# Dillard'S, Inc.: Form 10-K for the period ended Jan 30, 2016

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-K
- Filed: 2016-03-23
- Accepted by EDGAR: Mar 23, 2016, 16:50 ET
- Period: 2016-01-30
- Accession: 0000028917-16-000262
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000002891716000262/dds-01302016x10k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000002891716000262/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-01-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-11-01 to 2016-01-30 | $2.07bn | us-gaap:SalesRevenueNet |
| Revenue | 12 months, 2015-02-01 to 2016-01-30 | $6.75bn | us-gaap:Revenues |
| Cost of revenue | 12 months, 2015-02-01 to 2016-01-30 | $4.35bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2015-11-01 to 2016-01-30 | $616.6m | us-gaap:GrossProfit |
| Gross profit | 12 months, 2015-02-01 to 2016-01-30 | $2.24bn | us-gaap:GrossProfit |
| Income tax | 12 months, 2015-02-01 to 2016-01-30 | $140.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-11-01 to 2016-01-30 | $84.1m | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2015-02-01 to 2016-01-30 | $269.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-11-01 to 2016-01-30 | $2.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 12 months, 2015-02-01 to 2016-01-30 | $6.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 12 months, 2015-02-01 to 2016-01-30 | $6.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 12 months, 2015-02-01 to 2016-01-30 | 39,005,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 12 months, 2015-02-01 to 2016-01-30 | $450.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 12 months, 2015-02-01 to 2016-01-30 | $165.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 12 months, 2015-02-01 to 2016-01-30 | $10.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 12 months, 2015-02-01 to 2016-01-30 | $500.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-01-30 | $202.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-01-30 | $1.67bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-01-30 | $3.87bn | us-gaap:Assets |
| Current liabilities | at 2016-01-30 | $751.2m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-01-30 | $614.8m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2016-01-30 | $1.80bn | us-gaap:StockholdersEquity |

## Business

As filed, 9,579 characters.

Dillard's, Inc. ("Dillard's", the "Company", "we", "us", "our" or "Registrant") ranks among the nation's largest fashion apparel, cosmetics and home furnishing retailers. The Company, originally founded in 1938 by William T. Dillard, was incorporated in Delaware in 1964. As of January 30, 2016, we operated 297 Dillard's stores, including 24 clearance centers, and an Internet store offering a wide selection of merchandise including fashion apparel for women, men and children, accessories, cosmetics, home furnishings and other consumer goods. The Company also operates a general contracting construction company, CDI Contractors, LLC ("CDI"), a portion of whose business includes constructing and remodeling stores for the Company.

The following table summarizes the percentage of net sales by segment and major product line:

| Retail operations segment: | Percentage of Net Sales Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Cosmetics | 14% | 14% | 15% |
| Ladies' apparel | 22 | 22 | 22 |
| Ladies' accessories and lingerie | 16 | 16 | 16 |
| Juniors' and children's apparel | 8 | 9 | 8 |
| Men's apparel and accessories | 17 | 17 | 17 |
| Shoes | 16 | 16 | 16 |
| Home and furniture | 4 | 4 | 5 |
|  | 97 | 98 | 99 |
| Construction segment | 3 | 2 | 1 |
| Total | 100% | 100% | 100% |

Additional information regarding our business, results of operations and financial condition, including information pertaining to our reporting segments, can be found in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 hereof and in Note 2 in the "Notes to Consolidated Financial Statements" in Item 8 hereof.

We operate retail department stores in 29 states, primarily in the southwest, southeast and midwest regions of the United States. Most of our stores are located in suburban shopping malls and open-air centers. Customers may also purchase our merchandise on-line at our website, www.dillards.com, which features on-line gift registries and a variety of other services.

Our retail merchandise business is conducted under highly competitive conditions. Although we are a large regional department store, we have numerous competitors at the national and local level that compete with our individual stores, including specialty, off-price, discount and Internet retailers. Competition is characterized by many factors including location, reputation, merchandise assortment, advertising, price, quality, operating efficiency, service and credit availability. We believe that our stores are in a strong competitive position with regard to each of these factors. Other retailers may compete for customers on some or all of these factors, or on other factors, and may be perceived by some potential customers as being better aligned with their particular preferences.

