Dillard's 2008 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ...action at Dillard's during 2008 to position ourselves not only to weather this current economic crisis but also to emerge a stronger retailer in the long term. Particularly, we accomplished large-scale reductions in inventory, operating expenses and capital expenditures while planning conservatively...

  • Page 3
    ... of incorporation or organization (Address of principal executive offices) (Zip Code) 71-0388071 (IRS Employer Identification Number) 1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201 (501) 376-5200 Registrant's telephone number, including area code Securities registered pursuant to Section 12...

  • Page 4

  • Page 5
    ... Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security...

  • Page 6

  • Page 7
    ... shopping malls. Our customers may also purchase merchandise on-line at our website, www.dillards.com, which features on-line gift registries and a variety of other services. We operate retail department stores located primarily in the southwest, southeast and midwest regions of the United States...

  • Page 8
    ... developed a knowledge of each of our trade areas and customer bases for our stores. This knowledge is enhanced through regular store visits by senior management and merchandising personnel and through the use of on-line merchandise information and is supported by our regional merchandising offices...

  • Page 9
    ... of the Board of Directors and the Stock Option and Executive Compensation Committee. Our corporate offices are located at 1600 Cantrell Road, Little Rock, Arkansas 72201, telephone: 501-376-5200. ITEM 1A. RISK FACTORS. The risks described in Item 1A, Risk Factors, in this Annual Report on Form...

  • Page 10
    ... compete with our individual stores, including specialty, off-price, discount, internet and mail-order retailers. Competition is characterized by many factors including location, reputation, fashion, merchandise assortment, advertising, price, quality, service and credit availability. We anticipate...

  • Page 11
    ... decrease demand for our products. If customer demand decreases rapidly, our results of operations would also decline precipitously. These events and factors include changes in competitive and economic conditions generally; variations in the timing and volume of our sales; sales promotions by us or...

  • Page 12
    ... credit cards under a long-term marketing and servicing alliance ("Alliance") that expires in fiscal 2014. The Alliance provides for certain payments to be made by GE to the Company, including a revenue sharing and marketing reimbursement. The income and cash flow that the Company receives...

  • Page 13
    ... 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, GE's ability to extend credit to our customers as well as GE's funding costs, all of which can vary based on changes...

  • Page 14
    ... payments based on a percentage of net sales with a guaranteed minimum annual rent. In general, the Company pays the cost of insurance, maintenance and real estate taxes related to the leases. At January 31, 2009, we operated 315 stores in 29 states totaling approximately 54.2 million square feet...

  • Page 15
    ...Square Feet Owned / Leased Distribution Centers: ... Internet Fulfillment Center ...Dillard's Executive Offices ...CDI Contractors, LLC Executive Office ...CDI Storage Facilities ...Total ... Mabelvale, AR Gilbert, AZ Valdosta, GA Olathe, KS Salisbury, NC Ft. Worth, TX Nashville, TN Little Rock, AR...

  • Page 16
    ... Director; Executive Vice President Director; Senior Vice President; Chief Financial Officer Vice President Vice President Vice President; General Counsel Vice President Vice President Vice President 1998 1998 1984 1980 1998 1988 1988 1998 1998 1984 1998 1992 None Brother of William Dillard...

  • Page 17
    ... EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Company's Class A Common Stock trades on the New York Stock Exchange under the Ticker Symbol "DDS". No public market currently exists for the Class B Common Stock. The high and low sales prices of the Company's Class...

  • Page 18
    ... Department Stores Index. The cumulative total return on the Company's Class A Common Stock assumes $100 invested in such stock on February 1, 2004 and assumes reinvestment of dividends. Stock Performance Graph $300 $250 $200 Dollars $150 $100 $50 $0 2004 Dillard 2005 S&P 500 2006 2007 2008...

  • Page 19
    ... Number of stores Opened ...10 9 8 9 8 Closed (2) ...21 11 10 8 7 Total - end of year ...315 326 328 330 329 * 53 weeks (1) As discussed in Note 2 of the Notes to Consolidated Financial Statements, the Company purchased the remaining interest in CDI Contractors, LLC and CDI Contractors, Inc. ("CDI...

