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DILLARDS INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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EXECUTIVE OVERVIEW
Dillard's, Inc. operates 304 retail department stores spanning 29 states and an Internet store. Our retail stores are located in fashion-oriented shopping malls and open-air centers and offer a broad selection of fashion apparel, cosmetics and home furnishings. We offer an appealing and attractive assortment of merchandise to our customers at a fair price, including national brand merchandise as well as our exclusive brand merchandise. We seek to enhance our income by maximizing the sale of this merchandise to our customers by promoting and advertising our merchandise and by making our stores an attractive and convenient place for our customers to shop.
The Company also operates CDI, a general contractor whose business includes constructing and remodeling stores for the Company, which is a reportable segment separate from our retail operations.
In accordance with theNational Retail Federation fiscal reporting calendar, the fiscal 2011, 2010 and 2009 reporting periods presented and discussed below endedJanuary 28, 2012 ,January 29, 2011 andJanuary 30, 2010 , respectively, and each contained 52 weeks. Fiscal 2011 Our operating results improved during fiscal 2011 with continued consumer confidence. Retail sales were up over last year, with comparable store sales increases recognized in all four quarters of the year. Gross margin improved slightly over last year, mainly from improvement in the first half of the year, and operating expenses were leveraged. We repurchased 11.4 million shares of our Class A Common Stock during the year, helping to reduce our total outstanding shares by almost 18% from last year. Net income increased to$463.9 million , or$8.52 per share during fiscal 2011-our highest historical fiscal year earnings per share-compared to$179.6 million , or$2.67 per share, during fiscal 2010. Included in net income for fiscal 2011 are: º • º a$201.6 million income tax benefit ($3.70 per share) due to a
reversal of a valuation allowance related to the amount of the capital
loss carryforward used to offset the capital gain income recognized on
the taxable transfer of properties to our REIT. º • º a$44.5 million pretax gain ($28.7 million after tax or$0.53 per
share), net of settlement related expenses, related to the settlement
of a lawsuit with JDA Software Group for$57.0 million . º • º a$4.2 million pretax gain ($2.7 million after tax or$0.05 per share) related to a distribution from a mall joint venture. º • º a$2.1 million pretax gain ($1.4 million after tax or$0.03 per share) related to the sale of an interest in a mall joint venture. º • º a$1.3 million pretax gain ($0.9 million after tax or$0.02 per share) related to the sale of two former retail store locations. º • º a$1.2 million pretax charge ($0.8 million after tax or$0.01 per share) for asset impairment and store closing charges related to the write-down of one property held for sale. Included in net income for fiscal 2010 are: º • º a$2.2 million pretax charge ($1.4 million after tax or$0.02 per share) for asset impairment and store closing charges related to the write-down of one property held for sale; º • º a$7.5 million pretax gain ($4.8 million after tax or$0.07 per share) on proceeds received for final payment related to hurricane losses; 16
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º •
º a
related to the sale of five retail store locations; and
º •
º a
to net decreases in unrecognized tax benefits, interest and penalties
due to resolutions of federal and state examinations; decreases in state net operating loss valuation allowances; and a decrease in a capital loss valuation allowance. Highlights of fiscal 2011 as compared to fiscal 2010 are: º • º Record earnings per share of$8.52 compared to$2.67 for the prior year. Net income was$463.9 million for fiscal 2011 compared to$179.6 million for fiscal 2010; º • º A comparable store sales increase of 4% over the prior year; º •
º Operating expense leverage of 60 basis points of sales. Operating
expenses as a percent of sales were 26.0% and 26.6% for fiscal 2011 and fiscal 2010, respectively; and º •
º Cash flow from operations of
approximately$491.2 million (11.4 million shares) of Class A Common Stock under the Company's share repurchase programs. Total shares outstanding atJanuary 28, 2012 were 49.4 million shares compared to 60.0 million shares atJanuary 29, 2011 . As ofJanuary 28, 2012 , we had working capital of$721.4 million , cash and cash equivalents of$224.3 million and$891.6 million of total debt outstanding. We operated 304 total stores as ofJanuary 28, 2012 , a decrease of four stores from the same period last year.
Key Performance Indicators
We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, including the following: Fiscal Year Ended January 28, January 29, January 30, (retail segment only, excluding cash flow data) 2012 2011 2010 Net sales (in millions) $ 6,193.9 $ 6,020.0 $ 5,890.0 Gross profit (in millions) $ 2,221.0 $ 2,142.9 $ 1,982.9 Gross profit as a percentage of net sales 35.9 % 35.6 % 33.7 % Cash flow from operations (in millions) $ 501.1 $ 512.9 $ 554.0 Total store count at end of period 304 308 309 Sales per square foot $ 118 $ 113 $ 110 Net sales trend 3 % 2 % (13 )% Comparable store sales trend 4 % 3 % (10 )% Comparable store inventory trend 3 % (2 )% (5 )% Merchandise inventory turnover 2.8 2.8 2.6 Trends and Uncertainties
Fluctuations in the following key trends and uncertainties may have a material effect on our operating results.
º •
º Cash flow-Cash from operating activities is a primary source of
liquidity that is adversely affected when the industry faces economic challenges. Furthermore, operating cash flow can be negatively affected when new and existing competitors seek areas of growth to expand their businesses. º •
º Pricing-If our customers do not purchase our merchandise offerings in
sufficient quantities, we respond by taking markdowns. If we have to reduce our retail selling prices, the cost of sales on 17
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our consolidated statement of income will correspondingly rise, thus reducing our income and cash flow. º • º Success of brand-The success of our exclusive brand merchandise as well as merchandise we source from national vendors is dependent upon customer fashion preferences and how well we can predict and anticipate trends. º •
º Sourcing-Our store merchandise selection is dependent upon our ability
to acquire appealing products from a number of sources. Our ability to
attract and retain compelling vendors as well as in-house design talent, the adequacy and stable availability of materials and production facilities from which we source our merchandise and the speed at which we can respond to customer trends and preferences all have a significant impact on our merchandise mix and, thus, our ability to sell merchandise at profitable prices. º • º Store growth-Although store growth is presently not a near-term goal, such growth is dependent upon a number of factors which could impede our ability to open new stores, such as the identification of suitable
markets and locations and the availability of shopping developments,
especially in a weak economic environment.