Our merchandise selections include, but are not limited to, our lines of exclusive brand merchandise such as Antonio Melani, Gianni Bini, GB, Roundtree & Yorke and Daniel Cremieux. Our exclusive brands/private label merchandise program provides benefits for Dillard's and our customers. Our customers receive fashionable, higher quality product often at a savings compared to national brands. Our private label merchandise program allows us to ensure the Company's high standards are achieved, while minimizing costs and differentiating our merchandise offerings from other retailers.

We have made a significant investment in our trademark and license portfolio, in terms of design function, advertising, quality control and quick response to market trends in a quality manufacturing environment. Dillard's trademark registrations are maintained for as long as Dillard's holds the exclusive right to use the trademarks on the listed products.

Our merchandising, sales promotion and store operating support functions are conducted primarily at our corporate headquarters. Our back office sales support functions, such as accounting, product development, store planning and information technology, are also centralized.

We have developed a knowledge of each of our trade areas and customer bases for our stores. This knowledge is enhanced through regular store visits by senior management and merchandising personnel and through the use of on-line merchandise information and is supported by our regional merchandising offices. We will continue to use existing technology and research to edit merchandise assortments by store to meet the specific preference, taste and size requirements of each local operating area.

Certain departments in our stores are licensed to independent companies in order to provide high quality service and merchandise where specialization, focus and expertise are critical. The licensed departments vary by store to complement our own merchandising departments. The principal licensed department is an upscale women's apparel vendor in certain stores. The terms of the license agreements typically range between three and five years with one year renewals and require the licensee to pay for fixtures and to provide their own employees. We regularly evaluate the performance of the licensed departments and require compliance with established customer service guidelines.

Synchrony Financial ("Synchrony"; formerly GE Consumer Finance) owned and managed Dillard's private label credit cards, including credit cards co-branded with American Express (collectively "private label cards"), under a long-term marketing and servicing alliance ("Synchrony Alliance") that expired in November 2014. Following this 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. We participate in the marketing of the private label cards and 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.

We seek to expand the number and use of the private label 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 accounts are rewarded with discounts on future purchases. Private label card customers are sometimes offered private shopping nights, direct mail catalogs, special discounts and advance notice of sale events. Wells Fargo maintains the loyalty program that rewards customers for private label card usage.

Our earnings depend to a significant extent on the results of operations for the last quarter of our fiscal year. Due to holiday buying patterns, sales for that period average approximately one-third of annual sales.

As of January 30, 2016, we employed approximately 40,000 full-time and part-time associates, of which approximately 47% were part-time. The number of associates varies during the year, especially during peak seasonal selling periods.

We purchase merchandise from many sources and do not believe that we are dependent on any one supplier. We have no long-term purchase commitments or arrangements with any of our suppliers, but we consider our relationships to be strong and mutually beneficial.

Our fiscal year ends on the Saturday nearest January 31 of each year. Fiscal years 2015, 2014 and 2013 ended January 30, 2016, January 31, 2015 and February 1, 2014, respectively, and each contained 52 weeks.

The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K (this "Annual Report") and should not be considered to be a part of this Form 10-K. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of changes in beneficial ownership of securities on Form 4 and Form 5 and amendments to those reports filed or furnished pursuant to Section 13(a), 15(d) or 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable, are available free of charge (as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC) on the Dillard's, Inc. website: www.dillards.com.

We have adopted a Code of Conduct and Corporate Governance Guidelines, as required by the listing standards of the New York Stock Exchange and the rules of the SEC. We have posted on our website our Code of Conduct, Corporate Governance Guidelines, Social Accountability Policy, our most recent Social Accountability Report and committee charters for the Audit Committee of the Board of Directors and the Stock Option and Executive Compensation Committee of the Board of Directors.

Our corporate offices are located at 1600 Cantrell Road, Little Rock, Arkansas 72201, telephone: 501-376-5200.

## Risk factors

As filed, 28,546 characters.

The risks described in this Item 1A, Risk Factors, of this Annual Report could materially and adversely affect our business, financial condition and results of operations.

The Company cautions that forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, contained in this Annual Report on Form 10-K are based on estimates, projections, beliefs and assumptions of 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.

