# Dillard'S, Inc.: Form 10-Q for the period ended Aug 1, 2015

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2015-09-03
- Accepted by EDGAR: Sep 3, 2015, 16:38 ET
- Period: 2015-08-01
- Accession: 0000028917-15-000157
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000002891715000157/dds-08012015x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000002891715000157/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-08-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-05-03 to 2015-08-01 | $1.55bn | us-gaap:Revenues |
| Revenue | 6 months, 2015-02-01 to 2015-08-01 | $3.16bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2015-05-03 to 2015-08-01 | $1.02bn | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2015-02-01 to 2015-08-01 | $1.98bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2015-05-03 to 2015-08-01 | $493.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2015-02-01 to 2015-08-01 | $1.11bn | us-gaap:GrossProfit |
| Income tax | 3 months, 2015-05-03 to 2015-08-01 | $15.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-02-01 to 2015-08-01 | $73.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-05-03 to 2015-08-01 | $29.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2015-02-01 to 2015-08-01 | $139.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 6 months, 2015-02-01 to 2015-08-01 | $3.43 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2015-02-01 to 2015-08-01 | $62.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2015-02-01 to 2015-08-01 | $87.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2015-02-01 to 2015-08-01 | $4.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2015-02-01 to 2015-08-01 | $202.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-08-01 | $175.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-08-01 | $1.75bn | us-gaap:AssetsCurrent |
| Total assets | at 2015-08-01 | $4.00bn | us-gaap:Assets |
| Current liabilities | at 2015-08-01 | $815.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2015-08-01 | $614.8m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2015-08-01 | $1.95bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,323 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 January 31, 2015.

### EXECUTIVE OVERVIEW

The Company's second quarter performance of fiscal 2015 was disappointing. During the three months ended August 1, 2015, comparable store sales increased 1% over last year's second quarter. Gross margin from retail operations declined 54 basis points of sales. Selling, general and administrative expenses from retail operations increased 15 basis points of sales, mainly due to increases in payroll and insurance expense partially offset by decreased advertising expense. Net income decreased to $29.9 million ($0.75 per share) for the current year second quarter from $34.5 million ($0.80 per share) for the prior year second quarter.

As of August 1, 2015, we had working capital of $934.0 million, cash and cash equivalents of $175.1 million and $814.8 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $62.0 million for the six months ended August 1, 2015. We operated 272 Dillard's locations, 25 clearance centers and one internet store as of August 1, 2015, an increase of one store from August 2, 2014.

### 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 August 1, 2015 | August 2, 2014 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,513.8 | $1,474.5 |
| Retail stores sales trend | —% | —% |
| Comparable retail stores sales trend | 1% | 1% |
| Gross profit (in millions) | $493.4 | $498.2 |
| Gross profit as a percentage of net sales | 32.6% | 33.8% |
| Retail gross profit as a percentage of net sales | 33.5% | 34.0% |
| Selling, general and administrative expenses as a percentage of net sales | 26.7% | 27.2% |
| Cash flow from operations (in millions)\* | $62.0 | $133.8 |
| Total retail store count at end of period | 297 | 296 |
| Retail sales per square foot | $30 | $29 |
| Comparable retail store inventory trend | 3% | (1)% |
| Retail merchandise inventory turnover | 2.5 | 2.6 |

\*Cash flow from operations data is for the six months ended August 1, 2015 and August 2, 2014.

### General

**Net sales.** Net sales includes 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 includes 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 excludes changes in the allowance for sales returns. Non-comparable store sales includes: 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 private label card alliance with Wells Fargo Bank, N.A. (“Wells Fargo Alliance”) and former private label card alliance with

Synchrony Financial ("Synchrony Alliance"). 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.

**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 as well as the distribution of excess cash from a mall joint venture.

### Seasonality

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.

### 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 August 1, 2015 | August 2, 2014 | Six Months Ended August 1, 2015 | August 2, 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.4 | 2.6 | 2.5 | 2.5 |
|  | 102.4 | 102.6 | 102.5 | 102.5 |
| Cost of sales | 67.4 | 66.2 | 64.2 | 63.3 |
| Selling, general and administrative expenses | 26.7 | 27.2 | 26.2 | 26.2 |
| Depreciation and amortization | 4.0 | 4.2 | 3.9 | 4.1 |
| Rentals | 0.4 | 0.4 | 0.4 | 0.4 |
| Interest and debt expense, net | 1.0 | 1.0 | 1.0 | 1.0 |
| Gain on disposal of assets | — | — | — | — |
| Income before income taxes and income on and equity in earnings of joint ventures | 3.0 | 3.6 | 6.9 | 7.5 |
| Income taxes | 1.0 | 1.3 | 2.4 | 2.6 |
| Income on and equity in earnings of joint ventures | — | — | — | — |
| Net income | 2.0% | 2.3% | 4.5% | 4.8% |