Seasonality and Inflation
Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. We do not believe that inflation has had a material effect on our results during the periods presented; however, our business could be affected by such in the future. In response to economic volatility inAsia and to increased fabric prices (including cotton) and overseas wages, during fiscal 2011 we sought solutions to help minimize the effects of these events on our operations by (1) negotiating efficiencies through our longstanding relationships with our current suppliers, (2) considering alternative manufacturing sources, (3) redesigning our garments and incorporating other types of fibers where appropriate and (4) adjusting price points as necessary. With the help of these mitigating steps, the effects of the negative economic events did not have a material negative impact on our fiscal 2011 gross margins, and we believe they will not have a material negative impact on our fiscal 2012 gross margins as these same pressures have moderated since last year.
2012 Guidance
A summary of estimates on key financial measures for fiscal 2012 is shown below. (in millions of dollars) Fiscal 2012 Estimated Fiscal 2011 Actual
Depreciation and amortization $ 256 $ 258 Rentals 34 48 Interest and debt expense, net 71 72 Capital expenditures 175 116 General Net sales. Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI, the Company's general contracting construction company. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include: sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in 18
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the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; and sales in clearance centers.
Service charges and other income. Service charges and other income include income generated through the Alliance with GE. Other income includes rental income, shipping and handling fees and lease income on leased departments.
Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific margin maintenance allowances and direct payroll for salon personnel. Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs. Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
Depreciation and amortization. Depreciation and amortization expenses include depreciation and amortization on property and equipment.
Rentals. Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.
Interest and debt expense, net. Interest and debt expense includes interest, net of interest income, relating to the Company's unsecured notes, mortgage notes, term note, subordinated debentures and borrowings under the Company's credit facility. Interest and debt expense also includes gains and losses on note repurchases, amortization of financing costs and interest on capital lease obligations. Gain on litigation settlement. Gain on litigation settlement includes the proceeds received, net of related expenses, from the settlement of a lawsuit with JDA Software Group. Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an interest in a mall joint venture.
Asset impairment and store closing charges. Asset impairment and store closing charges consist of write-downs to fair value of under-performing or held for sale properties and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.
Income on (equity in losses of) joint ventures. Income on (equity in losses of) joint ventures includes the Company's portion of the income or loss of the Company's unconsolidated joint ventures as well as a distribution of excess cash from one of the Company's mall joint ventures.
Critical Accounting Policies and Estimates
The Company's accounting policies are also described in Note 1 of Notes to Consolidated Financial Statements. As disclosed in this note, the preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. 19
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Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates.
Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.
Merchandise inventory. Approximately 97% of the inventories are valued at the lower of cost or market using the last-in, first-out retail inventory method ("LIFO RIM"). Under LIFO RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. LIFO RIM is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the LIFO RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. During periods of deflation, current replacement cost could result in inventory values on the first-in, first-out ("FIFO") retail inventory method being lower than the LIFO method. At January 28, 2012 and January 29, 2011 , the LIFO method, after a lower of cost or market adjustment, approximated the cost of inventories using the FIFO method. The application of LIFO did not impact cost of sales during fiscal 2011, 2010 or 2009. The remaining 3% of the inventories are valued at the lower of cost or market using the average cost or specific identified cost methods. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $9 million for fiscal 2011. The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of merchandise inventory. Complete physical inventories of all of the Company's stores and warehouses are performed no less frequently than annually, with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts. The differences between the estimated amounts of shrinkage and the actual amounts realized during the past three years have not been material. Revenue recognition. The Company's retail operations segment recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns of merchandise. The provision for sales returns is based on historical evidence of our return rate. We recorded an allowance for sales returns of $9.0 million and $7.3 million as of January 28, 2012 and January 29, 2011 , respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision were not material for the years ended January 28, 2012 , January 29, 2011 and January 30, 2010 . The Company's share of income earned under the Alliance with GE involving the Dillard's branded proprietary credit cards is included as a component of service charges and other income. The Company received income of approximately $96 million , $85 million and $89 million from GE in fiscal 2011, 2010 and 2009, respectively. Pursuant to this Alliance, the Company has no continuing involvement other than to honor the proprietary cards in its stores. Although not obligated to a specific level of marketing commitment, the Company participates in the marketing of the proprietary credit cards and accepts payments on the proprietary credit cards in its stores as a convenience to customers who prefer to pay in person rather than by paying online or mailing their payments to GE. Revenues from CDI construction contracts are generally recognized by applying percentages of completion for each period to the total estimated revenue for the respective contracts. The length of each contract varies but is typically nine to eighteen months. The percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. Any anticipated losses on completed contracts are recognized as soon as they are determined. 20
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Vendor allowances. The Company receives concessions from vendors through a variety of programs and arrangements, including co-operative advertising, payroll reimbursements and margin maintenance programs.
Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. Similarly, we are not able to assess the impact of vendor advertising allowances on creating additional revenues, as such allowances do not directly generate revenues for our stores.
Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred.