***The retail merchandise business is highly competitive, and that competition could lower our revenues, margins and market share.***

We conduct our retail merchandise business under highly competitive conditions. Competition is characterized by many factors including location, reputation, fashion, merchandise assortment, advertising, operating efficiency, price, quality, customer service and credit availability. We have numerous competitors nationally, locally and on the Internet, including conventional department stores, specialty retailers, off-price and discount stores, boutiques, mass merchants, and Internet and mail-order retailers. Although we are a large regional department store, some of our competitors are larger than us with greater financial resources and, as a result, may be able to devote greater resources to sourcing, promoting and selling their products. Additionally, we compete in certain markets with a substantial number of retailers that specialize in one or more types of merchandise that we sell. In recent years, competition has intensified as a result of reduced discretionary consumer spending, increased promotional activity, deep price discounting, and few barriers to entry. Also, online retail shopping continues to rapidly evolve, and we continue to expect competition in the e-commerce market to intensify in the future as the Internet facilitates competitive entry and comparison shopping. We anticipate that intense competition will continue from both existing competitors and new entrants. If we are unable to maintain our competitive position, we could experience downward pressure on prices, lower demand for products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share.

***Changes in economic, financial and political conditions, and the resulting impact on consumer confidence and consumer spending, could have an adverse effect on our business and results of operations.***

The retail merchandise business is highly sensitive to changes in overall economic and political conditions that impact consumer confidence and spending. Various economic conditions affect the level of disposable income consumers have available to spend on the merchandise we offer, including unemployment rates, interest rates, taxation, energy costs, the availability of consumer credit, the price of gasoline, consumer confidence in future economic conditions and general business conditions. Due to the Company's concentration of stores in energy producing regions, recent declining conditions in these regions could adversely affect the Company's sales. Consumer purchases of discretionary items and other retail products generally decline during recessionary periods, and also may decline at other times when changes in consumer spending patterns affect us unfavorably. In addition, any significant decreases in shopping mall traffic could also have an adverse effect on our results of operations.

***Our business is dependent upon our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors.***

Our sales and operating results depend in part on our ability to effectively predict and quickly respond to changes in fashion trends and customer preferences. We continuously assess emerging styles and trends and focus on developing a merchandise assortment to meet customer preferences at competitive prices. Even with these efforts, we cannot be certain that we will be able to successfully meet constantly changing fashion trends and customer preferences. If we are unable to successfully predict or respond to changing styles or preferences, we may be faced with lower sales, increased inventories, additional markdowns or promotional sales to dispose of excess or slow-moving inventory, and lower gross margins, all of which would have an adverse effect on our business, financial condition, and results of operations. Additionally, failure to respond rapidly to changing trends could impact our reputation with customers and diminish brand and customer loyalty.

***Our failure to protect our reputation could have an adverse effect on our business.***

We offer our customers quality products at competitive prices and a high level of customer service, resulting in a well-recognized brand and customer loyalty. Any significant damage to our brand or reputation could negatively impact sales, diminish customer trust and generate negative sentiment, any of which would harm our business and results of operation.

***Fluctuations in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of goods and negatively impact our financial results.***

Fluctuations in the price and availability of fuel, labor and raw materials, combined with the inability to mitigate or to pass cost increases on to our customers or to change our merchandise mix as a result of such cost increases, could have an adverse impact on our profitability. Attempts to pass such costs along to our customers, however, might cause a decline in our sales volume. Additionally, any decrease in the availability of raw materials could impair our ability to meet our purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs.

***Third party suppliers on whom we rely to obtain materials and provide production facilities may experience financial difficulties due to current and future economic and political conditions.***

Our suppliers may experience financial difficulties due to a downturn in the industry or in other macroeconomic environments. Our suppliers' cash and working capital needs can be adversely impacted by the increased cost and lower availability of merchandise, raw materials, fuel and labor. Current and future economic conditions may prevent our suppliers from obtaining financing on favorable terms, which could impact their ability to supply us with merchandise on a timely basis. Similarly, political or financial instability, changes in U.S. and foreign laws and regulations affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws and regulations, as well as currency exchange rates, transport capacity and costs and other factors relating to foreign trade and the inability to access suitable merchandise on acceptable terms could adversely impact our results of operations.

***An increase in the cost or a disruption in the flow of our imported goods could decrease our sales and profits.***

We source many of our products from vendors in countries outside of the United States. Any disruption in the flow of imported merchandise, including strikes at ports at home or abroad, or an increase in the cost of those goods may harm our business and decrease our profitability.