15

### Net Sales

*(in thousands of dollars)*

| Net sales: | Three Months Ended August 1, 2015 | August 2, 2014 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,467,709 | $1,461,134 | $6,575 |
| Construction segment | 46,069 | 13,350 | 32,719 |
| Total net sales | $1,513,778 | $1,474,484 | $39,294 |

The percent change in the Company’s sales by segment and product category for the three months ended August 1, 2015 compared to the three months ended August 2, 2014 as well as the sales percentage by segment and product category to total net sales for the three months ended August 1, 2015 are as follows:

| Retail operations segment | % Change 2015-2014 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (0.6)% | 13% |
| Ladies’ apparel | 0.7 | 24 |
| Ladies’ accessories and lingerie | (1.3) | 16 |
| Juniors’ and children’s apparel | 2.2 | 8 |
| Men’s apparel and accessories | 0.7 | 17 |
| Shoes | 5.2 | 15 |
| Home and furniture | (11.2) | 4 |
|  |  | 97 |
| Construction segment | 245.1 | 3 |
| Total |  | 100% |

Net sales from the retail operations segment increased $6.6 million during the three months ended August 1, 2015 compared to the three months ended August 2, 2014. Net sales from the retail operations segment remained essentially unchanged on a percentage basis for the three month period ended August 1, 2015. Sales in comparable stores for the period increased 1%. Sales of shoes increased significantly, while sales of juniors' and children's apparel increased moderately over the prior year period. Sales of ladies' apparel and men's apparel and accessories increased slightly over the prior year period. Sales of cosmetics and ladies' accessories and lingerie decreased slightly over the prior year period while sales of home and furniture decreased significantly.

The number of sales transactions decreased 2% for the three months ended August 1, 2015 compared to the three months ended August 2, 2014 while the average dollars per sales transaction increased 2%. We recorded an allowance for sales returns of $7.1 million and $6.6 million as of August 1, 2015 and August 2, 2014, respectively.

During the three months ended August 1, 2015, net sales from the construction segment increased $32.7 million, or 245%, compared to the three months ended August 2, 2014 due to an increase in construction activity. The backlog of awarded construction contracts at August 1, 2015 totaled $288.5 million, decreasing approximately 5% from January 31, 2015 and decreasing approximately 15% from August 2, 2014.

*(in thousands of dollars)*

| Net sales: | Six Months Ended August 1, 2015 | August 2, 2014 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $2,986,069 | $3,000,327 | $(14,258) |
| Construction segment | 101,202 | 25,471 | 75,731 |
| Total net sales | $3,087,271 | $3,025,798 | $61,473 |

The percent change in the Company’s sales by segment and product category for the six months ended August 1, 2015 compared to the six months ended August 2, 2014 as well as the sales percentage by segment and product category to total net sales for the six months ended August 1, 2015 are as follows:

| Retail operations segment | % Change 2015-2014 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (0.9)% | 14% |
| Ladies’ apparel | 0.6 | 24 |
| Ladies’ accessories and lingerie | (1.3) | 15 |
| Juniors’ and children’s apparel | 1.7 | 9 |
| Men’s apparel and accessories | (1.7) | 17 |
| Shoes | 2.9 | 15 |
| Home and furniture | (14.4) | 3 |
|  |  | 97 |
| Construction segment | 297.3 | 3 |
| Total |  | 100% |

Net sales from the retail operations segment decreased $14.3 million during the six months ended August 1, 2015 compared to the six months ended August 2, 2014, remaining essentially unchanged on a percentage basis in both total and comparable stores. Sales of juniors' and children's apparel and shoes increased moderately while sales of ladies' apparel increased slightly over the prior year period. Sales of cosmetics and ladies' accessories and lingerie decreased slightly over the prior year period. Sales of men's apparel and accessories decreased moderately, and sales of home and furniture decreased significantly over the prior year period.

The number of sales transactions decreased 5% for the six months ended August 1, 2015 compared to the six months ended August 2, 2014 while the average dollars per sales transaction increased 4%.

Storewide sales penetration of exclusive brand merchandise for the six months ended August 1, 2015 was 22.1% compared to 21.6% during the six months ended August 2, 2014.