Amounts of margin maintenance allowances are recorded only when an agreement has been reached with the vendor and the collection of the concession is deemed probable. All such merchandise margin maintenance allowances are recognized as a reduction of cost purchases. Under LIFO RIM, a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory. Insurance accruals. The Company's consolidated balance sheets include liabilities with respect to claims for self-insured workers' compensation (with a self-insured retention of$4 million per claim) and general liability (with a self-insured retention of$1 million per claim and a one-time$1 million corridor). The Company's retentions are insured through a wholly-owned captive insurance subsidiary. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As ofJanuary 28, 2012 andJanuary 29, 2011 , insurance accruals of$50.3 million and$52.9 million , respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. Adjustments resulting from changes in historical loss trends have helped control expenses during fiscal 2011 and 2010, partially due to Company programs that have helped decrease both the number and cost of claims. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. A 10% change in our self-insurance reserve would have affected net earnings by$3.2 million for fiscal 2011. Long-lived assets. The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
º •
º Significant changes in the manner of our use of assets or the strategy
for the overall business; º • º Significant negative industry or economic trends; º •
º A current-period operating or cash flow loss combined with a history
of operating or cash flow losses; or º • º Store closings. The Company performs an analysis of the anticipated undiscounted future net cash flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit 21
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margins are included in this analysis. To the extent these future projections or the Company's strategies change, the conclusion regarding impairment may differ from the current estimates. Income taxes. Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management's estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company's actual results differ from estimated results due to changes in tax laws, changes in store locations or tax planning, the Company's effective tax rate and tax balances could be affected. As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change. The total amount of unrecognized tax benefits as ofJanuary 28, 2012 andJanuary 29, 2011 was$8.5 million and$9.1 million , respectively, of which$5.8 million and$6.3 million , respectively, would, if recognized, affect the effective tax rate. The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements as income tax expense. The total interest and penalties recognized in the consolidated statements of income as ofJanuary 28, 2012 ,January 29, 2011 andJanuary 30, 2010 was$(0.2) million ,$(2.3) million , and$(2.0) million , respectively. The total accrued interest and penalties in the consolidated balance sheets as ofJanuary 28, 2012 andJanuary 29, 2011 was$3.4 million and$3.7 million , respectively. During fiscal 2011, theInternal Revenue Service ("IRS") concluded its examination of the Company's federal income tax returns for the fiscal tax years 2008 and 2009, and no significant changes occurred in these tax years as a result of such examination. The Company is currently under examination by various state and local taxing jurisdictions for various fiscal years. The tax years that remain subject to examination for major tax jurisdictions are fiscal tax years 2008 and forward, with the exception of fiscal 2003 through 2007 amended state and local tax returns related to the reporting of federal audit adjustments. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company's consolidated financial statements. The Company has taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the finalization of the Company's various state income tax audits and lapse of statutes of limitation. The Company's federal income tax audit uncertainties primarily relate to research and development credits, while various state income tax audit uncertainties primarily relate to income from intangible assets. The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between$0.5 million and $2.0 million . Changes in the Company's assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. Pension obligations. The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup Above Median Pension Index Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate decreased to 4.3% as ofJanuary 28, 2012 from 5.5% as ofJanuary 29, 2011 . We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of$174 million is appropriately stated as ofJanuary 28, 2012 ; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would increase or decrease the pension liability by approximately$10.4 million . The Company expects to make a contribution to the pension plan of approximately$7.9 million in fiscal 2012. The Company expects pension expense to be approximately$16.3 million in fiscal 2012 with a liability of$182.5 million atFebruary 2, 2013 . 22
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RESULTS OF OPERATIONS
The following table sets forth the results of operations and percentage of net sales, for the periods indicated:
For the years ended January 28, 2012 January 29, 2011 January 30, 2010 % of % of % of Net Net Net
(in thousands of dollars) Amount Sales Amount Sales
Amount Sales Net sales $ 6,263,600 100.0 % $ 6,120,961 100.0 % $ 6,094,948 100.0 % Service charges and other income 136,165 2.2 132,574 2.2 131,680 2.2 6,399,765 102.2 6,253,535 102.2 6,226,628 102.2 Cost of sales 4,041,550 64.5 3,976,063 65.0 4,102,892 67.3 Advertising, selling, administrative and general expenses 1,630,907 26.0 1,625,793 26.6 1,644,091 27.0 Depreciation and amortization 257,685 4.1 261,550 4.3 262,877 4.3 Rentals 48,110 0.8 51,045 0.8 58,363 1.0 Interest and debt expense, net 72,059 1.2 73,792 1.2 74,003 1.2 Gain on litigation settlement (44,460 ) (0.7 ) - 0.0 - 0.0 Gain on disposal of assets (3,955 ) 0.0 (5,632 ) (0.1 ) (3,207 ) (0.1 ) Asset impairment and store closing charges 1,200 0.0 2,208 0.0 3,084 0.1 Income before income taxes and income on (equity in losses of) joint ventures 396,669 6.3 268,716 4.4 84,525 1.4 Income taxes (benefit) (62,518 ) (1.0 ) 84,450 1.4 12,690 0.2 Income on (equity in losses of) joint ventures 4,722 0.1 (4,646 ) (0.1 ) (3,304 ) (0.1 ) Net income $ 463,909 7.4 % $ 179,620 2.9 % $ 68,531 1.1 % 23
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Sales (in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009 Net sales: Retail operations segment $ 6,193,903 $ 6,020,043 $ 5,889,961 Construction segment 69,697 100,918 204,987 Total net sales $ 6,263,600 $ 6,120,961 $ 6,094,948
The percent change by category in the Company's retail operations segment sales for the past two years is as follows:
Percent Change Fiscal Fiscal 2011 - 2010 2010 - 2009 Cosmetics 4.7 % (0.1 )% Ladies' apparel and accessories 2.1 2.4 Juniors' and children's apparel 3.7 1.6 Men's apparel and accessories 2.8 1.8 Shoes 5.6 7.3 Home and furniture (2.8 ) (3.6 )
2011 Compared to 2010
Net sales from the retail operations segment increased$173.9 million or 3% during fiscal 2011 as compared to fiscal 2010 while sales in comparable stores improved 4%. Sales of shoes and cosmetics were up significantly while sales of juniors' and children's apparel, men's apparel and accessories and ladies' apparel and accessories increased moderately. Sales in the home and furniture category were down moderately.
The number of sales transactions decreased 2% over the prior year while the average dollars per sales transaction increased significantly.
We believe that we may continue to see some sales growth in the retail operations segment during the coming months; however, there is no guarantee of improved sales performance.
Net sales from the construction segment decreased$31.2 million or 31% during fiscal 2011 as compared to fiscal 2010. This decrease is primarily attributable to the negative impact that the weakUnited States economy had in previous periods on our construction project backlog. During fiscal 2011, we were awarded approximately$165 million in new contracts. Consequently, we believe we may see some sales growth in the construction segment during the coming months; however, there is no guarantee of improved sales performance.