All of our suppliers must comply with our supplier compliance programs and applicable laws, including consumer and product safety laws, but we do not control our vendors or their labor and business practices. The violation of labor or other laws by one of our vendors could have an adverse effect on our business. Additionally, although we diversify our sourcing and production, the failure of any supplier to produce and deliver our goods on time, to meet our quality standards and adhere to our product safety requirements or to meet the requirements of our supplier compliance program or applicable laws, could impact our ability to flow merchandise to our stores or directly to consumers in the right quantities at the right time, which could adversely affect our profitability and could result in damage to our reputation and translate into sales losses.

***A decrease in cash flows from our operations and constraints to accessing other financing sources could limit our ability to fund our operations, capital projects, interest and debt repayments, stock repurchases and dividends.***

Our business depends upon our operations to generate strong cash flow and to some extent upon the availability of financing sources to supply capital to fund our general operating activities, capital projects, interest and debt repayments, stock repurchases and dividends. Our inability to continue to generate sufficient cash flows to support these activities or the lack of available financing in adequate amounts and on appropriate terms when needed could adversely affect our financial performance including our earnings per share.

***Reductions in the income and cash flow from our long-term marketing and servicing alliance related to our private label credit cards could impact operating results and cash flows.***

Wells Fargo owns and manages our private label credit cards under the Wells Fargo Alliance. The Wells Fargo Alliance provides for certain payments to be made by Wells Fargo to the Company, including the Company's share of revenues under this alliance. The income and cash flow that the Company receives from the Wells Fargo Alliance is dependent upon a number of factors including the level of sales on Wells Fargo accounts, the level of balances carried on the 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, Wells Fargo's ability to extend credit to our customers as well as the cost of customer rewards programs, all of which can vary based on changes in federal and state banking and consumer protection laws and from a variety of economic, legal, social and other factors that we cannot control. If the income or cash flow that the Company receives from the Wells Fargo Alliance decreases, our operating results and cash flows could be adversely affected.

Credit card operations are subject to numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing, and enforcement of credit accounts, and limitations on the amount of finance charges and fees that may be charged by a credit card provider. Wells Fargo may be subject to regulations that may adversely impact its operation of our private label credit card. To the extent that such limitations or regulations materially limit the availability of credit or increase the cost of credit to our cardholders or negatively impact provisions which affect our revenue streams associated with our private label credit card, our results of operations could be adversely affected. In addition, changes in credit card use, payment patterns, or default rates could be affected by a variety of economic, legal, social, or other factors over which we have no control and cannot predict with certainty. Such changes could also negatively impact our ability to facilitate consumer credit or increase the cost of credit to our cardholders.

***Our business is seasonal, and fluctuations in our revenues during the last quarter of our fiscal year can have a disproportionate effect on our results of operations.***

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. Our fiscal fourth-quarter results may fluctuate significantly, based on many factors, including holiday spending patterns and weather conditions, and any such fluctuation could have a disproportionate effect on our results of operations for the entire fiscal year. Because of the seasonality of our business, our operating results vary considerably from quarter to quarter, and results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

***A shutdown of, or disruption in, any of the Company's distribution or fulfillment centers would have an adverse effect on the Company's business and operations.***

Our business depends on the orderly operation of the process of receiving and distributing merchandise, which relies on adherence to shipping schedules and effective management of distribution centers. Although we believe that our receiving and distribution process is efficient and that we have appropriate contingency plans, unforeseen disruptions in operations due to fire, severe weather conditions, natural disasters, or other catastrophic events, labor disagreements, or other shipping problems may result in the loss of inventory and/or delays in the delivery of merchandise to our stores and customers.

***Current store locations may become less desirable, and desirable new locations may not be available for a reasonable price, if at all, either of which could adversely affect our results of operations.***

In order to generate customer traffic and for convenience of our customers, we locate our stores in desirable locations within shopping malls and open air centers. Our stores benefit from the abilities that our Company, other anchor tenants and other area attractions have to generate consumer traffic. They also benefit from the continuing popularity of shopping malls as shopping destinations. Adverse changes in the development of new shopping malls in the United States, the availability or cost of appropriate locations within existing or new shopping malls, competition with other retailers for prominent locations, the success of individual shopping malls and the success or failure of other anchor tenants, or the continued popularity of shopping malls may impact our ability to maintain or grow our sales in our existing stores, as well as our ability to open new stores, which could have an adverse effect on our financial condition or results of operations.