During the six months ended August 1, 2015, net sales from the construction segment increased $75.7 million or 297% compared to the six months ended August 2, 2014 due to an increase in construction activity.

### Service Charges and Other Income

*(in thousands of dollars)*

| Service charges and other income: Retail operations segment | Three Months Ended August 1, 2015 | August 2, 2014 | Six Months Ended August 1, 2015 | August 2, 2014 | Three Months $ Change 2015-2014 | Six Months $ Change 2015-2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income from Wells Fargo Alliance and former Synchrony Alliance | $23,991 | $28,229 | $50,727 | $55,747 | $(4,238) | $(5,020) |
| Shipping and handling income | 6,021 | 5,203 | 11,800 | 10,057 | 818 | 1,743 |
| Leased department income | 1,798 | 2,083 | 3,413 | 4,050 | (285) | (637) |
| Other | 5,210 | 2,873 | 10,732 | 5,753 | 2,337 | 4,979 |
|  | 37,020 | 38,388 | 76,672 | 75,607 | (1,368) | 1,065 |
| Construction segment | 46 | 16 | 319 | 24 | 30 | 295 |
| Total service charges and other income | $37,066 | $38,404 | $76,991 | $75,631 | $(1,338) | $1,360 |

Service charges and other income is composed primarily of income from the Wells Fargo Alliance and former Synchrony Alliance. Income from the alliances decreased during the three months ended August 1, 2015 compared to the three months ended August 1, 2014 due to increased credit losses partially resulting from the portfolio transition. Income from the alliances decreased during the six months ended August 1, 2015 compared to the six months ended August 2, 2014 primarily due to increased credit losses.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: Three months ended | August 1, 2015 | August 2, 2014 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $491,645 | $497,319 | $(5,674) | (1.1)% |
| Construction segment | 1,802 | 896 | 906 | 101.1 |
| Total gross profit | $493,447 | $498,215 | $(4,768) | (1.0)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $1,102,639 | $1,108,691 | $(6,052) | (0.5)% |
| Construction segment | 3,882 | 1,614 | 2,268 | 140.5 |
| Total gross profit | $1,106,521 | $1,110,305 | $(3,784) | (0.3)% |

| Gross profit as a percentage of segment net sales: | Three Months Ended August 1, 2015 | August 2, 2014 | Six Months Ended August 1, 2015 | August 2, 2014 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 33.5% | 34.0% | 36.9% | 37.0% |
| Construction segment | 3.9 | 6.7 | 3.8 | 6.3 |
| **Total gross profit as a percentage of net sales** | 32.6 | 33.8 | 35.8 | 36.7 |

Gross profit as a percentage of net sales declined 119 basis points and 85 basis points of sales during the three and six months ended August 1, 2015 compared to the three and six months ended August 2, 2014.

Gross profit from retail operations declined 54 basis points of sales during the three month comparable periods primarily from increased markdowns. Gross margin declined moderately in ladies' accessories and lingerie and declined slightly in shoes and juniors' and children's apparel. Gross margin was essentially flat in cosmetics, ladies' apparel and men's apparel and accessories. Gross margin improved slightly in home and furniture.

Gross profit from retail operations declined 2 basis points of sales during the six month comparable periods. Gross margin in ladies' accessories and lingerie declined moderately. Gross margin was essentially flat in cosmetics, juniors’ and children’s apparel, shoes and ladies' apparel. Gross margin improved slightly in men’s apparel and accessories and home and furniture.

Gross profit from the construction segment improved $0.9 million and $2.3 million during the three and six months ended August 1, 2015, respectively, due to increased sales over the comparable prior year three and six month periods.

Inventory increased 3% in both total and comparable stores as of August 1, 2015 compared to August 2, 2014. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $3 million and $5 million for the three and six months ended August 1, 2015.

