Dillard's 2005 Annual Report Download - page 26

improve its merchandise mix and reduce markdown activity. The lower level of markdown activity decreased
cost of sales by 50 basis points of sales. Improved levels of markups were responsible for a decrease in cost of
sales of 90 basis points of sales. All product categories had increased gross margins during 2004 except for the
home category. Gross margins were notably higher in men and children’s categories with margin improvement
well above the average margin improvement for the year.
Expenses
2005 Compared to 2004
Advertising, selling, administrative and general (“SG&A”) expenses decreased to 27.0% of sales for fiscal
2005 compared to 27.9% for fiscal 2004. On a dollar basis, SG&A expenses declined $57.3 million from the
prior year. For fiscal 2005, savings in bad debts of $22.3 million (as a result of the sale of the Company’s credit
card business in November 2004), payroll of $15.0 million, advertising of $17.6 million, communications of
$10.0 million and insurance of $8.3 million were partially offset by increases in utilities of $6.4 million, supplies
of $3.9 million, pension expense of $3.2 million and preopening expense of $3.6 million. The reduction in
payroll, advertising and communications was partially due to the sale of the credit card business in November
2004 and cost reduction throughout the year. The decrease in insurance is due to additional reserves set aside in
the prior year for workers’ compensation self-insurance to reflect an expected increase in future medical costs.
Pension expense increased primarily as a result of higher expenses for the 401(k) plan and the officers
nonqualified defined benefit plan. The higher pre-opening expenses resulted from the opening of eight new stores
and one replacement store totaling 1.5 million square feet, net of replacement square footage, during 2005
compared with five new stores and three replacement stores totaling 820,000 square feet, net of replacement
square footage, during the same period in 2004.
Depreciation and amortization as a percentage of sales was 4.0% for fiscal 2005 and fiscal 2004,
respectively.
Rental expense as a percentage of net sales was 0.6% for the year ended January 28, 2006 compared to 0.7%
for the same period in 2004. Rentals declined $7.3 million for the year ended January 28, 2006 compared to the
similar period in 2004. Rental expenses experienced a decline due to a lower number of leased stores in fiscal
2005 compared to the prior year partially offset by higher data processing and equipment rentals. Leased stores
declined by seven stores during fiscal 2004 to 65 stores at January 29, 2005 compared with a decline of three
stores during fiscal 2005 to 62 stores at January 28, 2006 resulting in lower rent expense of $9.2 million. A
review of the Company’s lease accounting policies resulted in a charge of $821,000 for straight-line rent during
fiscal 2004.
Interest and debt expense as a percentage of sales decreased to 1.4% for fiscal 2005 compared to 1.8% for
fiscal 2004 primarily as a result of lower debt levels. Interest expense declined $33.5 million in fiscal 2005.
Average debt outstanding declined approximately $573 million in fiscal 2005. The debt reduction was partially
due to the assumption by GE of $400 million in accounts receivable securitization debt in conjunction with the
sale of the Company’s private label credit card business to GE in November 2004. In addition, the Company had
maturities and repurchases of $163.9 million on various notes and mortgages during 2005.
During fiscal 2005, the Company recorded a pre tax charge of $61.7 million for asset impairment and store
closing costs. The charge includes a write down to fair value for certain under-performing properties. Included in
asset impairment and store closing charges is a pre-tax loss on the disposition of all the outstanding capital stock
of an indirect wholly-owned subsidiary in the amount of $40.1 million. The Company realized an income tax
benefit of $45.4 million for the year ended January 28, 2006 related to the sale of the subsidiary’s stock. The
charge also consists of a write down of goodwill on one store of $1.0 million, an accrual for future rent, property
tax and utility payments on four stores of $3.7 million and a write down of property and equipment on nine stores
in the amount of $16.9 million. The Company does not expect to incur significant additional exit costs upon the
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