# Dillard'S, Inc.: Form 10-Q for the period ended Nov 1, 2014

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2014-12-01
- Accepted by EDGAR: Dec 1, 2014, 16:26 ET
- Period: 2014-11-01
- Accession: 0000028917-14-000211
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000002891714000211/dds-11012014x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000002891714000211/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-11-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-08-03 to 2014-11-01 | $1.50bn | us-gaap:Revenues |
| Revenue | 9 months, 2014-02-02 to 2014-11-01 | $4.60bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-08-03 to 2014-11-01 | $924.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2014-02-02 to 2014-11-01 | $2.84bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-08-03 to 2014-11-01 | $535.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-02-02 to 2014-11-01 | $1.65bn | us-gaap:GrossProfit |
| Income tax | 3 months, 2014-08-03 to 2014-11-01 | $30.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-02-02 to 2014-11-01 | $110.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-08-03 to 2014-11-01 | $55.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-02-02 to 2014-11-01 | $201.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 9 months, 2014-02-02 to 2014-11-01 | $4.67 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2014-02-02 to 2014-11-01 | $209.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2014-02-02 to 2014-11-01 | $124.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2014-02-02 to 2014-11-01 | $7.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2014-02-02 to 2014-11-01 | $290.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-11-01 | $91.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-11-01 | $2.04bn | us-gaap:AssetsCurrent |
| Total assets | at 2014-11-01 | $4.36bn | us-gaap:Assets |
| Current liabilities | at 2014-11-01 | $1.21bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2014-11-01 | $614.8m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2014-11-01 | $1.90bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,256 characters.

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended February 1, 2014.

### EXECUTIVE OVERVIEW

During the quarter ended November 1, 2014, comparable store sales declined 1% over last year's third quarter. Weaker sales contributed to a 70 basis points of sales increase in our selling general, and administrative expenses. Gross margin from retail operations improved 69 basis points of sales as we increased markups and took fewer markdowns. Net income increased to $55.2 million for the current year third quarter from $50.9 million for the prior year third quarter. This improvement in net earnings combined with the completion of our remaining $224.5 million of share repurchase authorization during the quarter helped raise our earnings per share to $1.30 per share from $1.13 per share, a 15% increase over last year's third quarter.

Included in net income for the quarter ended November 1, 2014 is a pretax gain of $5.9 million ($3.8 million after tax or $0.09 per share) related to the sale of a retail store location.

As of November 1, 2014, we had working capital of $826.6 million, cash and cash equivalents of $91.9 million and $877.8 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $209.9 million for the nine months ended November 1, 2014, increasing 21% over the prior year comparable period. We operated 298 total stores, including 18 clearance centers, and one internet store as of November 1, 2014, a decrease of one store from November 2, 2013.

### Key Performance Indicators

We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:

|  | Three Months Ended November 1, 2014 | November 2, 2013 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,459.8 | $1,468.6 |
| Retail stores sales trend | (1)% | 1% |
| Comparable retail stores sales trend | (1)% | 1% |
| Gross profit (in millions) | $535.3 | $531.2 |
| Gross profit as a percentage of net sales | 36.7% | 36.2% |
| Retail gross profit as a percentage of net sales | 37.5% | 36.8% |
| Selling, general and administrative expenses as a percentage of net sales | 28.2% | 27.5% |
| Cash flow from operations (in millions)\* | $209.9 | $173.0 |
| Total retail store count at end of period | 298 | 299 |
| Retail sales per square foot | $28 | $29 |
| Comparable retail store inventory trend | 0% | 6% |
| Retail merchandise inventory turnover | 2.3 | 2.4 |

\*Cash flow from operations data is for the nine months ended November 1, 2014 and November 2, 2013.

### General

**Net sales.** Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company. Comparable store sales include sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior year. Comparable store sales exclude the change in the allowance for sales returns. Non-comparable store sales include: sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns.

**Service charges and other income.** Service charges and other income includes income generated through the long-term marketing and servicing alliance (“Alliance”) with Synchrony Financial ("Synchrony"; formerly GE Consumer Finance), which owned and managed the Dillard’s branded proprietary cards. Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.