2010 Compared to 2009
Net sales from the retail operations segment increased$130.1 million or 2% during fiscal 2010 as compared to fiscal 2009 while sales in comparable stores improved 3%. Sales of shoes were up significantly, and sales of ladies' apparel and accessories, men's apparel and accessories and juniors' and children's apparel were up moderately. Sales of cosmetics were flat while sales in the home and furniture category were down moderately.
The number of sales transactions increased 1% over the prior year, and the average dollars per sales transaction increased slightly.
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Net sales from the construction segment decreased
Exclusive Brand Merchandise
Sales penetration of exclusive brand merchandise for fiscal years 2011, 2010 and 2009 was 21.8%, 22.7% and 23.8% of total net sales, respectively.
Service Charges and Other Income
Dollar Change Percent Change Fiscal Fiscal Fiscal (in millions of dollars) 2011 2010 2009 2011 - 2010 2010 - 2009 2011 - 2010 2010 - 2009 Service charges and other income: Retail operations segment Income from GE marketing and servicing alliance $ 95.8 $ 84.7 $ 88.7 $ 11.1 $ (4.0 ) 13.1 % (4.5 )% Leased department income 10.1 10.0 10.8 0.1 (0.8 ) 1.0 (7.4 ) Shipping and handling income 18.4 17.2 15.4 1.2 1.8 7.0 11.7 Visa Check/Mastermoney Antitrust settlement proceeds - 0.4 5.7 (0.4 ) (5.3 ) (100.0 ) (93.0 ) Hurricane settlement - 7.5 - (7.5 ) 7.5 (100.0 ) +100.0 Other 11.2 11.1 10.7 0.1 0.4 0.9 3.7 135.5 130.9 131.3 4.6 (0.4 ) 3.5 (0.3 ) Construction segment 0.7 1.7 0.4 (1.0 )
1.3 (58.8 ) +100.0 Total $ 136.2 $ 132.6 $ 131.7 $ 3.6 $ 0.9 2.7 % 0.7 % 2011 Compared to 2010 Service charges and other income is composed primarily of income from the Alliance with GE. Income from the Alliance increased$11.1 million in fiscal 2011 compared to fiscal 2010 due to decreased credit losses partially offset by reduced finance charge and late charge fee income.
2010 Compared to 2009
Income from the Alliance decreased$4.0 million in fiscal 2010 compared to fiscal 2009 due to reduced finance charge and late charge fee income related to recent credit regulation legislation partially offset by decreased credit losses. We were a member of a class of a settled lawsuit against VisaU.S.A. Inc. ("Visa") andMasterCard International Incorporated ("MasterCard"). The Visa Check/MasterMoney Antitrust litigation settlement became final onJune 1, 2005 . The settlement provided$3.05 billion in compensatory relief by Visa and MasterCard to be funded over a fixed period of time to respective Settlement Funds. We received and recorded$0.4 million and$5.7 million as part of our share of the proceeds from the settlement during fiscal 2010 and 2009 respectively. This amount was recorded in service charges and other income.
Also included in service charges and other income were proceeds of
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Table of Contents Gross Profit (in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009 Gross profit: Retail operations segment $ 2,220,951 $ 2,142,913 $ 1,982,858 Construction segment 1,099 1,985 9,198 Total gross profit $ 2,222,050 $ 2,144,898 $ 1,992,056 Gross profit as a percentage of segment net sales: Retail operations segment 35.9 % 35.6 % 33.7 % Construction segment 1.6 2.0 4.5 Total gross profit as a percentage of net sales 35.5 35.0 32.7 2011 Compared to 2010 Gross profit improved 50 basis points of sales during fiscal 2011 compared to fiscal 2010. Gross profit from retail operations improved 30 basis points of sales during the same periods as a result of increased markups partially offset by increased markdowns. Inventory in comparable stores increased 3% as ofJanuary 28, 2012 compared toJanuary 29, 2011 .
During fiscal 2011, gross margin improved moderately in the home and furniture category and improved slightly in shoes. Men's apparel and accessories experienced a slight decline in gross margin while all other merchandise categories were flat.
We believe that gross margin from retail operations will improve slightly in the coming months; however, there is no guarantee of improved gross margin performance.
Gross profit from the construction segment declined 40 basis points of sales during fiscal 2011 compared to fiscal 2010. This decline from the prior year was a result of fewer projects caused by the reduction in demand for construction services combined with pricing pressures in an already competitive marketplace. This decline was also due to a$1.2 million loss recorded during the year on an electrical contract partially offset by a$2.5 million loss recorded in the prior year on certain electrical contracts stemming from job delays related to bad weather and job underperformance.
2010 Compared to 2009
Gross profit improved 230 basis points of sales during fiscal 2010 compared to fiscal 2009. Gross profit from retail operations improved 190 basis points of sales during the same periods as a result of inventory management measures leading to reduced markdown activity. These inventory management measures included considerable adjustment to receipt cadence to shorten the period of time from receipt to sale, to reduce markdown risk and to keep customers engaged with a more continuous flow of fresh merchandise selections throughout the season. Inventory in comparable stores declined 2% as ofJanuary 29, 2011 compared toJanuary 30, 2010 .
Most merchandise categories experienced moderate improvements in gross margin during fiscal 2010 compared to fiscal 2009, while cosmetics and home and furniture improved only slightly.
Gross profit from the construction segment declined 250 basis points of sales during fiscal 2010 compared to fiscal 2009. This decrease was the result of the decline in demand for construction services that has created pricing pressures in an already competitive marketplace. This decrease was also due to job delays from bad weather and job underperformance resulting in the recognition of a$2.5 million loss during fiscal 2010 on certain electrical contracts. 26
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Advertising, Selling, Administrative and General Expenses ("SG&A")
(in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009 SG&A: Retail operations segment $ 1,626,142 $ 1,621,190 $ 1,638,538 Construction segment 4,765 4,603 5,553 Total SG&A $ 1,630,907 $ 1,625,793 $ 1,644,091 SG&A as a percentage of segment net sales: Retail operations segment 26.3 % 26.9 % 27.8 % Construction segment 6.8 4.6
2.7
Total SG&A as a percentage of net sales 26.0 26.6 27.0 2011 Compared to 2010 SG&A improved 60 basis points of sales during fiscal 2011 compared to fiscal 2010 while total SG&A dollars increased$5.1 million . The dollar increase was most noted in payroll and payroll related taxes ($14.2 million ), primarily of selling payroll, services purchased ($7.3 million ) and supplies ($6.6 million ) partially offset by decreased net advertising expenditures ($14.3 million ) and utilities ($6.7 million ).
