Dillard's 2009 Annual Report Download

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2009 Annual Report

Table of contents

  • Page 1
    2009 Annual Report

  • Page 2
    ...our customers with exceptional fashion choices and premium service. Together, we made notable progress in 2009 in key operating and financial areas as evidenced by the following: • We achieved a 410 basis point (of sales) improvement in merchandise gross margin compared to the 2008 fiscal year. We...

  • Page 3
    ... or organization) 1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS (Address of principal executive offices) 71-0388071 (IRS Employer Identification No.) 72201 (Zip Code) DILLARD'S, INC. Registrant's telephone number, including area code (501) 376-5200 Securities registered pursuant to Section 12(b) of...

  • Page 4
    ...about 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 10. 11. 12. 13. 14. Directors, Executive Officers and Corporate Governance ...Executive...

  • Page 5
    ... Most of our stores are located in suburban shopping malls and open-air centers. 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...

  • Page 6
    ... paying online or mailing their payments to GE. We seek to expand the number and use of the proprietary cards by, among other things, providing incentives to sales associates to open new credit accounts, which generally can be opened while a customer is visiting one of our stores. Customers who open...

  • Page 7
    ... Conduct, Corporate Governance Guidelines, Social Accountability Policy and committee charters for the Audit Committee 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...

  • Page 8
    ... 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 9
    ...investors, our share price may decline. Our sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond our control. Certain events and factors may directly and immediately decrease demand for our products or increase operating...

  • Page 10
    ... of new and constantly changing requirements. We receive certain personal information about our customers and employees. In addition, our online operations at www.dillards.com depend upon the secure transmission of confidential information over public networks, including information permitting...

  • Page 11
    ...information security systems and could result in a disruption of our operations, particularly our online sales operations. Changes in the income and cash flow from our long-term marketing and servicing alliance related to our proprietary credit cards could impact operating results and cash flows. GE...

  • Page 12
    ... annual rent. In general, the Company pays the cost of insurance, maintenance and real estate taxes related to the leases. The following table summarizes by state of operation the number of retail stores we operate and the corresponding owned and leased footprint at January 30, 2010: Owned Building...

  • Page 13
    ... 30, 2010, we operated the following additional facilities: Facility Location Square Feet Owned / Leased Distribution Centers: ... Internet Fulfillment Center ...Dillard's Executive Offices ...CDI Contractors, LLC Executive Office . CDI Storage Facilities ... ... ... ... Mabelvale, AR Gilbert...

  • Page 14
    ...to CEO William Dillard, II ...65 Alex Dillard ...60 Mike Dillard ...58 Drue Matheny ...63 James I. Freeman ...60 Director; Chief Executive Officer Director; President Director; Executive Vice President Director; Executive Vice President Director; Senior Vice President; Chief Financial Officer Vice...

  • Page 15
    ... AND ISSUER PURCHASES OF EQUITY SECURITIES. Market and Dividend Information for Common Stock 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...

  • Page 16
    ... Department Stores Index. The cumulative total return on the Company's Class A Common Stock assumes $100 invested in such stock on January 30, 2005 and assumes reinvestment of dividends. Stock Performance Graph $200 $150 Dollars $100 $50 $0 2005 Dillard 2006 S&P 500 2007 2008 2009...

  • Page 17
    ... and Results of Operations'', our consolidated audited financial statements and notes thereto and the other information contained elsewhere in this report. (Dollars in thousands of dollars, except per share data) 2009 2008 2007 2006* 2005 Net sales ...Percent change ...Cost of sales ...Percent of...

  • Page 18
    ... incurred during the 2005 hurricane season (see Note 15 of the Notes to Consolidated Financial Statements). • a $12.0 million income tax benefit ($0.15 per diluted share) primarily due to state administrative settlement, federal credits and the change in a capital loss valuation allowance. 14

  • Page 19
    ...ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. EXECUTIVE OVERVIEW Dillard's, Inc. operates 309 retail department stores in 29 states. 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...

  • Page 20
    ... the Company's operations. Despite a significant decrease in sales, our gross margin improved during fiscal 2009 compared to fiscal 2008. We continued to benefit from our improvements in inventory management, focusing on more conservative purchasing and efforts to better match the timing of receipts...

  • Page 21
    ...business, including the following: January 30, 2010 Fiscal Year Ended January 31, February 2, 2009 2008 (retail segment only, excluding cash flow data) Net sales (in millions) ...Sales per square foot ...Total store count at end of period ...Net sales trend ...Comparable store sales trend ...Gross...