***Ownership and leasing of significant amounts of real estate exposes us to possible liabilities and losses.***

We own the land and building, or lease the land and/or the building, for all of our stores. Accordingly, we are subject to all of the risks associated with owning and leasing real estate. In particular, the value of our real estate assets could decrease, and their operating costs could increase, because of changes in the investment climate for real estate, demographic trends and supply or demand for the use of the store, which may result from competition from similar stores in the area. Additionally, we are subject to potential liability for environmental conditions on the property that we own or lease. If an existing owned store is not profitable, and we decide to close it, we may be required to record an impairment charge and/or exit costs associated with the disposal of the store. We generally cannot cancel our leases. If an existing or future store is not profitable, and we decide to close it, we may be committed to perform certain obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of the leases expires, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. We may not be able to close an unprofitable owned store due to an existing operating covenant which may cause us to operate the location at a loss and prevent us from finding a more desirable location. We have approximately 75 stores along the Gulf and Atlantic coasts that are covered by third party insurance but are self-insured for property and merchandise losses related to "named storms"; therefore, repair and replacement costs will be borne by us for damage to any of these stores from "named storms".

***A privacy breach could adversely affect our business, reputation and financial condition.***

We receive certain personal information about our employees and our customers, including information permitting cashless payments, both in our stores and through our online operations at www.dillards.com. In addition, our online operations depend upon the secure transmission of confidential information over public networks.

We have a longstanding Information Security Program committed to regular risk assessment practices surrounding the protection of confidential data. This program includes network segmentation and access controls around the computer resources that house confidential data. We continue to evaluate the security environment surrounding the handling and control of our critical data, especially the private data we receive from our customers, and we institute additional measures to help protect us from a privacy breach.

Despite our security measures, it is possible that unauthorized persons (through cyberattacks, which are evolving and becoming increasingly sophisticated, physical breach or other means) might defeat our security measures, those of Wells Fargo or of our other third party service providers or vendors, and obtain personal information of customers, employees or others. We have purchased Network Security and Cyber Liability insurance to provide some financial protection should a privacy breach occur; however, such a compromise, whether in our information security system or our third party service providers or vendors, resulting in personal information being obtained by unauthorized persons could adversely affect our reputation with our customers, employees and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in a disruption of our operations, particularly our online sales operations.

***Litigation with customers, employees and others could harm our reputation and impact operating results.***

In the ordinary course of business, we may be involved in lawsuits and regulatory actions. We are impacted by trends in litigation, including, but not limited to, class-action allegations brought under various consumer protection, employment, and privacy and information security laws. Additionally, we may be subject to employment-related claims alleging discrimination, harassment, wrongful termination and wage issues, including those relating to overtime compensation. We are susceptible to claims filed by customers alleging responsibility for injury suffered during a visit to a store or from product defects, and we are also subject to lawsuits filed by patent holders alleging patent infringement. These types of claims, as well as other types of lawsuits to which we are subject from time to time, can distract management's attention from core business operations and impact operating results, particularly if a lawsuit results in an unfavorable outcome.

### Our profitability may be adversely impacted by weather conditions.

Our merchandise assortments reflect assumptions regarding expected weather patterns and our profitability depends on our ability to timely deliver seasonally appropriate inventory. Unexpected or unseasonable weather conditions could render a portion of our inventory incompatible with consumer needs. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of the Company's inventory incompatible with those unseasonable conditions. Additionally, extreme weather or natural disasters, particularly in the areas in which our stores are located, could also severely hinder our ability to timely deliver seasonally appropriate merchandise. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for the Company's customers to travel to its stores and thereby reduce the Company's sales and profitability. A reduction in the demand for or supply of our seasonal merchandise or reduced sales due to reduced customer traffic in our stores could have an adverse effect on our inventory levels, gross margins and results of operations.

***Natural disasters, war, acts of terrorism, other armed conflicts, and public health issues may adversely impact our business.***

The occurrence of, or threat of, a natural disaster, war, acts of terrorism, other armed conflicts, and public health issues could disrupt our operations, disrupt international trade and supply chain efficiencies, suppliers or customers, or result in political or economic instability. If commercial transportation is curtailed or substantially delayed our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers, fulfillment centers, stores, or directly to customers. As a result of the occurrence of, or threat of, a natural disaster or acts of terrorism in the United States, we may be required to suspend operations in some or all of our stores, which could have a material adverse impact on our business, financial condition, and results of operations.