  • Page 20
    ... or $0.11 per diluted share) on the sale of the Company's interest in a mall joint venture (see Note 1 of the Notes to Consolidated Financial Statements). • a $6.5 million pretax gain ($4.0 million after tax or $0.05 per diluted share) related to proceeds received from the Visa Check/Mastermoney...

  • Page 21
    ... is also a general contractor that constructs stores for the Company, creating a reportable segment separate from our retail operations. Our retail stores are located in fashion-oriented shopping malls and open-air centers and offer a broad selection of fashion apparel and home furnishings. We offer...

  • Page 22
    ...count at end of period ...Net sales trend ...Comparable store sales trend ...Gross profit (in millions) ...Gross profit as a percentage of net sales ...Comparable store inventory trend ...Merchandise inventory turnover ...Cash flow from operations (in millions) ...* ** Retail segment only, excluding...

  • Page 23
    ... year and sales in the previous fiscal year for stores that were closed in the current fiscal year. Service charges and other income. Service charges and other income include income generated through the long-term marketing and servicing alliance between the Company and GE. Other income relates...

  • Page 24
    ...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 98% of the inventories are valued at the lower of cost or market using...

  • Page 25
    ... 31, 2009, February 2, 2008 and February 3, 2007. The Company's share of income earned under the long-term marketing and servicing 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...

  • Page 26
    ... or our strategies change, the conclusion regarding impairment may differ from the current estimates. Estimates of fair value are primarily determined using projected discounted cash flows and are based on our best estimate of future revenue and operating costs and general market conditions. These...

  • Page 27
    ... statements of operations. Discount rate. The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual...

  • Page 28
    ... in the Company's retail operations segment sales for the past two years is as follows: Fiscal 2008-2007 Percent Change Fiscal Fiscal 2007-2006 2007-2006* Cosmetics ...Ladies' apparel and accessories ...Juniors' and children's apparel ...Men's apparel and accessories ...Shoes ...Home and furniture...

  • Page 29
    ... Company's retail operations segment sales for the past two years is as follows: Fiscal 2008-2007 Percent Change Fiscal Fiscal 2007-2006 2007-2006* Eastern ...Central ...Western ...* (8.7)% (4.5) (7.9) (6.8)% (4.9) (5.3) (5.3)% (3.2) (3.7) Percent change based on 52 weeks ended February 2, 2008...

  • Page 30
    ... from the Company's marketing and servicing alliance ("Alliance") with GE. Income from the Alliance decreased $9.1 million in fiscal 2008 compared to fiscal 2007 primarily due to a lower penetration rate of Dillard's branded proprietary credit card. 2007 Compared to 2006 Service charges and other...

  • Page 31
    .... All merchandise categories experienced declines in gross margin with the exception of men's apparel and accessories which was up only slightly. The weakest performance was noted in the home and furniture category, which significantly exceeded the Company's average decline for the year. Advertising...

  • Page 32
    ... settlements with federal and state tax authorities for multiple tax years. Exclusive of this interest credit, net interest and debt expense decreased $6.6 million in fiscal 2007 compared to fiscal 2006 mainly due to lower weighted average total debt in the current year of $1.1 billion compared to...

  • Page 33
    ... its store location at Rivercenter in San Antonio, Texas for $8.0 million, resulting in a gain of $7.2 million on the sale. The Company also purchased a corporate aircraft by exercising its option under a synthetic lease and by issuing a $23.6 million note payable, secured by letters of credit. The...

  • Page 34
    ... asset impairment and store closing charges for fiscal 2007 follows: Number of Impairment Locations Amount (in thousands of dollars) Store closed in prior year ...Stores closed in fiscal 2007 ...Stores to close in fiscal 2008 ...Stores impaired based on cash flows ...Non-operating facility ...Total...

  • Page 35
    ... 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. Cash flows for the three fiscal years ended...