  • Page 22
    ...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 Alliance with GE. Other income includes rental income, shipping and handling fees and lease income on leased departments. Cost of sales...

  • Page 23
    ... statements in conformity with accounting principles generally accepted in the 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...

  • Page 24
    ... on our sales return provision were not material for the years ended January 30, 2010, January 31, 2009 and February 2, 2008. 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...

  • Page 25
    .... The Company is currently being examined by the Internal Revenue Service (''IRS'') for the fiscal tax years 2006 through 2007. During fiscal 2008, the IRS completed its examination of the Company's federal income tax returns for the fiscal tax years 2003 through 2005. Certain issues relating to...

  • Page 26
    ...and statements of operations. Pension obligations. 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...

  • Page 27
    ... change by category in the Company's retail operations segment sales for the past two years is as follows: Percent Change Fiscal Fiscal 2009-2008 2008-2007 Cosmetics ...Ladies' apparel and accessories Juniors' and children's apparel . Men's apparel and accessories . Shoes ...Home and furniture...

  • Page 28
    ...of exclusive brand merchandise for fiscal years 2009, 2008 and 2007 was 23.8%, 24.0% and 24.2% of total net sales, respectively. Service Charges and Other Income (in millions of dollars) Fiscal 2009 Fiscal 2008 Fiscal 2007 Dollar Change 2009-2008 2008-2007 Percent Change 2009-2008 2008-2007 Service...

  • Page 29
    ... 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. Gross Profit (in thousands of dollars) Fiscal 2009 Fiscal 2008 Fiscal 2007 Gross profit: Retail operations segment...

  • Page 30
    ... $132.6 million during fiscal 2008 from fiscal 2007 primarily as a result of the Company's cost control measures and store closures. Notable areas of savings during the year were in payroll and related payroll taxes ($73.5 million), advertising ($31.6 million), services purchased ($15.7 million) and...

  • Page 31
    .... Fiscal 2008 During fiscal 2008, the Company sold its store location at Rivercenter in San Antonio, Texas for $8.0 million, resulting in a pretax 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...

  • Page 32
    ... impairment and store closing charges for fiscal 2008 follows: (in thousands of dollars) Number of Locations Impairment Amount Store closed in prior year ...Stores closed in fiscal 2008 ...Stores to close in fiscal 2009 ...Stores impaired based on cash flows Non-operating facility ...Distribution...

  • Page 33
    ... fiscal tax year 2006 and 2007. During fiscal 2008, the IRS completed its examination of the Company's federal income tax returns for the fiscal years 2003 through 2005. Certain issues relating to this examination are currently under appeal. The Company is also under examination by various state and...

  • Page 34
    ... 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...

  • Page 35
    ... $100 million. During February 2010, we opened our new locations at The Domain in Austin, Texas (200,000 square feet) and The Village at Fairview in Fairview, Texas (155,000 square feet). There are no other planned store openings for fiscal 2010. We received insurance proceeds of $16.1 million...

  • Page 36
    ... 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 $245.7 million in fiscal 2009 from $223.9 million in fiscal 2008. This decrease in cash flow of $21...

  • Page 37
    ...'s Board of Directors authorized another share repurchase plan under which the Company may repurchase up to $200 million of its Class A Common Stock (''2007 Stock Plan''). This open-ended authorization permits the Company to repurchase its Class A Common Stock in the open market or through privately...

  • Page 38
    ... possible uncertain tax benefit decrease in the next twelve months is between $4 million and $8 million. (4) The Company is unable to reasonably estimate the timing of future cash flows of workers' compensation and general liability insurance reserves of $32.8 million, gift card liabilities of $15...

  • Page 39
    ... of this guidance during the fiscal quarter ended October 31, 2009, which had no impact on the Company's consolidated financial statements. Derivative Instruments and Hedging Activities In March 2008, the FASB issued new accounting guidance related to disclosures about derivative instruments and...

  • Page 40
    ... 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; changes in operating expenses, including employee...

  • Page 41
    ...disclosed in the Company's current report on Form 8-K filed on May 7, 2009, the Company changed its independent registered public accountants effective for the fiscal year ended January 30, 2010. There were no disagreements or reportable events related to the change in accountants. ITEM 9A. CONTROLS...

  • Page 42
    ... management concluded that our internal control over financial reporting was effective as of January 30, 2010. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited our Consolidated Financial Statements included in this Annual Report on Form 10-K and have issued...

  • Page 43
    ... of charge on the Company's website, www.dillards.com, and is available in print to any shareholder who requests copies by contacting Julie J. Bull, Director of Investor Relations, at the Company's principal executive offices set forth above. ITEM 11. EXECUTIVE COMPENSATION. The information called...

