0        4.0        N/A        N/A   

The following weighted-average assumptions were used to determine net periodic benefit cost for the fiscal years shown:

 

    Pension Plan     Old SERP Plan     Postretirement Plan  
    January 28,
2012
    January 29,
2011
    January 30,
2010
    January 28,
2012
    January 29,
2011
    January 30,
2010
    January 28,
2012
    January 29,
2011
    January 30,
2010
 

Discount rates

    5.500     5.750     6.375     5.500     5.750     6.375     5.500     5.750     6.375

Rates of compensation increase

    N/A        N/A        4.0        4.0        4.0        4.0        N/A        N/A        N/A   

Return on plan assets

    7.50     8.00     8.00     N/A        N/A        N/A        N/A        N/A        N/A   

The Company developed the discount rate by matching the projected future cash flows of the plan to a modeled yield curve consisting of over 500 Aa-graded, noncallable bonds. Based on this analysis, management selected a 5.50% discount rate, which represented the calculated yield curve rate rounded up to the nearest quarter point. The pension plan’s expected return assumption is based on the weighted average aggregate long-term expected returns of various actively managed asset classes corresponding to the plan's asset allocation. The pension plan assets are allocated approximately 40% to mutual funds, 30% to fixed income securities, and 25% to equity securities, with the remaining assets allocated to private equity investments and cash.

For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for fiscal year 2012; the rate was assumed to decrease to 5.0% gradually over the next six years and remain at that level for fiscal years thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing or decreasing the assumed health care cost trend rates by one percentage point would increase or decrease the accumulated postretirement benefit obligation as of January 28, 2012 by $0.5 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended January 28, 2012 by less than $0.1 million.

The Company maintains policies for investment of pension plan assets. The policies set forth stated objectives and a structure for managing assets, which includes various asset classes and investment management styles that, in the aggregate, are expected to produce a sufficient level of diversification and investment return over time and provide for the availability of funds for benefits as they become due. The policies also provide guidelines for each investment portfolio that control the level of risk assumed in the portfolio and ensure that assets are managed in accordance with stated objectives. The policies set forth criteria to monitor and evaluate the performance results achieved by the investment managers. In addition, managing the relationship between plan assets and benefit obligations within the policy objectives is achieved through periodic asset and liability studies required by the policies.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The asset allocation for the pension plan is as follows:

 

           Percentage of Plan Assets at Measurement Date  
     Target Allocation     January 28, 2012     January 29, 2011     January 30, 2010  

Domestic equity securities

     31-51     43     48     50

International equity securities

     7-17     12     14     12

Fixed income

     40-50     43     35     34

Private equity

     0-5     1     2     2

Cash

     0-5     1     1     2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of January 28, 2012 and January 29, 2011, the pension plan assets were required to be measured at fair value. These assets included cash and cash equivalents, equity securities, fixed income securities, mutual funds, private equity funds and exchange traded limited partnership units. These categories can cross various asset allocation strategies as reflected in the preceding table.

Fair values of the pension plan assets were as follows:

 

          Fair Value Measurement at Reporting Date Using           Fair Value Measurement at Reporting Date Using  

Description

  January 28,
2012
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable
Outputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    January 29, 2011     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable
Outputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 
    (in thousands)     (in thousands)  

Cash and cash equivalents

  $ 8,404      $      $ 8,404      $      $ 9,647      $      $ 9,647      $   

Equity securities

               

International companies

    14,515        14,515                      14,060        14,060                 

U.S. companies(a)

    98,320        98,320                      92,336        92,336                 

Fixed income securities

               

Corporate bonds

    36,544               36,544               20,335               20,335          

Government securities

    78,169               78,169               63,204               63,204          

Mortgage backed securities

    17,231               17,231               2,075               2,075          

Municipal bonds

    1,421               1,421               640               640          

Mutual funds

    193,578        53,126        140,452               169,720        53,620        116,100          

Private equity

    4,906                      4,906        5,560                      5,560   

Exchange traded limited partnership units

                                247        247                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $ 453,088      $ 165,961      $ 282,221      $ 4,906      $ 377,824      $ 160,263      $ 212,001      $ 5,560   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(a)

The U.S. equity securities consist of large cap companies, mid cap companies and small cap companies of $62.8 million, $16.9 million and $18.6 million, respectively, in fiscal year 2012, and $56.3 million, $20.5 million and $15.5 million, respectively, in fiscal year 2011.

The pension plan cash equivalents, corporate bonds, government securities, mortgage backed securities, municipal bonds, and mutual funds of $8.4 million, $36.5 million, $78.2 million, $17.2 million, $1.4 million, and $140.5 million, respectively, in fiscal year 2012, and $9.6 million, $20.3 million, $63.2 million, $2.1 million, $0.6 million, and $116.1 million, respectively, in fiscal year 2011 have been classified as Level 2:

Cash equivalents and mutual funds — fair values of cash equivalents and mutual funds are largely provided by independent pricing services. Where independent pricing services provide fair values, the Company has obtained an understanding of the methods, models and inputs used in pricing, and has procedures in place to validate that amounts provided represent current fair values.

Investments in corporate bonds, municipal bonds and government securities — fair values of corporate bonds, municipal bonds, and government securities are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instruments (maturity and coupon interest rate) and consider the counterparty credit rating.

Mortgage backed securities — fair values of mortgage backed securities are based on external broker bids, where available, or are determined by discounting estimated cash flows.

The private equity pension plan investments are considered Level 3 assets as there is not an active market for identical assets from which to determine fair value or current market information about similar assets to use as observable inputs. The fair value of private equity investments is determined using pricing models, which requires significant management judgment.

The following table provides a reconciliation of the fiscal year 2012 and 2011 beginning and ending balances of the pension plan’s private equity funds (Level 3):

 

(in thousands)       

Balance as of January 30, 2010

   $ 5,640   

Calls of private equity investments

     476   

Total gains realized/unrealized included in plan earnings

     402   

Distributions of private equity investments

     (958
  

 

 

 

Balance as of January 29, 2011

     5,560   
  

 

 

 

Calls of private equity investments

     990   

Total gains realized/unrealized included in plan earnings

     36   

Distributions of private equity investments

     (1,680
  

 

 

 

Balance as of January 28, 2012

   $ 4,906   
  

 

 

 

The Company expects to have the following benefit payments related to its pension, Old SERP and postretirement plans in the coming years:

 

Fiscal Year

   Pension Plan      Old SERP Plan      Postretirement Plan  
     (in thousands)  

2013

   $ 28,654       $ 1,295       $ 2,886   

2014

     28,712         1,245         2,733   

2015

     28,777         1,198         2,503   

2016

     28,846         1,152         2,358   

2017

     28,947         1,108         2,290   

2018 — 2022

     149,926         6,095         10,333   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company expects to contribute sufficient amounts to the pension plan so that the Pension Protection Act of 2006 guidelines are exceeded. The Company elected to contribute $59.0 million to its Pension Plan in both fiscal years 2012 and 2011. The Company expects to contribute $1.3 million and $2.1 million to its non-qualified defined benefit Supplemental Executive Retirement Plan and postretirement plan, respectively, in fiscal year 2013.

The components of net periodic benefit expense are as follows:

 

    Fiscal Year Ended  
    Pension Plan     Old SERP Plan     Postretirement Plan  
    January 28,
2012
    January 29,
2011
    January 30,
2010
    January 28,
2012
    January 29,
2011
    January 30,
2010
    January 28,
2012
    January 29,
2011
    January 30,
2010
 
    (in thousands)  

Service cost

  $