We believe that SG&A will improve slightly as a percentage of sales in the coming months; however, there is no guarantee of improved SG&A performance.
2010 Compared to 2009
SG&A decreased
Depreciation and Amortization
(in thousands of dollars) Fiscal 2011 Fiscal 2010
Fiscal 2009
Depreciation and amortization: Retail operations segment $ 257,504 $ 261,368 $ 262,709 Construction segment 181 182 168 Total depreciation and amortization $ 257,685 $ 261,550 $ 262,877 2011 Compared to 2010
Depreciation and amortization expense decreased
2010 Compared to 2009
Depreciation and amortization expense decreased$1.3 million during fiscal 2010 compared to fiscal 2009 primarily as a result of store closures and the Company's continuing efforts to reduce capital expenditures. 27
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Rentals
(in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009
Rentals:
Retail operations segment $ 48,058 $ 50,967 $ 58,273 Construction segment 52 78 90 Total rentals $ 48,110 $ 51,045 $ 58,363 2011 Compared to 2010
Rental expense declined
We believe that rental expense will decline significantly during fiscal 2012, with a current projected reduction of
2010 Compared to 2009
Rental expense declined$7.3 million or 12.5% in fiscal 2010 compared to fiscal 2009 primarily due to a decrease in the amount of equipment leased by the Company.
Interest and Debt Expense, Net
(in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009 Interest and debt expense (income), net: Retail operations segment $ 72,218 $ 74,009 $ 74,256 Construction segment (159 ) (217 ) (253 )
Total interest and debt expense, net
2011 Compared to 2010 Net interest and debt expense declined$1.7 million in fiscal 2011 compared to fiscal 2010 primarily due to matured and repurchased outstanding notes partially offset by increased short-term borrowing costs. Total weighted average debt outstanding during fiscal 2011 increased approximately$33.3 million compared to fiscal 2010.
2010 Compared to 2009
Net interest and debt expense declined$0.2 million in fiscal 2010 compared to fiscal 2009 primarily due to lower average debt levels and earned interest on invested cash partially offset by the elimination of capitalized interest and gain on prior year debt repurchases. Total weighted average debt outstanding during fiscal 2010 decreased approximately$63.4 million compared to fiscal 2009. Gain on Litigation Settlement (in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009
Gain on litigation settlement:
Retail operations segment $ 44,460 $ - $ - Construction segment - - -
Total gain on litigation settlement
$ - 28
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The Company reached an agreement effectiveNovember 30, 2011 with i2Technologies, Inc. ("i2"), a subsidiary of JDA Software Group, Inc. ("JDA"), to settle a lawsuit filed byDillard's against i2 over software sold toDillard's by i2 in 2000, prior to JDA's acquisition of i2 in 2010. Pursuant to the agreement, i2 paidDillard's $57.0 million during fiscal 2011. After providing for settlement related expenses, the Company recorded$44.5 million in gain on litigation settlement. Gain on Disposal of Assets (in thousands of dollars) Fiscal 2011 Fiscal 2010
Fiscal 2009
Gain (loss) on disposal of assets: Retail operations segment $ 4,019 $ 5,620 $ 3,203 Construction segment (64 ) 12 4 Total gain on disposal of assets $ 3,955 $ 5,632 $ 3,207 Fiscal 2011 During fiscal 2011, the Company received proceeds of$10.3 million from the sale of two former retail store locations located inWest Palm Beach, Florida andLas Vegas, Nevada , resulting in gains totaling$1.3 million . Additionally, the Company received proceeds of$11.0 million from the sale of an interest in a mall joint venture, resulting in a gain of$2.1 million .
Fiscal 2010
During fiscal 2010, the Company sold three vacant retail store properties located inAustin, Texas ,Macon, Georgia andChesapeake, Virginia for$7.3 million , resulting in a$3.1 million net gain. The Company also sold two retail store properties located inCoral Springs, Florida andMiami, Florida for$10.0 million , resulting in a$2.0 million gain.
Fiscal 2009
During fiscal 2009, the Company sold a vacant retail store location in
Asset Impairment and Store Closing Charges
(in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009 Asset impairment and store closing charges: Retail operations segment $ 1,200 $ 2,208 $ 3,084 Construction segment - - - Total asset impairment and store closing charges $ 1,200 $ 2,208 $ 3,084 Fiscal 2011
Asset impairment and store closing charges for fiscal 2011 consisted of the write-down of a property held for sale.
Fiscal 2010
Asset impairment and store closing charges for fiscal 2010 consisted of the write-down of one property held for sale.
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Fiscal 2009
Asset impairment and store closing charges for fiscal 2009 consisted of the write-down of property of$3.9 million on two stores closed in fiscal 2008. This amount was partially offset by the renegotiation of a lease that resulted in the reduction of a future rent accrual of$0.8 million on a store closed in fiscal 2008. Income Taxes
The Company's estimated federal and state income tax rate, inclusive of income on (equity in losses of) joint ventures, was (15.6)% in fiscal 2011, 32.0% in fiscal 2010 and 15.6% in fiscal 2009.