***Increases in the cost of employee benefits could impact the Company's financial results and cash flows.***

The Company's expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could impact the Company's financial results and cash flows. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. Many of our employees who currently choose not to participate in our healthcare plans may find it more advantageous to do so as a result of recent changes to healthcare laws in the United States. Such changes include potential penalties on persons for not obtaining healthcare coverage. Additionally, employees may be ineligible for certain healthcare subsidies if such employee is eligible and offered qualifying and affordable healthcare coverage under an employer's plan. If a large portion of eligible employees who currently choose not to participate in our plans choose to enroll as a result of the law change, it may significantly increase our healthcare coverage costs, or we may not be able to offer competitive health care benefits to attract and retain employees; either of which could have an adverse effect on our reputation and have a negative impact on our financial results.

***The Company depends on its ability to attract and retain quality employees, and failure to do so could adversely affect our ability to execute our business strategy and our operating results.***

The Company's business is dependent upon attracting and retaining quality employees. The Company has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. The Company's ability to meet its labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, changing demographics, prevailing wage rates, and current or future minimum wage and health care reform legislation. In addition, as a complex enterprise operating in a highly competitive and challenging business environment, the Company is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any circumstances that adversely impact the Company's ability to attract, train, develop and retain quality employees throughout the organization could adversely affect the Company's business and results of operations.

***Variations in the amount of vendor allowances received could adversely impact our operating results.***

We receive vendor allowances for advertising, payroll and margin maintenance that are a strategic part of our operations. A reduction in the amount of cooperative advertising allowances would likely cause us to consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase/decrease our expenditures and/or revenue. Decreased payroll reimbursements would either cause payroll costs to rise, negatively impacting operating income, or cause us to reduce the number of employees, which may cause a decline in sales. A decline in the amount of margin maintenance allowances would either increase cost of sales, which would negatively impact gross margin and operating income, or cause us to reduce merchandise purchases, which may cause a decline in sales.

***Our operations are dependent on information technology systems, and disruptions in those systems could have an adverse impact on our results of operations.***

Our operations are dependent upon the integrity, security and consistent operation of various systems and data centers, including the point-of-sale systems in the stores, our Internet website, data centers that process transactions, communication systems and various software applications used throughout our Company to track inventory flow, process transactions and generate performance and financial reports. The Company's computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyberattack or other security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by the Company's employees. If the Company's computer systems are damaged or cease to function properly, the Company may have to make a significant investment to repair or replace them, and the Company may suffer loss of critical data and interruptions or delays in its operations in the interim. Any material interruption in the Company's computer systems could adversely affect its business or results of operations. Additionally, to keep pace with changing technology, we must continuously provide for the design and implementation of new information technology systems and enhancements of our existing systems. We could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses or to losses due to disruption in business operations.

***The percentage-of-completion method of accounting that we use to recognize contract revenues for our construction segment may result in material adjustments, which could result in a charge against our earnings.***

Our construction segment recognizes contract revenues using the percentage-of-completion method. Under this method, estimated contract revenues are recognized by applying the percentage of completion of the project for the period to the total estimated revenues for the contract. Estimated contract losses are recognized in full when determined. Total contract revenues and cost estimates are reviewed and revised at a minimum on a quarterly basis as the work progresses and as change orders are approved. Adjustments based upon the percentage of completion are reflected in contract revenues in the period when these estimates are revised. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we are required to recognize a credit or a charge against current earnings, which could be material.

## Properties

As filed, 2,661 characters.

All of our stores are owned by us or leased from third parties. At January 30, 2016, we operated 297 stores in 29 states totaling approximately 50.1 million square feet of which we owned approximately 44.4 million square feet. Our third-party store leases typically provide for rental payments based on a percentage of net sales with a guaranteed minimum annual rent. In general, the Company pays the cost of insurance, maintenance and real estate taxes related to the leases.

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, 2016:

