Dillard's 2003 Annual Report Download - page 20

Cost of Sales
Cost of sales as a percentage of sales increased to 68.0% during 2003 compared with 66.4% for 2002. The decline of
160 basis points in gross margin during fiscal 2003 was due to competitive pressures in the Company’s retail sector and
the resulting effort to maintain a competitive position with increased markdown activity. The higher level of markdown
activity increased cost of sales by 3.7% of sales. Improved levels of markups partially offset this promotional activity
during fiscal 2003. The increased markup percentage was responsible for a decrease in cost of sales of 2.1% of sales. All
product categories had decreased gross margins during 2003 except cosmetics, which increased 10 basis points from
2002. The Company has continued to build penetration and recognition of its private brand merchandise as a means for
increased control over merchandise mix and better gross margin performance with the goal of replacing under-
performing branded vendors with Dillard’s private brands.
Inventory in comparable stores at January 31, 2004 increased 140 basis points comparing to inventory in comparable
stores at February 1, 2003. This increase was due to lower than expected sales in the fourth quarter of fiscal 2003.
Cost of sales as a percentage of sales decreased to 66.4% during 2002 compared with 67.5% for 2001. The Company
experienced lower than expected consumer demand in its fourth quarter of 2002 necessitating increased promotional
efforts to clear slower moving merchandise. This higher level of markdown activity increased the cost of sales by 1.5%
of sales in response to a heavily promotional retail environment and comparatively weak sales trends in the holiday
merchandise category compared to the prior year. Significantly improved levels of markups offset this promotional
activity during 2002 compared with 2001. The increased markup percentage was responsible for a decrease in cost of
sales of 2.6% of sales. All product categories had improved gross margins during 2002 except cosmetics, which was
unchanged from 2001.
Expenses
2003 Compared to 2002
Advertising, selling, administrative and general (“SG&A“) expenses increased to 27.6% of sales for fiscal 2003
compared to 27.3% for fiscal 2002. The percentage increase is primarily due to a lack of sales leverage as SG&A
expenses decreased $66.1 million in 2003 compared to 2002. On a dollar basis significant decreases were noted in
payroll, advertising and bad debt expense. Payroll, advertising and bad debt expense declined $37.0 million, $8.6
million and $9.5 million, respectively. The decrease in payroll was caused primarily by a reduction in incentive based
sales payroll which is directly tied to the decrease in sales during 2003. The decline in advertising expense resulted
primarily from a reduction in newspaper advertising as the Company considers which media more appropriately matches
its customers’ lifestyles. Improvement in the quality of accounts receivable through lower delinquencies as well as a
reduction in outstanding accounts receivable contributed to the lower bad debt expense. SG&A expenses in fiscal 2003
include a $12.3 million pretax credit recorded due to the resolution of certain liabilities originally recorded in conjunction
with the purchase of Mercantile Stores Company, Inc. that were deemed not necessary based upon current information.
Depreciation and amortization as a percentage of sales remained flat during fiscal 2003 principally due to lower capital
expenditures in fiscal 2003 combined with a lack of sales leverage from the 4% decline in comparable store sales during
the year.
Interest and debt expense as a percentage of sales was unchanged from fiscal 2002 as a result of the Company’s lack of
sales leverage. Interest expense declined $9.0 million due to the Company’s continuing focus on reducing its out-
standing debt levels. Average debt outstanding declined approximately $226 million in fiscal 2003. Interest expense for
fiscal 2003 includes a credit of $4.1 million received from the Internal Revenue Service as a result of the Company’s
filing of an interest netting claim related to previously settled tax years. A call premium of $15.6 million related to the
early retirement of debt is included in interest expense for fiscal 2003 compared to a call premium of $11.6 million
related to the early retirement of debt for fiscal 2002. The Company has retired all the remaining debt associated with
the call premiums in fiscal 2003 and 2002 and does not anticipate any similar call premiums in fiscal 2004. Also
included in interest expense for the fiscal 2002 is a pretax gain of $4.8 million related to the early extinguishment of
debt. The Company retired $272 million in long-term debt and issued $50 million in new short-term borrowings during
2003.
During fiscal 2003, the Company recorded a pre tax charge of $44 million for asset impairment and store closing costs.
The charge includes a write down to fair value for certain under-performing properties. The charge consists of a write
down for a joint venture in the amount of $5.5 million, a write down of goodwill on two stores to be closed of $2.5
million and a write down of property and equipment in the amount of $35.7 million. The Company does not expect to
incur significant additional exit costs upon the closing of these properties during fiscal 2004. A breakdown of the asset
impairment and store closing charges for fiscal 2003 is as follows:
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