**Cost of sales.** Cost of sales includes the cost of merchandise sold (net of purchase discounts and non-specific margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, and direct payroll for salon personnel. Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.

**Selling, general and administrative expenses.** Selling, general and administrative expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

**Depreciation and amortization.** Depreciation and amortization expenses include depreciation and amortization on property and equipment.

**Rentals.** Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.

**Interest and debt expense, net.** Interest and debt expense includes interest, net of interest income and capitalized interest, relating to the Company’s unsecured notes, subordinated debentures and borrowings under the Company’s credit facility. Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on capital lease obligations.

**Gain on disposal of assets.** Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an investment.

**Asset impairment and store closing charges.** Asset impairment and store closing charges consist of (a) write-downs to fair value of under-performing or held for sale properties and of cost method investments and (b) exit costs associated with the closure of certain stores, when applicable. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

**Income on and equity in earnings of joint ventures.** Income on and equity in earnings of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures.

### Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results during the periods presented; however, our business could be affected by such in the future.

### RESULTS OF OPERATIONS

The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding):

|  | Three Months Ended November 1, 2014 | November 2, 2013 | Nine Months Ended November 1, 2014 | November 2, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.7 | 2.6 | 2.6 | 2.6 |
|  | 102.7 | 102.6 | 102.6 | 102.6 |
| Cost of sales | 63.3 | 63.8 | 63.3 | 63.4 |
| Selling, general and administrative expenses | 28.2 | 27.5 | 26.9 | 26.5 |
| Depreciation and amortization | 4.3 | 4.4 | 4.2 | 4.3 |
| Rentals | 0.4 | 0.4 | 0.4 | 0.4 |
| Interest and debt expense, net | 1.0 | 1.1 | 1.0 | 1.1 |
| Gain on disposal of assets | (0.4) | — | (0.1) | (0.3) |
| Asset impairment and store closing charges | — | — | — | 0.1 |
| Income before income taxes and income on and equity in earnings of joint ventures | 5.8 | 5.3 | 6.9 | 7.0 |
| Income taxes | 2.1 | 1.9 | 2.5 | 2.5 |
| Income on and equity in earnings of joint ventures | — | — | — | — |
| Net income | 3.8% | 3.5% | 4.5% | 4.5% |

16

### Net Sales (Three-Month Comparison)

*(in thousands of dollars)*

| Net sales: | Three Months Ended November 1, 2014 | November 2, 2013 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,422,359 | $1,437,492 | $(15,133) |
| Construction segment | 37,422 | 31,120 | 6,302 |
| Total net sales | $1,459,781 | $1,468,612 | $(8,831) |

The percent change in the Company’s sales by segment and product category for the three months ended November 1, 2014 compared to the three months ended November 2, 2013 as well as the sales percentage by segment and product category to total net sales for the three months ended November 1, 2014 are as follows:

| Retail operations segment | % Change 2014-2013 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | 0.1% | 15% |
| Ladies’ apparel | (0.1) | 22 |
| Ladies’ accessories and lingerie | (1.0) | 14 |
| Juniors’ and children’s apparel | 2.1 | 9 |
| Men’s apparel and accessories | 1.0 | 17 |
| Shoes | (4.3) | 16 |
| Home and furniture | (12.1) | 4 |
|  |  | 97 |
| Construction segment | 20.3 | 3 |
| Total |  | 100% |

Net sales from the retail operations segment decreased $15.1 million during the three months ended November 1, 2014 compared to the three months ended November 2, 2013, declining 1% in both total and comparable stores. Sales of juniors’ and children’s apparel increased moderately over the prior year period, and sales of men’s apparel and accessories increased slightly. Sales of ladies' apparel and cosmetics remained essentially flat between the periods. Sales of ladies’ accessories and lingerie decreased slightly compared to the prior year period, sales of shoes decreased moderately and sales of home and furniture decreased significantly.

The number of sales transactions decreased 5% for the three months ended November 1, 2014 compared to the three months ended November 2, 2013 while the average dollars per sales transaction increased 4%. We recorded an allowance for sales returns of $5.8 million and $6.6 million as of November 1, 2014 and November 2, 2013, respectively.