Fiscal 2011
InJanuary 2011 , the Company formed a wholly-owned subsidiary intended to operate as a real estate investment trust ("REIT") and transferred certain properties to this subsidiary. The Company entered into this transaction in order to enhance its financial flexibility by providing additional sources of liquidity. At the time, the Company believed that a tax election might be available to the Company that would result in a taxable gain on the transfer of these properties to the REIT. InMay 2011 , the Company requested that theIRS review the transaction and the potential tax election available to the Company, through theIRS's voluntary Pre-Filing Agreement Program ("PFA"). Through the PFA, inSeptember 2011 , the Company and theIRS entered into a Closing Agreement on Final Determination Covering Specific Matters under which theIRS agreed with the Company regarding the tax treatment of the transfer of the properties to the REIT and the availability of the tax election to the Company. Based on the agreement with theIRS reached during fiscal 2011, the Company determined to make the tax election in its tax return for the fiscal year endedJanuary 29, 2011 (fiscal 2010). This tax election increased the tax basis of the properties transferred to the REIT to their fair values at the date of the transfer. The income tax that would otherwise be payable because of the gain recognized by this election was largely reduced by the utilization of a capital loss carryforward, that would otherwise have expired as ofJanuary 29, 2011 , against a portion of the recognized gain. Because of the Company's past uncertainty regarding the incurrence of capital gain income, the deferred tax asset associated with that capital loss carryforward had been offset by a full valuation allowance since its recognition in fiscal 2005. During fiscal 2011, income taxes included the recognition of approximately$201.6 million in tax benefit due to the reversal of the valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of the properties to the REIT ("REIT Transaction"). Approximately$134.4 million of the tax benefit relates to increased basis in depreciable property while approximately$67.2 million of the benefit relates to increased basis in land. Due to the increased tax basis of the depreciable properties transferred to the REIT, the Company will recognize increased tax depreciation deductions in the future which are expected to yield cash tax benefits of approximately$5.0 million annually in years one through twenty and approximately$2.0 million annually in years twenty-one through forty beginning with the current year. Due to the uncertainty surrounding whether the REIT will dispose of any of its land assets in the future, the Company cannot estimate when or if the cash tax benefits related to the increased basis in land will be received. During fiscal 2011, income taxes included the recognition of tax benefits of approximately$201.6 million due to the valuation allowance reversal related to the REIT Transaction,$3.7 million related to federal tax credits,$1.0 million for the increase in the cash surrender value of life insurance policies,$0.6 million due to net decreases in unrecognized tax benefits, interest and penalties, and$0.6 million related to decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions. These tax benefits were partially offset by the recognition of tax expense of approximately$2.3 million due to increases in net operating loss valuation allowances. Additionally, during fiscal 2011, theIRS concluded its examination of the Company's federal income tax returns for 30
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the fiscal tax years 2008 through 2009, and no significant changes occurred in these tax years as a result of such examination. The Company is currently under examination by various state and local taxing jurisdictions for various fiscal years. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company's financial statements.
Fiscal 2010
During fiscal 2010, income taxes included approximately$1.4 million for an increase in deferred liabilities due to an increase in the state effective tax rate, and included the recognition of tax benefits of approximately$6.1 million for the net decrease in unrecognized tax benefits, interest, and penalties,$2.9 million for the decrease in net operating loss valuation allowances,$0.7 million for the decrease in the capital loss valuation allowance resulting from capital gain income,$1.2 million for the increase in the cash surrender value of life insurance policies, and$2.5 million due to federal tax credits. During fiscal 2010, theIRS completed its examination of the Company's federal income tax returns for the fiscal tax years 2006 and 2007, and no significant changes occurred in these tax years as a result of such examination. During fiscal 2010, the Company reached settlements with federal and state taxing jurisdictions which resulted in reductions in the liability for unrecognized tax benefits. Fiscal 2009 During fiscal 2009, income taxes included the recognition of tax benefits of approximately$6.3 million for the net decrease in unrecognized tax benefits, interest, and penalties,$1.3 million for a decrease in deferred liabilities due to a decrease in the state effective tax rate,$4.4 million for a decrease in a capital loss valuation allowance resulting from capital gain income, and$2.4 million due to federal tax credits. During fiscal 2009, the Company reached a settlement with a state taxing jurisdiction which resulted in a reduction in unrecognized tax benefits, interest, and penalties.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position Summary January 28, January 29, Dollar Percent (in thousands of dollars) 2012 2011 Change Change Cash and cash equivalents $ 224,272 $ 343,291 $ (119,019 ) (34.7 )% Long-term debt, including current portion 691,574 746,412 (54,838 ) (7.3 ) Subordinated debentures 200,000 200,000 - - Stockholders' equity 2,052,019 2,086,720 (34,701 ) (1.7 ) Current ratio 1.83 2.05 Debt to capitalization 30.3 % 31.2 %
The Company's current non-operating priorities for its use of cash are stock repurchases, debt reduction, strategic investments to enhance the value of existing properties and dividend payments to shareholders.
At present, there are numerous general business and economic factors affecting the retail industry. These factors include: (1) consumer confidence; (2) competitive conditions; (3) the recent recession in the U.S. and numerous economies around the globe; (4) high levels of unemployment in various sectors; (5) rising gas prices; and (6) other factors that are both separate from, and outgrowths of, the above. These conditions may impact our comparable store sales which may result in reduced cash flows if we are not appropriately managing our inventory levels or expenses. Further, if one or more of these conditions continue or worsen, we may experience a further adverse effect on our business, financial condition and results of operations, including our ability to access capital. 31
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Table of Contents Cash flows for the three fiscal years ended were as follows: Percent Change (in thousands of dollars) Fiscal 2011 Fiscal 2010 Fiscal 2009 2011 - 2010 2010 - 2009 Operating Activities $ 501,140 $ 512,922 $ 554,007 (2.3 )% (7.4 )% Investing Activities (83,224 ) (89,615 ) (63,453 ) 7.1 (41.2 ) Financing Activities (536,935 ) (421,709 ) (245,684 ) (27.3 ) (71.7 ) Total Cash (Used) Provided $ (119,019 ) $ 1,598 $ 244,870 Operating Activities The primary source of the Company's liquidity is cash flows from operations. Due to the seasonality of the Company's business, we have historically realized a significant portion of the cash flows from operating activities during the second half of the fiscal year. Retail operations sales are the key operating cash component, providing 96.8% and 96.3% of total revenues in fiscal 2011 and 2010, respectively. Operating cash inflows also include revenue and reimbursements from the Alliance with GE, which owns and manages the Company's private label credit card business under the Alliance, and cash distributions from joint ventures. Operating cash outflows include payments to vendors for inventory, services and supplies, payments to employees and payments of interest and taxes. The Alliance provides for certain payments to be made by GE to the Company, including a revenue sharing and marketing reimbursement. The Company received income of approximately$96 million and$85 million from GE in fiscal 2011 and 2010, respectively. While future cash flows under this Alliance are difficult to predict, the Company expects income from the Alliance to improve moderately during fiscal 2012 compared to fiscal 2011. The amount the Company receives is dependent on the level of sales on GE accounts, the level of balances carried on the GE accounts by GE customers, payment rates on GE accounts, finance charge rates and other fees on GE accounts, the level of credit losses for the GE accounts as well as GE's funding costs. The Alliance expires in fiscal 2014. Net cash flows from operations decreased$11.8 million during fiscal 2011 compared to fiscal 2010. This decrease is primarily attributable to a decrease of$56.4 million related to changes in working capital items, primarily of changes in trade accounts payable and accrued expenses. This decrease was partially offset by higher net income, as adjusted for non-cash items, of$44.6 million for fiscal 2011 compared to fiscal 2010.