  • Page 36
    ... reduced from current year levels due to the challenging economy. 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...

  • Page 37
    ... Square Feet Market Street at Heath Brook ...Shops at Lake Havasu ...Shoppes at River Crossing ...Pier Park ...Uptown Village at Cedar Hill ...Edgewater Mall(1) ...Shops at Wiregrass ...Anderson Mall ...Pearland Town Center ...Zona Rosa ...Total new square footage ...Closed Locations - Fiscal 2008...

  • Page 38
    ... 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 $223.9 million in fiscal 2008 from $27.5 million in fiscal 2007. This decrease in cash flow of $196...

  • Page 39
    .... 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...

  • Page 40
    ... in the Company's subordinated debentures ...Other short-term borrowings ...Capital lease obligations, including interest ...Defined benefit plan participant payments ...Other liabilities ...Purchase obligations (1) ...Operating leases (2) ...Total contractual cash obligations (3) (4) ... $ 783...

  • Page 41
    ... not been reduced by outstanding short-term borrowings of $200.0 million or outstanding letters of credit of $92.9 million. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, Disclosures...

  • Page 42
    ... labor from which the Company sources its merchandise; 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...

  • Page 43
    ... public accounting firm, on management's assessment of internal control over financial reporting is incorporated herein by reference from pages F-3 and F-4 of this report. William Dillard, II, Chairman of the Board of Directors and Chief Executive Officer, has certified to the New York Stock...

  • Page 44
    ... Reporting Compliance" in the Proxy Statement, which information is incorporated herein by reference. The Company's Board of Directors ("Board") has adopted a Code of Conduct that applies to all Company employees, including the Company's executive officers, and, when appropriate, the members...

  • Page 45
    ..., AND DIRECTOR INDEPENDENCE. Information regarding certain relationships and related transactions is incorporated herein by reference to the information under the heading "Certain Relationships and Transactions" in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Information...

  • Page 46
    ... IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1) and (2) Financial Statements An "Index of Financial Statements" has been filed as a part of this Report beginning on page F-1 hereof. (a)(3) Exhibits and Management Compensatory Plans An "Exhibit Index" has been filed as a part of this...

  • Page 47
    ... II /S/ JAMES I. FREEMAN William Dillard, II Chairman of the Board and Chief Executive Officer (Principal Executive Officer) James I. Freeman Senior Vice President and Chief Financial Officer and Director /S/ ALEX DILLARD Alex Dillard President and Director /S/ DRUE CORBUSIER Drue Corbusier...

  • Page 48

  • Page 49
    ... Registered Public Accounting Firm ...Management's Report on Internal Control over Financial Reporting ...Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets - January 31, 2009 and February 2, 2008 ...Consolidated Statements of Operations - Fiscal years ended...

  • Page 50
    ... ACCOUNTING FIRM To the Stockholders and Board of Directors of Dillard's, Inc. Little Rock, Arkansas We have audited the accompanying consolidated balance sheets of Dillard's, Inc. and subsidiaries (the "Company") as of January 31, 2009 and February 2, 2008, and the related consolidated statements...

  • Page 51
    ... Framework. Based on management's assessment using those criteria, it believes that, as of January 31, 2009, the Company's internal control over financial reporting is effective. As described in Note 2 of Notes to Consolidated Financial Statements, on August 29, 2008, the Company purchased the...

  • Page 52
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of Dillard's, Inc. Little Rock, Arkansas We have audited Dillard's Inc. and its subsidiaries (the "Company") internal control over financial reporting as of January 31, 2009 based on criteria established...

  • Page 53
    ... the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of January 31, 2009 and February 2, 2008, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the...

  • Page 54
    CONSOLIDATED BALANCE SHEETS January 31, February 2, 2009 2008 Dollars in Thousands Assets Current assets: Cash and cash equivalents ...$ 96,823 $ 88,912 Accounts receivable, net ...87,998 10,880 Merchandise inventories ...1,374,394 1,779,279 Federal income tax ...74,415 - Other current assets ...53...