During the three months ended November 1, 2014, net sales from the construction segment increased $6.3 million or 20% compared to the three months ended November 2, 2013 due to an increase in construction projects. The backlog of awarded construction contracts at November 1, 2014 totaled $318.3 million, increasing approximately 62% from February 1, 2014 and approximately 101% from November 2, 2013.

### Net Sales (Nine-Month Comparison)

*(in thousands of dollars)*

| Net sales: | Nine Months Ended November 1, 2014 | November 2, 2013 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $4,422,686 | $4,426,270 | $(3,584) |
| Construction segment | 62,893 | 71,330 | (8,437) |
| Total net sales | $4,485,579 | $4,497,600 | $(12,021) |

The percent change in the Company’s sales by segment and product category for the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013 as well as the sales percentage by segment and product category to total net sales for the nine months ended November 1, 2014 are as follows:

| Retail operations segment | % Change 2014-2013 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (0.7)% | 15% |
| Ladies’ apparel | 0.4 | 24 |
| Ladies’ accessories and lingerie | 0.3 | 15 |
| Juniors’ and children’s apparel | 3.0 | 9 |
| Men’s apparel and accessories | 1.8 | 17 |
| Shoes | (2.0) | 15 |
| Home and furniture | (8.8) | 4 |
|  |  | 99 |
| Construction segment | (11.8) | 1 |
| Total |  | 100% |

Net sales from the retail operations segment decreased $3.6 million during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013, remaining essentially flat in total stores and increasing 1% in comparable stores. Sales of juniors’ and children’s apparel and men’s apparel and accessories increased moderately over the prior year period while sales of ladies' apparel and ladies’ accessories and lingerie remained essentially flat. Sales of cosmetics decreased slightly compared to the prior year period, sales of shoes decreased moderately and sales of home and furniture decreased significantly.

The number of sales transactions decreased 3% for the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013 while the average dollars per sales transaction increased 3%.

During the nine months ended November 1, 2014, net sales from the construction segment decreased $8.4 million or 12% compared to the nine months ended November 2, 2013 due to a delay in the timing of certain construction projects during the first half of the year.

### Service Charges and Other Income

*(in thousands of dollars)*

| Service charges and other income: Retail operations segment | Three Months Ended November 1, 2014 | November 2, 2013 | Nine Months Ended November 1, 2014 | November 2, 2013 | Three Months $ Change 2014-2013 | Nine Months $ Change 2014-2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Leased department income | $2,018 | $1,990 | $6,068 | $6,394 | $28 | $(326) |
| Income from Synchrony marketing and servicing alliance | 29,431 | 29,281 | 85,178 | 84,317 | 150 | 861 |
| Shipping and handling income | 4,874 | 4,262 | 14,931 | 13,720 | 612 | 1,211 |
| Other | 2,690 | 2,766 | 8,443 | 11,045 | (76) | (2,602) |
|  | 39,013 | 38,299 | 114,620 | 115,476 | 714 | (856) |
| Construction segment | 350 | 14 | 374 | 26 | 336 | 348 |
| Total service charges and other income | $39,363 | $38,313 | $114,994 | $115,502 | $1,050 | $(508) |

Service charges and other income is composed primarily of income from the Alliance with Synchrony. Income from the Alliance increased during the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013 primarily from increases in finance charge income partially offset by increased credit losses.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: Three months ended | November 1, 2014 | November 2, 2013 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $533,679 | $529,453 | $4,226 | 0.8% |
| Construction segment | 1,659 | 1,752 | (93) | (5.3) |
| Total gross profit | $535,338 | $531,205 | $4,133 | 0.8% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,642,370 | $1,640,759 | $1,611 | 0.1% |
| Construction segment | 3,273 | 4,827 | (1,554) | (32.2) |
| Total gross profit | $1,645,643 | $1,645,586 | $57 | —% |

| Gross profit as a percentage of segment net sales: | Three Months Ended November 1, 2014 | November 2, 2013 | Nine Months Ended November 1, 2014 | November 2, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 37.5% | 36.8% | 37.1% | 37.1% |
| Construction segment | 4.4 | 5.6 | 5.2 | 6.8 |
| **Total gross profit as a percentage of net sales** | 36.7 | 36.2 | 36.7 | 36.6 |

Gross profit as a percentage of net sales improved 50 basis points of sales during the three months ended November 1, 2014 compared to the three months ended November 2, 2013. Gross profit from retail operations improved 69 basis points of sales during the same comparable periods primarily from increased markups combined with decreased markdowns. Gross margin improved moderately in juniors’ and children’s apparel and shoes and improved slightly in men’s apparel and accessories and ladies' apparel. Gross margin was essentially flat in cosmetics. Gross margin declined slightly in ladies' accessories and lingerie and declined moderately in home and furniture.