Included in net income for fiscal 2011 was a
Included in net income for fiscal 2010 was a
Investing Activities
Cash inflows from investing activities generally include proceeds from sales of property and equipment. Investment cash outflows generally include payments for capital expenditures such as property and equipment. Capital expenditures increased$17.5 million for fiscal 2011 compared to fiscal 2010. The fiscal 2011 expenditures of$115.7 million consisted primarily of the remodeling of existing stores and equipment upgrades, including installation of the Company's new internet fulfillment center located in 32
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Store closures during fiscal 2011 were:
Closed Locations-Fiscal 2011 City Square Feet Highland Mall Austin, Texas 190,000 Decatur Mall Decatur, Alabama 128,000 Westminster Mall Westminster, Colorado 159,000
Total closed square footage
573,000
We have also announced the upcoming closure of our
Capital expenditures for fiscal 2012 are expected to be approximately$175 million . These expenditures are primarily for the remodeling of stores, purchase of equipment, including the buyout of certain leased equipment, and completion of the new internet fulfillment center. There are no planned store openings for fiscal 2012.
During fiscal 2011, 2010 and 2009, we received proceeds from the sale of property and equipment of
During fiscal 2010, the Company invested an additional$9.0 million in itsDenver, Colorado mall joint venture. During fiscal 2011, the Company sold its interest in this joint venture for$11.0 million , resulting in a gain of$2.1 million that was recorded in gain on disposal of assets. During fiscal 2011, the Company received a distribution of excess cash from a mall joint venture of$6.7 million and recorded a related gain of$4.2 million in income on (equity in losses of) joint ventures.
Financing Activities
Our primary source of cash inflows from financing activities is generally our$1.0 billion revolving credit facility. Financing cash outflows generally include the repayment of borrowings under the revolving credit facility, the repayment of mortgage notes or long-term debt, the payment of dividends and the purchase of treasury stock. Cash used in financing activities increased to$536.9 million in fiscal 2011 from$421.7 million in fiscal 2010. This decrease in cash flow of$115.2 million was primarily due to the purchase of treasury stock and debt payments. Stock Repurchase. InMay 2011 , the Company's Board of Directors authorized the Company to repurchase up to$250 million of the Company's Class A Common Stock under an open-ended plan ("May 2011 Stock Plan"). This authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 ("Exchange Act") or through privately negotiated transactions. During fiscal 2011, the Company repurchased 5.0 million shares for$222.5 million at an average price of$44.77 per share. AtJanuary 28, 2012 ,$27.5 million in share repurchase authorization remained under theMay 2011 Stock Plan. InFebruary 2011 , the Company's Board of Directors authorized the Company to repurchase up to$250 million of the Company's Class A Common Stock ("February 2011 Stock Plan"). This 33
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authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions. During fiscal 2011, the Company repurchased 6.0 million shares for$250.0 million at an average price of$41.93 per share, which completed the authorization under theFebruary 2011 Stock Plan. InAugust 2010 , the Company's Board of Directors authorized the Company to repurchase up to$250 million of the Company's Class A Common Stock ("2010 Stock Plan"). During fiscal 2010, the Company repurchased 7.5 million shares for$231.3 million at an average price of$31.04 per share. During fiscal 2011, the Company repurchased 0.4 million shares for$18.7 million at an average price of$42.19 per share, which completed the remaining authorization under the 2010 Stock Plan. InNovember 2007 , the Company's Board of Directors approved the repurchase of up to$200 million of the Company's Class A Common Stock ("2007 Stock Plan"). Availability under the 2007 Stock Plan at the beginning of fiscal 2009 was$182.6 million . No repurchases were made during fiscal 2009. During fiscal 2010, the Company repurchased 7.2 million shares of stock for approximately$182.6 million at an average price of$25.39 per share, which completed the remaining authorization under the 2007 Stock Plan. InFebruary 2012 , the Company announced that the Board of Directors authorized the repurchase of up to$250 million of the Company's Class A Common Stock under an additional stock plan ("2012 Stock Plan"). This authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions. The 2012 Stock Plan has no expiration date. Revolving Credit Agreement. AtJanuary 28, 2012 , the Company maintained a$1.0 billion revolving credit facility ("credit agreement") withJPMorgan Chase Bank ("JPMorgan") as agent for various banks, secured by the inventory ofDillard's, Inc. operating subsidiaries. Borrowings under the credit agreement accrue interest at either JPMorgan's Base Rate minus 0.5% orLIBOR plus 1.0% (1.27% atJanuary 28, 2012 ) subject to certain availability thresholds as defined in the credit agreement. Limited to 85% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was$836.5 million atJanuary 28, 2012 . No borrowings were outstanding atJanuary 28, 2012 . Letters of credit totaling$83.7 million were issued under this credit agreement leaving unutilized availability under the facility of approximately$753 million atJanuary 28, 2012 . There are no financial covenant requirements under the credit agreement provided that availability for borrowings and letters of credit exceeds$100 million . The Company pays an annual commitment fee to the banks of 0.25% of the committed amount less outstanding borrowings and letters of credit. The Company had weighted-average borrowings of$72.6 million and$8.7 million during fiscal 2011 and 2010, respectively. The Company's credit agreement expiresDecember 12, 2012January 28, 2012 , the Company had$691.6 million of long-term debt, comprised of unsecured notes, a term note and a mortgage note outstanding. The unsecured notes bear interest at rates ranging from 6.625% to 7.875% with due dates from fiscal 2012 through fiscal 2028, the term note bears interest at 5.93% interest with a due date of fiscal 2012 and the mortgage note bears interest at 9.25% with a due date of fiscal 2012. The Company reduced its net level of outstanding debt and capital leases during fiscal 2011 by$56.8 million compared to a reduction of$17.5 million in fiscal 2010. In addition to paying the regularly scheduled maturities of the unsecured notes, term note and mortgage principal during fiscal 2011, the Company repurchased$5.7 million face amount of 6.625% notes with an original maturity on 34
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The debt and capital lease decline in fiscal 2010 was due to (1) regularly scheduled payments on the Company's term note and mortgage principal, (2) the pay off of$13 million in capital lease obligations for two corporate aircraft and (3) the repurchase of$1.2 million face amount of 7.13% notes with an original maturity onAugust 1, 2018 . The debt and capital lease decline in fiscal 2009 was primarily due to regular maturities of outstanding notes and scheduled payments of mortgage principal. During fiscal 2009, the Company also repurchased$8.4 million face amount of 9.125% notes with an original maturity onAugust 1, 2011 . This repurchase resulted in a pretax gain of approximately$1.7 million which was recorded in net interest and debt expense.