  • Page 55
    CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended January 31, February 2, February 3, 2009 2008 2007 Dollars in Thousands, Except Per Share Data Net sales ...Service charges and other income ...Cost of sales ...Advertising, selling, administrative and general expenses ...Depreciation and ...

  • Page 56
    ...option and stock bonus plans ...Purchase of 5,202,699 shares of treasury stock ...Cumulative effect of accounting change related to adoption of FIN 48 ...Cash dividends declared: Common stock, $0.16 per share ...Balance, February 2, 2008 ...Net loss ...Change in unrecognized losses and prior service...

  • Page 57
    ... 27,826 Proceeds from sale of joint venture ...- - 19,990 Net cash used in investing activities ...(118,191) (331,987) (266,345) Financing activities: Principal payments on long-term debt and capital lease obligations ...(199,492) (104,291) (205,907) Purchase of treasury stock ...(17,441) (111,592...

  • Page 58
    ... of Business-Dillard's, Inc. (the "Company") operates retail department stores, located primarily in the Southeastern, Southwestern and Midwestern areas of the United States, and a general contracting construction company based in Little Rock, Arkansas. The Company's fiscal year ends on the...

  • Page 59
    ... day of the fourth quarter using the two-step process prescribed in SFAS No. 142. The Company identifies its reporting units under SFAS No. 142 at the store unit level. The fair value of these reporting units are estimated using the expected discounted future cash flows and market values of related...

  • Page 60
    ... value of merchandise inventory. The accounting policies described above are in compliance with Emerging Issues Task Force 02-16, Accounting by a Customer (Including a Reseller) for Certain Considerations Received from a Vendor. Insurance Accruals-The Company's consolidated balance sheets include...

  • Page 61
    ... manages Dillard's proprietary credit cards ("proprietary cards") under a long-term marketing and servicing alliance ("Alliance") that expires in fiscal 2014. The Company's share of income earned under the Alliance is included as a component of service charges and other income. The Company received...

  • Page 62
    ... merchandise from many suppliers, none of which accounted for more than 5% of the Company's net purchases during fiscal 2008. New Accounting Pronouncements In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an Amendment of FASB Statement...

  • Page 63
    ...net sales by segment and major product line: Percentage of Net Sales Fiscal Fiscal Fiscal 2008 2007 2006 Retail operations segment: Cosmetics ...Ladies' apparel and accessories ...Juniors' and children's apparel ...Men's apparel and accessories ...Shoes ...Home and furniture ...Construction segment...

  • Page 64
    ... certain segment information, including the reconciliation of those items to the Company's consolidated operations. Fiscal 2008 Retail Operations Construction Consolidated (in thousands of dollars) Net sales from external customers ...Interest expense (income), net ...Gross profit ...Depreciation...

  • Page 65
    ...During fiscal 2008, the Company purchased a corporate aircraft by exercising its option under a synthetic lease and by issuing a $23.6 million term note, secured by letters of credit. The Company then sold the aircraft for $44.5 million. A gain of $17.6 million was recognized related to the sale and...

  • Page 66
    ...FIN 48 liabilities /reserves ...Tax benefit of federal credits ...Nondeductible goodwill write off ...Changes in cash surrender value of life insurance policies ...Changes in valuation allowance ...Other ...Tax benefit of state restructuring ...Changes in tax rate ... $(133,555) (6,538) 2,495 (4,069...

  • Page 67
    ... to an increase in the state effective tax rate, and a $24.4 million tax benefit related to the decrease in a capital loss valuation allowance due to capital gain income. In fiscal 2006, the Company achieved a settlement with the Internal Revenue Service ("IRS") concerning the issues raised in their...

  • Page 68
    ... 1997 through 2002 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 financial statements. The Company has taken positions in certain...

  • Page 69
    ... the Capital Securities. 10. Benefit Plans The Company has a retirement plan with a 401(k)-salary deferral feature for eligible employees. Under the terms of the plan, eligible employees may contribute up to the lesser of $16,500 ($22,000 if at least 50 years of age) or 75% of eligible pay. Eligible...