Gross profit as a percentage of net sales improved 10 basis points of sales during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013. Gross profit from retail operations improved 7 basis points of sales during the same comparable periods primarily from increased markups partially offset by increased markdowns. Gross margin improved moderately in juniors’ and children’s apparel and improved slightly in shoes and ladies' apparel. Gross margin remained essentially flat in cosmetics. Gross margin declined slightly in men’s apparel and accessories and ladies' accessories and lingerie and declined moderately in home and furniture.

Inventory in both total and comparable stores remained essentially flat as of November 1, 2014 compared to November 2, 2013. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $6 million for the three and nine months ended November 1, 2014, respectively.

### Selling, General and Administrative Expenses (“SG&A”)

*(in thousands of dollars)*

| SG&A: Three months ended | November 1, 2014 | November 2, 2013 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $411,272 | $403,101 | $8,171 | 2.0% |
| Construction segment | 987 | 1,305 | (318) | (24.4) |
| Total SG&A | $412,259 | $404,406 | $7,853 | 1.9% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,202,448 | $1,189,320 | $13,128 | 1.1% |
| Construction segment | 3,921 | 3,500 | 421 | 12.0 |
| Total SG&A | $1,206,369 | $1,192,820 | $13,549 | 1.1% |

| SG&A as a percentage of segment net sales: | Three Months Ended November 1, 2014 | November 2, 2013 | Nine Months Ended November 1, 2014 | November 2, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 28.9% | 28.0% | 27.2% | 26.9% |
| Construction segment | 2.6 | 4.2 | 6.2 | 4.9 |
| **Total SG&A as a percentage of net sales** | 28.2 | 27.5 | 26.9 | 26.5 |

SG&A increased $7.9 million or 70 basis points of sales during the three months ended November 1, 2014 compared to the three months ended November 2, 2013. This increase was primarily due to an increase in payroll and payroll taxes ($8.8 million), primarily of selling payroll.

SG&A increased $13.5 million or 37 basis points of sales during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013. This increase was primarily due to an increase in payroll and payroll taxes ($22.9 million) partially offset by a decrease in insurance expenses ($6.8 million) and advertising ($6.6 million). During the nine months ended November 2, 2013, the Company also recognized a $1.5 million pretax reduction of pension expense for a gain from a pension plan curtailment.

### Depreciation and Amortization

*(in thousands of dollars)*

| Depreciation and amortization: Three months ended | November 1, 2014 | November 2, 2013 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $62,639 | $64,878 | $(2,239) | (3.5)% |
| Construction segment | 75 | 64 | 11 | 17.2 |
| Total depreciation and amortization | $62,714 | $64,942 | $(2,228) | (3.4)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $186,507 | $194,121 | $(7,614) | (3.9)% |
| Construction segment | 224 | 181 | 43 | 23.8 |
| Total depreciation and amortization | $186,731 | $194,302 | $(7,571) | (3.9)% |

The decrease in depreciation and amortization expense for the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013 was primarily due to the timing and composition of capital expenditures.

### Interest and Debt Expense, Net

*(in thousands of dollars)*

| Interest and debt expense (income), net: Three months ended | November 1, 2014 | November 2, 2013 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $14,606 | $15,806 | $(1,200) | (7.6)% |
| Construction segment | (8) | (17) | 9 | 52.9 |
| Total interest and debt expense, net | $14,598 | $15,789 | $(1,191) | (7.5)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $45,672 | $48,398 | $(2,726) | (5.6)% |
| Construction segment | (30) | (53) | 23 | 43.4 |
| Total interest and debt expense, net | $45,642 | $48,345 | $(2,703) | (5.6)% |

The decrease in net interest and debt expense for the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013 was primarily attributable to a reduction in credit facility fees and an increase in capitalized interest. Total weighted average debt decreased approximately $27.6 million and $24.6 million during the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013, respectively.