As of
Subordinated Debentures. As ofJanuary 28, 2012 , the Company had$200 million outstanding of its 7.5% subordinated debentures dueAugust 1, 2038 . All of these subordinated debentures were held by Dillard's Capital Trust I, a 100% owned, unconsolidated finance subsidiary of the Company. The Company has the right to defer the payment of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters; however, the Company has no present intention of exercising this right to defer interest payments.
Fiscal 2012
During fiscal 2012, the Company expects to finance its capital expenditures and its working capital requirements, including required debt repayments and stock repurchases, from cash on hand, cash flows generated from operations and utilization of the credit facility. Peak borrowings under the credit facilities were approximately$298 million during fiscal 2011. Net borrowings (borrowings less cash and cash equivalents) were approximately$202 million at the peak during fiscal 2011. Peak borrowings during fiscal 2012 are expected to be at similar levels as fiscal 2011. Depending on conditions in the capital markets and other factors, the Company will from time to time consider possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.
OFF-BALANCE-SHEET ARRANGEMENTS
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 off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources. 35
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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 (in thousands of dollars) Less than More than Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years 5 years Long-term debt $ 691,574 $ 76,789 $ - $ - $ 614,785 Interest on long-term debt 525,661 49,191 89,014 89,014 298,442 Subordinated debentures 200,000 - - - 200,000 Interest on subordinated debentures 404,178 15,247 29,918 29,918 329,095 Capital lease obligations, including interest 16,050 3,191 3,916 2,856 6,087 Defined benefit plan participant payments 179,247 8,600 16,865 21,722 132,060 Other liabilities 251 251 - - - Purchase obligations(1) 1,274,974 1,273,591 1,383 - - Operating leases(2) 99,644 29,537 28,121 22,110 19,876 Total contractual cash obligations(3)(4) $ 3,391,579 $ 1,456,397 $ 169,217 $ 165,620 $ 1,600,345
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º (1)
º The Company's purchase obligations principally consist of purchase orders
for merchandise and store construction commitments. Amounts committed under
open purchase orders for merchandise inventory represent
of the purchase obligations, of which a significant portion are cancelable
without penalty prior to a date that precedes the vendor's scheduled shipment date. º (2)
º The operating leases included in the above table do not include contingent
rent based upon sales volume, which represented approximately 9% of minimum
lease obligations in fiscal 2011. º (3) º The total liability for unrecognized tax benefits is$11.9 million ,
including tax, penalty, and interest (refer to Note 6 to the consolidated
financial statements). The Company is not able to reasonably estimate the
timing of future cash flows and has excluded these liabilities from the
table above; however, at this time, the Company believes the estimated
range of the reasonably possible uncertain tax benefit decrease in the next
twelve months is between
º (4)
º The Company is unable to reasonably estimate the timing of future cash
flows of workers' compensation and general liability insurance reserves of
of$2.9 million and have excluded these from the table above. AMOUNT OF COMMITMENT EXPIRATION PER PERIOD (in thousands of dollars) Total Amounts Within After Other Commercial Commitments Committed 1 year 2 - 3 years 4 - 5 years 5 years$1.0 billion line of credit, none outstanding(1) $ - $ - $ - $ - $ - Standby letters of credit 78,249 77,399 850 - - Import letters of credit 5,496 5,496 - - - Total commercial commitments $ 83,745 $ 82,895 $ 850 $ - $ -
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º (1)
º Availability under the credit facility is limited to 85% of the inventory
of certain Company subsidiaries (approximately
2012). At
issued under the credit facility.
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NEW ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements and Disclosure
InMay 2011 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, Fair Value Measurement (Topic 820)-Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This update is effective for interim and annual periods beginning afterDecember 15, 2011 and is to be applied prospectively. The Company does not expect the adoption of ASU No. 2011-04 to have a material impact on the Company's financial statements.
Presentation of Comprehensive Income
InJune 2011 , the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)-Presentation of Comprehensive Income, to make the presentation of items within other comprehensive income ("OCI") more prominent. The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders' equity. This new update is effective for interim and annual periods beginning afterDecember 15, 2011 and is to be applied retrospectively. The adoption of this new standard may change the order in which certain financial statements are presented and will provide additional detail in those financial statements when applicable, but will not have any other impact on the Company's financial statements. InDecember 2011 , the FASB issued ASU 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-5" which deferred the requirement from theJune 2011 guidance that related to the presentation of reclassification adjustments. The amendment will allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as "may," "will," "could," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "estimate," "continue," or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company's future occurrences, plans and objectives, including statements regarding management's expectations and forecasts for fiscal 2012. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company's stores are located and 37
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the effect of these factors on the buying patterns of the Company's customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company's future business; fluctuations inLIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature.
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