  • Page 44
    ...Incentive and Nonqualified Stock Option Plan (2) This column excludes shares reflected under the column ''Number of securities to be issued upon exercise of outstanding options''. Additional information called for by this item is incorporated herein by reference to the information under the headings...

  • Page 45
    ... 26, 2010 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the date indicated. /s/ WILLIAM DILLARD, II William Dillard, II Chairman of the Board and Chief Executive...

  • Page 46
    ...of Operations-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008 ...Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008 ...Consolidated Statements of Cash Flows-Fiscal years...

  • Page 47
    ... on these financial statements and on the Company's internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform...

  • Page 48
    ... PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Dillard's, Inc. Little Rock, Arkansas We have audited the accompanying consolidated balance sheet of Dillard's, Inc. and subsidiaries (the ''Company'') as of January 31, 2009, and the related consolidated statements of operations...

  • Page 49
    CONSOLIDATED BALANCE SHEETS January 30, 2010 January 31, 2009 Dollars in Thousands Assets Current assets: Cash and cash equivalents ...Accounts receivable, net ...Merchandise inventories ...Federal income tax receivable Other current assets ...$ 341,693 63,222 1,300,680 217 43,717 1,749,529 73,844...

  • Page 50
    CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended January 31, 2009 Dollars in Thousands, Except Per Share Data January 30, 2010 February 2, 2008 Net sales ...Service charges and other income ... $6,094,948 131,680 6,226,628 $6,830,543 157,897 6,988,440 4,827,769 1,932,732 284,287 61,481 88,821 ...

  • Page 51
    ... plan and other retiree benefit adjustments, net of tax of $567 . . - Total comprehensive income ...Issuance of 227,850 shares under stock 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...

  • Page 52
    ... ...Excess tax benefits from share-based compensation ...Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ...Decrease (increase) in merchandise inventories ...Decrease (increase) in federal income tax receivable ...Decrease (increase) in other current assets...

  • Page 53
    ... Accounting Policies Description 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...

  • Page 54
    ... annually as of the last day of the fourth quarter using the two-step process prescribed by GAAP. The Company identifies its reporting units 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 55
    ... $15 million and $22 million at January 30, 2010 and January 31, 2009, respectively. These joint ventures consisted of two shopping malls located in Denver, Colorado and Bonita Springs, Florida and one property located in Toledo, Ohio. During fiscal 2008, the investment in the properties in Toledo...

  • Page 56
    ... time, the Company will recognize breakage income over the performance period for those gift cards (i.e. 60 months) as a reduction of cost of sales. As of January 30, 2010 and January 31, 2009, gift card liabilities of $58.5 million and $65.1 million, respectively, were included in trade accounts...

  • Page 57
    ... also recorded. Shipping and Handling-The Company records shipping and handling reimbursements in service charges and other income. The Company records shipping and handling costs in cost of sales. Retirement Benefit Plans-The Company's retirement benefit plan costs are accounted for using actuarial...

  • Page 58
    ... Company's consolidated financial statements. In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about fair value of financial instruments in interim as well as in annual financial...

  • Page 59
    ... to cash of $14.1 million and accounts receivable of $72.9 million, and the liabilities assumed of $82.2 million consisted of accounts payable. 3. Business Segments Before the acquisition of CDI in August 2008, the Company operated in one reportable segment: the operation of retail department stores...

  • Page 60
    ... summarizes the percentage of net sales by segment and major product line: Percentage of Net Sales Fiscal Fiscal Fiscal 2009 2008 2007 Retail operations segment: Cosmetics ...Ladies' apparel and accessories Juniors' and children's apparel Men's apparel and accessories . Shoes ...Home and furniture...

  • Page 61
    ... for a store that closed during that year where the projected cash flows were unable to sustain the amount of goodwill. There was no further goodwill activity in fiscal 2009. 5. Revolving Credit Agreement At January 30, 2010, the Company maintained a $1.2 billion revolving credit facility (''credit...

  • Page 62
    ... an original maturity on August 1, 2011. This repurchase resulted in a pretax gain of approximately $1.7 million which was recorded in net interest and debt expense. During fiscal 2008, the Company purchased a corporate aircraft by exercising its option under a synthetic lease and by issuing a $23...

  • Page 63
    ... expenses consist of the following: (in thousands of dollars) January 30, 2010 January 31, 2009 Trade accounts payable ...Accrued expenses: Taxes, other than income ...Salaries, wages and employee benefits Liability to customers ...Interest ...Rent ...Other ... ... $494,372 59,791 50,421 43,197...