### Gain on Disposal of Assets

*(in thousands of dollars)*

| (Gain) loss on disposal of assets: Three months ended | November 1, 2014 | November 2, 2013 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $(5,923) | $(6) | $(5,917) |
| Construction segment | — | 4 | (4) |
| Total gain on disposal of assets | $(5,923) | $(2) | $(5,921) |
| Nine months ended |  |  |  |
| Retail operations segment | $(6,362) | $(12,367) | $6,005 |
| Construction segment | — | (4) | 4 |
| Total gain on disposal of assets | $(6,362) | $(12,371) | $6,009 |

During the three months ended November 1, 2014, the Company received proceeds of $9.9 million from the sale of a store location, resulting in a gain of $5.9 million that was recorded in gain on disposal of assets.

During the nine months ended November 2, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas. The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.

During the nine months ended November 2, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.

### Asset Impairment and Store Closing Charges

There were no asset impairment and store closing charges recorded during the three or nine months ended November 1, 2014 or the three months ended November 2, 2013. During the nine months ended November 2, 2013, the Company's retail operations segment recorded a pretax charge of $6.5 million for asset impairment and store closing costs. The charge was for the write-down of an operating property and certain cost method investments.

### Income Taxes

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 35.3% and 35.1% for the three months ended November 1, 2014 and November 2, 2013, respectively. During the three months ended November 1, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes. During the three months ended November 2, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 35.3% and 35.1% for the nine months ended November 1, 2014 and November 2, 2013, respectively. During the nine months ended November 1, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes. During the nine months ended November 1, 2014, the IRS concluded its examination of the Company's federal income tax returns for fiscal tax years 2011 and 2012, with no material changes in these tax years as a result of such examination. During the nine months ended November 2, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.

The Company expects the fiscal 2014 federal and state effective income tax rate to approximate 35%. This rate may change if results of operations for fiscal 2014 differ from management’s current expectations. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

### FINANCIAL CONDITION

A summary of net cash flows for the nine months ended November 1, 2014 and November 2, 2013 follows:

*(in thousands of dollars)*

|  | Nine Months Ended November 1, 2014 | November 2, 2013 | $ Change |
| --- | ---: | ---: | ---: |
| Operating Activities | $209,902 | $173,002 | $36,900 |
| Investing Activities | (119,310) | (47,016) | (72,294) |
| Financing Activities | (235,825) | (139,074) | (96,751) |
| Total Cash Used | $(145,233) | $(13,088) | $(132,145) |

Net cash flows from operations increased $36.9 million during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013. This improvement was primarily attributable to an increase of $48.4 million related to changes in working capital items, primarily of changes in inventories.

Synchrony owned and managed Dillard’s branded proprietary credit card business under the Alliance. The Alliance provided for certain payments to be made by Synchrony to the Company, including a revenue sharing and marketing reimbursement. The Company received income of approximately $85.2 million and $84.3 million from Synchrony during the nine months ended November 1, 2014 and November 2, 2013, respectively. The amount the Company received was dependent on the level of sales on Synchrony accounts, the level of balances carried on the Synchrony accounts by Synchrony customers, payment rates on Synchrony accounts, finance charge rates and other fees on Synchrony accounts, the level of credit losses for the Synchrony accounts as well as Synchrony’s funding costs. The Alliance expired in November 2014.

In April 2014, the Company announced that it entered into a 10-year agreement with Wells Fargo Bank, N.A. ("Wells Fargo"), which took effect in November 2014 following the scheduled expiration of the Alliance. Under the new agreement, Wells Fargo funds, issues and services Dillard's-branded private label and co-branded credit cards and also manages the cardholder loyalty program for the Company. While future cash flows under this new agreement are difficult to predict, the Company expects income, exclusive of startup costs, from the new agreement to be comparable to the Company's historical earnings from the Alliance and believes that earnings will increase with future program growth.

During the nine months ended November 1, 2014, the Company received proceeds of $9.9 million from the sale of a store location, resulting in a gain of $5.9 million that was recorded in gain on disposal of assets. The cash proceeds from this sale are being held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.

