Dillard's 2005 Annual Report Download - page 27

closing of these properties during fiscal 2006. A breakdown of the asset impairment and store closing charges for
fiscal 2005 is as follows:
(in thousands of dollars)
Number of
Locations
Impairment
Amount
Stores closed during fiscal 2005 ........................... 5 $ 8,729
Stores impaired based on cash flows ........................ 9 12,899
Wholly-owned subsidiary ................................ 7 40,106
Total ............................................. 21 $61,734
2004 Compared to 2003
Advertising, selling, administrative and general (“SG&A”) expenses increased to 27.9% of sales for fiscal
2004 compared to 27.6% for fiscal 2003. On a dollar basis, SG&A expenses were up slightly over the prior year.
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. For fiscal 2004, savings in bad debts of $25.9 million (as
a result of the sale of the Company’s credit card business in November 2004 and decreased bad debt write-offs
throughout the year), services purchased of $11.3 million and communications of $4.0 million were offset by
increases in incentive payroll of $8.6 million, insurance of $8.6 million and advertising of $16.9 million. The
reduction in services purchased and communications was partially due to the sale of the credit card business in
November 2004 and costs reductions throughout the year. Services purchased includes marketing, collection fees
and merchandise handling costs. Communications includes telephone, postage and data line expenses. As a result
of the Company’s improved performance, incentive compensation to store managers, merchants and management
significantly increased during the year ended January 29, 2005. Also during the year, Dillard’s increased its
provision for workers’ compensation self-insurance to reflect an expected increase in future medical costs.
Dillard’s increased its advertising expenditures during the year as it continued to evaluate new media outlets
better suited to meet its customers’ lifestyles than those outlets traditionally employed. Due to the sale of the
credit card business, the Company will no longer incur bad debt expense.
Depreciation and amortization as a percentage of sales increased to 4.0% for fiscal 2004 compared to 3.8%
for fiscal 2003. This increase is due to higher capital expenditures in 2004 and the addition of capital leases for
data processing equipment in 2004 which have shorter useful lives.
Rental expenses experienced a decline due to a lower number of leased stores in fiscal 2004 compared to the
prior year and lower data processing equipment rent. Leased stores declined from 71 stores at January 31, 2004
to 65 stores at January 29, 2005 resulting in lower rent expense of $6.6 million. Lower data processing equipment
rent of $2.7 million was due to a certain number of 2004 leases qualifying for capital lease treatment. 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 1.8% for fiscal 2004 compared to 2.4% for
fiscal 2003 primarily as a result of lower debt levels. Interest expense declined $42.0 million in fiscal 2004.
Average debt outstanding declined approximately $602 million in fiscal 2004. The debt reduction was due
primarily to the assumption by GE of $400 million in accounts receivable securitization debt and the payoff of
seasonal borrowings in conjunction with the sale of the Company’s private label credit card business to GE. The
Company also redeemed the $331.6 million Preferred Securities and had maturities of outstanding notes of
$163.4 million during fiscal 2004. 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 also included in
interest expense for fiscal 2003.
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