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

*(in thousands of dollars)*

| SG&A: Three months ended | August 1, 2015 | August 2, 2014 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $403,007 | $398,968 | $4,039 | 1.0% |
| Construction segment | 1,271 | 1,491 | (220) | (14.8) |
| Total SG&A | $404,278 | $400,459 | $3,819 | 1.0% |
| Six months ended |  |  |  |  |
| Retail operations segment | $805,260 | $791,176 | $14,084 | 1.8% |
| Construction segment | 2,578 | 2,934 | (356) | (12.1) |
| Total SG&A | $807,838 | $794,110 | $13,728 | 1.7% |

| SG&A as a percentage of segment net sales: | Three Months Ended August 1, 2015 | August 2, 2014 | Six Months Ended August 1, 2015 | August 2, 2014 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 27.5% | 27.3% | 27.0% | 26.4% |
| Construction segment | 2.8 | 11.2 | 2.5 | 11.5 |
| **Total SG&A as a percentage of net sales** | 26.7 | 27.2 | 26.2 | 26.2 |

SG&A decreased 45 basis points of sales during the three months ended August 1, 2015 compared to the three months ended August 2, 2014 while total SG&A dollars increased $3.8 million. SG&A from retail operations increased $4.0 million or 15 basis points of sales during the three months ended August 1, 2015 compared to the three months ended August 2, 2014. This increase was primarily due to an increase in payroll and payroll taxes ($4.7 million) and insurance expense ($2.0 million) partially offset by a decrease in advertising expense ($1.6 million).

SG&A decreased 7 basis points of sales during the six months ended August 1, 2015 compared to the six months ended August 2, 2014 while total SG&A dollars increased $13.7 million. SG&A from retail operations increased $14.1 million or 60 basis points of sales during the six months ended August 1, 2015 compared to the six months ended August 2, 2014. This increase was primarily due to an increase in payroll and payroll taxes ($13.9 million) and services purchased expense ($4.4 million) partially offset by decreased advertising expense ($2.8 million).

### Depreciation and Amortization

*(in thousands of dollars)*

| Depreciation and amortization: Three months ended | August 1, 2015 | August 2, 2014 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $60,415 | $61,983 | $(1,568) | (2.5)% |
| Construction segment | 85 | 75 | 10 | 13.3 |
| Total depreciation and amortization | $60,500 | $62,058 | $(1,558) | (2.5)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $121,477 | $123,868 | $(2,391) | (1.9)% |
| Construction segment | 176 | 149 | 27 | 18.1 |
| Total depreciation and amortization | $121,653 | $124,017 | $(2,364) | (1.9)% |

The decrease in depreciation and amortization expense for the three and six months ended August 1, 2015 compared to the three and six months ended August 2, 2014 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 | August 1, 2015 | August 2, 2014 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $14,780 | $15,212 | $(432) | (2.8)% |
| Construction segment | (15) | (9) | (6) | (66.7) |
| Total interest and debt expense, net | $14,765 | $15,203 | $(438) | (2.9)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $30,020 | $31,066 | $(1,046) | (3.4)% |
| Construction segment | (28) | (22) | (6) | (27.3) |
| Total interest and debt expense, net | $29,992 | $31,044 | $(1,052) | (3.4)% |

The decrease in net interest and debt expense for the three months ended August 1, 2015 compared to the three months ended August 2, 2014 was primarily attributable to an increase in capitalized interest. The decrease in net interest and debt expense for the six months ended August 1, 2015 compared to the six months ended August 2, 2014 was primarily attributable to an increase in capitalized interest and interest income. Total weighted average debt increased approximately $6.4 million and $3.2 million for the three and six months ended August 1, 2015 compared to the three and six months ended August 2, 2014, respectively.

### 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 34.3% and 35.4% for the three months ended August 1, 2015 and August 2, 2014, respectively. During the three months ended August 1, 2015, 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, which included benefits for legislatively-enacted state income tax rate reductions. During the three months ended August 2, 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.

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 34.6% and 35.3% for the six months ended August 1, 2015 and August 2, 2014, respectively. During the six months ended August 1, 2015 and August 2, 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.

The Company expects the fiscal 2015 federal and state effective income tax rate to approximate 35%. This rate may change if results of operations for fiscal 2015 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 six months ended August 1, 2015 and August 2, 2014 follows:

*(in thousands of dollars)*

|  | Six Months Ended August 1, 2015 | August 2, 2014 | $ Change |
| --- | ---: | ---: | ---: |
| Operating Activities | $61,974 | $133,836 | $(71,862) |
| Investing Activities | (79,452) | (64,090) | (15,362) |
| Financing Activities | (211,137) | (71,549) | (139,588) |
| Total Cash Provided | $(228,615) | $(1,803) | $(226,812) |

Net cash flows from operations decreased $71.9 million during the six months ended August 1, 2015 compared to the six months ended August 2, 2014. This decline was primarily attributable to a decrease of $63.5 million related to changes in working capital items, primarily due to increases in inventories and decreases in income taxes payable.