During the nine months ended November 2, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas. The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.

During the nine months ended November 2, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.

Capital expenditures were $124.1 million and $65.3 million for the nine months ended November 1, 2014 and November 2, 2013, respectively. The current year expenditures were primarily for the construction of new stores and the remodeling of existing stores. Capital expenditures for fiscal 2014 are expected to be approximately $155 million compared to actual expenditures of $95 million during fiscal 2013. We opened two new locations during the third quarter of fiscal 2014: The Mall at University Town Center in Sarasota, Florida (180,000 square feet) and The Shops at Summerlin in Las Vegas, Nevada (200,000 square feet).

No stores were closed during the nine months ended November 1, 2014; however, we remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

The Company had cash on hand of $91.9 million as of November 1, 2014. As part of our overall liquidity management strategy and for peak working capital requirements, the Company maintains a $1.0 billion credit facility. The credit agreement expires July 1, 2018. Limited to 90% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $1.0 billion at November 1, 2014. Borrowings of $63.0 million were outstanding at November 1, 2014, and letters of credit totaling $33.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $904 million at November 1, 2014.

During the nine months ended November 1, 2014, the Company repurchased 2.8 million shares of stock for $290.4 million at an average price of $104.44 per share under the Company’s March 2013 and November 2013 Stock Plans. During the nine months ended November 2, 2013, the Company repurchased 3.9 million shares of stock for $301.6 million at an average price of $78.30 per share under the Company's 2012 and March 2013 Stock Plans. At November 1, 2014, no authorization remained under the 2012, March 2013 and November 2013 Stock Plans. The ultimate disposition of the repurchased stock has not been determined.

In November 2014, the Company’s Board of Directors authorized the repurchase of up to an additional $500 million of the Company’s Class A Common Stock under an open-ended stock plan. This authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions.

The Company paid dividends of $7.8 million and $4.6 million during the nine months ended November 1, 2014 and November 2, 2013, respectively. Historically, our dividends declared during the fourth quarter of a fiscal year were paid during the first quarter of the following fiscal year; however, the dividends declared during the fourth quarter of fiscal 2012 were expedited and paid during that same quarter.

During fiscal 2014, the Company expects to finance its capital expenditures and its working capital requirements, including stock repurchases, from cash on hand, cash flows generated from operations and utilization of the credit facility. The Company expects peak borrowings for fiscal 2014 not to exceed $140 million. Depending on conditions in the capital markets and other factors, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.

There have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

### OFF-BALANCE-SHEET ARRANGEMENTS

The Company has not created, and is not party to, any special-purpose entities or off-balance-sheet arrangements for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources.

### NEW ACCOUNTING STANDARDS

#### Presentation of Discontinued Operations

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, *Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity*, which stipulates that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also removed the conditions that (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company adopted this guidance as of the beginning of its fiscal year 2014. The adoption of this guidance had no impact on the Company's condensed consolidated financial statements.

#### Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, *Revenue from Contracts with Customers (Topic 606)*, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will be effective for the Company retrospectively beginning in the first quarter of fiscal 2017 with early adoption not permitted. The Company is currently assessing the impact of this update on its condensed consolidated financial statements.

#### Presentation of Financial Statements - Going Concern

In August 2014, the FASB issued ASU No. 2014-15, *Presentation of Financial Statements - Going Concern (Subtopic 205-40),* which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This ASU is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements.

### FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company’s future occurrences, plans and objectives, including statements regarding management’s expectations and forecasts for the remainder of fiscal 2014 and beyond. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company’s stores are located and the effect of these factors on the buying patterns of the Company’s customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet 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 at acceptable pricing; 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 availability of financing in amounts and at the terms necessary to support the Company’s future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended February 1, 2014, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.

## Market risk

As filed, 235 characters.

There have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

## Controls and procedures

As filed, 776 characters.

The Company has established and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). The Company’s management, with the participation of our CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the fiscal quarter covered by this quarterly report, and based on that evaluation, the Company’s CEO and CFO have concluded that these disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended November 1, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 189 characters.

There have been no material changes in the information set forth under caption “Item 1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Filed Dec 1, 2014.
Source: SEC EDGAR, the filing index for accession 0000028917-14-000211. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.