  • Page 70
    .... The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date as of the end of each fiscal year and is matched to the future expected cash flows of the benefit plans by annual periods...

  • Page 71
    ... plan are as follows: (in thousands of dollars) Fiscal Year 2009 ...2010 ...2011 ...2012 ...2013 ...2014-2018 ...Total payments for next ten fiscal years ... $ 4,174 5,462 5,328 5,951 5,853 37,620 $64,388 11. Stockholders' Equity Capital stock is comprised of the following: Type Par Value Shares...

  • Page 72
    ...will be entitled to receive, upon payment of the exercise price, shares of Class A Common Stock having a market value of two times the exercise price. The rights will expire, unless extended, redeemed or exchanged by the Company, on March 2, 2012. Share Repurchase Programs 2007 Plan In November 2007...

  • Page 73
    ... than fair market value at dates of grant. At the end of fiscal 2008, 6,310,445 shares were available for grant under the plans and 11,571,820 shares of Class A Common Stock were reserved for issuance under the stock option plans. The Company follows SFAS No. 123(R), Share-Based Payment ("SFAS 123...

  • Page 74
    ... based entirely on a percentage of sales. The future minimum rental commitments as of January 31, 2009 for all non-cancelable leases for buildings and equipment are as follows: Fiscal Year Operating Capital Leases Leases (in thousands of dollars) 2009 ...2010 ...2011 ...2012 ...2013 ...After 2013...

  • Page 75
    ... and Hurricane Wilma interrupted operations in approximately 60 of the Company's stores for varying amounts of time. Ten stores suffered damage to either merchandise or property related to the hurricanes. One store in the New Orleans area was permanently closed. A store in Biloxi, Mississippi was...

  • Page 76
    ... of the Company's long-term debt and guaranteed preferred beneficial interests in the Company's subordinated debentures is based on market prices or dealer quotes (for publicly traded unsecured notes) and on discounted future cash flows using current interest rates for financial instruments with...

  • Page 77
    18. Quarterly Results of Operations (unaudited) Fiscal 2008, Three Months Ended May 3 August 2 November 1 January 31 (in thousands of dollars, except per share data) Net sales ...Gross profit ...Net income (loss) ...Diluted earnings per share: Net income (loss) ... $1,675,554 557,252 2,693 $ 0.04 ...

  • Page 78
    ... after tax or $0.13 per diluted share) for asset impairment and store closing charges related to certain stores. a $10.3 million income tax benefit ($0.14 per diluted share) primarily due to state administrative settlement, federal credits and the change in a capital loss valuation allowance. F-30

  • Page 79
    ... Stock Option Plan (Exhibit 10(e) to Form 10-K for the fiscal year ended February 3, 2001 in 1-6140). Second Amendment to Amended and Restated Credit Agreement among Dillard's, Inc. and JPMorgan Chase Bank (Exhibit 10 to Form 8-K dated June 3, 2005 in 1-6140). Purchase, Sale and Servicing...

  • Page 80
    ... 32(b) Statement re: Computation of Ratio of Earnings to Fixed Charges. Subsidiaries of Registrant. Consent of Independent Registered Public Accounting Firm. Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer...

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  • Page 83
    .... ~ New York, New York Warren A. Stephens ~ President & Chief Executive Officer of Stephens Inc., Co-Chairman of SF Holding Corp. ~ Little Rock, Arkansas Nick White ~ President & Chief Executive Officer, White & Associates ~ Rogers, Arkansas C O R P O R AT E O R G A N I Z AT I O N William Dillard...

  • Page 84
    ...16, 2009 - 9:30 a.m. Dillard's Corporate Office 1600 Cantrell Road Little Rock, Arkansas 72201 Dillard's, Inc. ranks among the nation's largest fashion apparel and home furnishings retailers with annual revenues exceeding $6.9 billion. The Company focuses on delivering maximum fashion and value to...