Synchrony Financial ("Synchrony") owned and managed Dillard’s private label credit cards under the Synchrony Alliance that expired in November 2014. Following that scheduled expiration, Wells Fargo Bank, N.A. ("Wells Fargo") purchased the Dillard's private label card portfolio from Synchrony and began managing Dillard's private label cards under a new 10-year agreement ("Wells Fargo Alliance"). Under the Wells Fargo Alliance, Wells Fargo establishes and owns private label card accounts for our customers, retains the benefits and risks associated with the ownership of the accounts, provides key customer service functions, including new account openings, transaction authorization, billing adjustments and customer inquiries, receives the finance charge income and incurs the bad debts associated with those accounts.

Pursuant to the Wells Fargo Alliance, we receive on-going cash compensation from Wells Fargo based upon the portfolio's earnings. The compensation earned on the portfolio is determined monthly and has no recourse provisions. The amount the Company receives is dependent on the level of sales on Wells Fargo accounts, the level of balances carried on Wells Fargo accounts by Wells Fargo customers, payment rates on Wells Fargo accounts, finance charge rates and other fees on Wells Fargo accounts, the level of credit losses for the Wells Fargo accounts as well as Wells Fargo's ability to extend credit to our customers. We participate in the marketing of the private label cards, which includes the cost of customer reward programs. We accept payments on the private label cards in our stores as a convenience to customers who prefer to pay in person rather than by paying online or mailing their payments to Wells Fargo. The Wells Fargo Alliance expires in fiscal 2024.

The Company received income of approximately $50.7 million and $55.7 million from the Wells Fargo Alliance and former Synchrony Alliance during the six months ended August 1, 2015 and August 2, 2014, respectively.

Capital expenditures were $87.0 million and $68.8 million for the six months ended August 1, 2015 and August 2, 2014, respectively. The current year expenditures were primarily for the construction of new stores and the remodeling of existing stores. Capital expenditures for fiscal 2015 are expected to be approximately $160 million compared to actual expenditures of $152 million during fiscal 2014.

The Company opened its new 200,000 square foot location at Fashion Place in Murray, Utah on August 8, 2015. The store replaces a 190,000 square foot location at the same center. Construction continues on the following new locations:

| Center | City | Square Feet |  | Projected 2015 Opening |
| --- | --- | ---: | --- | --- |
| Fremaux Town Center | Slidell, Louisiana | 126,000 | \* | October |
| Liberty Center | Cincinnati, Ohio | 155,000 |  | October |

\* replacement store

No stores were closed during the six months ended August 1, 2015; 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 cash proceeds from the prior year sale of a store location were originally held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts were administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash was 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 six months ended August 1, 2015, payments of $7.3 million were made from restricted cash for like-kind property.

The Company had cash on hand of $175.1 million as of August 1, 2015. In May 2015, as part of our overall liquidity management strategy and for peak working capital requirements, the Company entered into a new $1.0 billion senior unsecured revolving credit facility, replacing the secured credit facility. The new credit agreement matures on May 13, 2020 and is available to the Company for working capital needs and general corporate purposes. To be in compliance with the financial covenants of the credit agreement, the Company's total leverage ratio cannot exceed 4.0 to 1.0 and the coverage ratio cannot be less than 2.5 to 1.0.

At August 1, 2015, no borrowings were outstanding, and letters of credit totaling $28.0 million were issued under the credit agreement.

During the six months ended August 1, 2015, the Company repurchased 1.8 million shares of Class A Common Stock at an average price of $112.83 per share for $208.0 million (including the accrual of $5.0 million of share repurchases that had not settled as of August 1, 2015). During the six months ended August 2, 2014, the Company repurchased 0.7 million shares of stock for $65.9 million at an average price of $89.34 per share under the Company's stock plans. At August 1, 2015, $292.1 million of authorization remained under the Company's November 2014 Stock Plan. The ultimate disposition of the repurchased stock has not been determined.

During fiscal 2015, 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. 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 January 31, 2015.

### 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

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 12 to the accompanying 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 2015 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements concerning capital expenditures and sources of liquidity, statements concerning pension contributions and statements concerning estimated taxes. 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 January 31, 2015, 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 January 31, 2015.

## Controls and procedures

As filed, 878 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 Principal Executive Officer and Co-Principal Financial Officers, 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 Principal Executive Officer and Co-Principal Financial Officers 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 August 1, 2015 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 January 31, 2015.

Filed Sep 3, 2015.
Source: SEC EDGAR, the filing index for accession 0000028917-15-000157. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.