  • Page 64
    ...approximately $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. During fiscal 2008, income taxes included the net increase in unrecognized...

  • Page 65
    ... gains necessary to utilize the capital loss carryforward. At January 30, 2010, the Company had a deferred tax asset related to state net operating loss carryforwards of approximately $151 million that could be utilized to reduce the tax liabilities of future years. These carryforwards will expire...

  • Page 66
    ... tax benefits at end of period ... The Company is currently being examined by the IRS for the fiscal tax years 2006 through 2007. During fiscal 2008, the IRS completed its examination of the Company's federal income tax returns for the fiscal tax years 2003 through 2005. Certain issues relating to...

  • Page 67
    ... unconditional guarantee of payments due on the Capital Securities. The Trust is a variable interest entity and is not consolidated into the Company's financial statements, since the Company is not the primary beneficiary of the Trust. 10. Benefit Plans The Company has a retirement plan with a 401...

  • Page 68
    ... Benefit obligation at end of year ...Change in Pension Plan assets: Fair value of Pension Plan assets at beginning of year ...Employer contribution ...Benefits paid ...Fair value of Pension Plan assets at end of year ...Funded status (benefit obligation less Pension Unamortized prior service costs...

  • Page 69
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Benefit Plans (Continued) 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...

  • Page 70
    ... Company's Board of Directors authorized the Company to repurchase up to $200 million of its Class A Common Stock (''2007 Stock Plan''). This open-ended authorization permits the Company to repurchase its Class A Common Stock in the open market or through privately negotiated transactions. No shares...

  • Page 71
    ... of their inclusion would have been antidilutive. 13. Stock-Based Compensation The Company has various stock option plans that provide for the granting of options to purchase shares of Class A Common Stock to certain key employees of the Company. Exercise and vesting terms for options granted under...

  • Page 72
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Stock-Based Compensation (Continued) Stock option transactions are summarized as follows: Fiscal 2009 Weighted Average Shares Exercise Price Fixed Options Outstanding, beginning of year Granted ...Exercised ...Expired ... ... ... ... ... ...

  • Page 73
    ... during year ended January 30, 2010. This amount was recorded in service charges and other income. At January 30, 2010, letters of credit totaling $89.6 million were issued under the Company's $1.2 billion revolving credit facility. On May 27, 2009, a lawsuit was filed in the United States District...

  • Page 74
    ... 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 75
    ... (for publicly traded unsecured notes) and on discounted future cash flows using current interest rates for financial instruments with similar characteristics and maturities (for bank notes and mortgage notes). The fair value of the Company's cash and cash equivalents and trade accounts receivable...

  • Page 76
    ... markets that we estimated would be used by a market participant in valuing these assets. 18. Quarterly Results of Operations (unaudited) (in thousands of dollars, except per share data) May 2 Fiscal 2009, Three Months Ended August 1 October 31 January 30 Net sales ...Gross profit ...Net income...

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

  • Page 78
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. Quarterly Results of Operations (unaudited) (Continued) • a $7.2 million pretax gain ($4.6 million after tax or $0.06 per share) related to the sale of a store in San Antonio, Texas. Fourth Quarter 2009 • a $3.1 million pretax charge ...

  • Page 79
    ...6140). Purchase, Sale and Servicing Transfer Agreement among GE Capital Consumer Card Co., General Electric Capital Corporation, Dillards, Inc. and Dillard National Bank (Exhibit 2.1 to Form 8-K dated as of August 12, 2004 in 1-6140). Private Label Credit Card Program Agreement between Dillards, Inc...

  • Page 80
    ... (Exhibit 10 to Form 10-Q dated August 28, 2009 in File No. 1-6140). Subsidiaries of Registrant. Consent of Independent Registered Public Accounting Firm. Consent of Independent Registered Public Accounting Firm. Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley...

  • Page 81
    ... Corp. - Little Rock, Arkansas J.C. Watts, Jr. - Former Member of Congress, Chairman of J.C. Watts Companies - Washington, D.C. Nick White - President & Chief Executive Officer, White & Associates - Rogers, Arkansas CORPORATE ORGANIZATION William Dillard, II - Chief Executive Officer Alex Dillard...

  • Page 82
    ...merchandise and feature products from both national and exclusive brand sources. The Company operates 299 Dillard's locations and 12 clearance centers spanning 29 states plus an Internet store at www.dillards.com. ON THE COVER The fresh, contemporary expression of Gianni Bini as featured in "Dillard...