| Location | Number of stores | Owned Stores | Leased Stores | Owned Building on Leased Land | Partially Owned and Partially Leased |
| --- | ---: | ---: | ---: | ---: | ---: |
| Alabama | 9 | 9 | — | — | — |
| Arkansas | 8 | 7 | — | — | 1 |
| Arizona | 17 | 16 | — | 1 | — |
| California | 3 | 3 | — | — | — |
| Colorado | 7 | 7 | — | — | — |
| Florida | 42 | 39 | 1 | 2 | — |
| Georgia | 12 | 8 | 3 | 1 | — |
| Iowa | 5 | 5 | — | — | — |
| Idaho | 2 | 2 | — | — | — |
| Illinois | 3 | 3 | — | — | — |
| Indiana | 3 | 3 | — | — | — |
| Kansas | 6 | 3 | 1 | 2 | — |
| Kentucky | 6 | 5 | 1 | — | — |
| Louisiana | 15 | 14 | 1 | — | — |
| Missouri | 10 | 7 | 1 | 2 | — |
| Mississippi | 6 | 4 | 1 | 1 | — |
| Montana | 2 | 2 | — | — | — |
| North Carolina | 14 | 13 | 1 | — | — |
| Nebraska | 3 | 2 | 1 | — | — |
| New Mexico | 6 | 3 | 3 | — | — |
| Nevada | 5 | 5 | — | — | — |
| Ohio | 14 | 11 | 3 | — | — |
| Oklahoma | 10 | 6 | 4 | — | — |
| South Carolina | 8 | 8 | — | — | — |
| Tennessee | 10 | 8 | 1 | — | 1 |
| Texas | 59 | 43 | 10 | 1 | 5 |
| Utah | 5 | 4 | 1 | — | — |
| Virginia | 6 | 5 | — | 1 | — |
| Wyoming | 1 | 1 | — | — | — |
| Total | 297 | 246 | 33 | 11 | 7 |

8

At January 30, 2016, we operated the following additional facilities:

| Facility | Location | Square Feet | Owned / Leased |
| --- | --- | ---: | --- |
| Distribution Centers: | Mabelvale, AR | 400,000 | Owned |
|  | Gilbert, AZ | 295,000 | Owned |
|  | Valdosta, GA | 370,000 | Owned |
|  | Olathe, KS | 500,000 | Owned |
|  | Salisbury, NC | 355,000 | Owned |
|  | Ft. Worth, TX | 700,000 | Owned |
| Internet Fulfillment Center | Maumelle, AR | 850,000 | Owned |
| Dillard's Executive Offices | Little Rock, AR | 333,000 | Owned |
| CDI Contractors, LLC Executive Office | Little Rock, AR | 25,000 | Owned |
| CDI Storage Facilities | Maumelle, AR | 66,000 | Owned |
| Total |  | 3,894,000 |  |

Additional property information is contained in Notes 1, 12 and 13 in the "Notes to Consolidated Financial Statements," in Item 8 hereof.

## Legal proceedings

As filed, 488 characters.

From time to time, the Company is involved in litigation relating to claims arising out of the Company's operations in the normal course of business. This may include litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of March 23, 2016, neither the Company nor any of its subsidiaries is a party to, nor is any of their property the subject of, any material legal proceedings.

## Management's discussion and analysis

As filed, 57,259 characters.

Dillard's, Inc. operates 297 retail department stores spanning 29 states and an Internet store. The Company also operates a general contractor, CDI, a portion of whose business includes constructing and remodeling stores for the Company, which is a reportable segment separate from our retail operations.

In accordance with the National Retail Federation fiscal reporting calendar and our bylaws, the fiscal 2015, 2014 and 2013 reporting periods presented and discussed below ended January 30, 2016, January 31, 2015 and February 1, 2014, respectively, and each contained 52 weeks.

### EXECUTIVE OVERVIEW

### Fiscal 2015

The Company's performance during fiscal 2015 was difficult. Sales were less than planned, but the Company worked to control inventory during an unusually competitive environment. Comparable retail sales decreased 2% over last year, and gross profit from retail operations decreased 107 basis points of net retail sales as a result of increased markdowns. Consolidated selling, general and administrative expenses increased 19 basis points of net sales, primarily as a result of increased selling payroll, which was partially offset by decreased advertising expense. Net income decreased to $269.4 million, or $6.91 per share, during fiscal 2015 from $331.9 million, or $7.79 per share, in the prior year.

Included in net income for fiscal 2015 is a pre-tax gain of $12.6 million ($8.1 million after tax or $0.21 per share) related to the sale of four retail store locations.

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

During fiscal 2015, the Company repurchased $500 million, or 5.3 million shares, of Class A Common Stock under the November 2014 Stock Plan, with no authorization remaining at January 30, 2016.

As of January 30, 2016, we had working capital of $917.7 million (including cash and cash equivalents of $202.9 million) and $814.8 million of total debt outstanding, excluding capital lease obligations, with no scheduled maturities until late fiscal 2017. We operated 273 Dillard's locations, 24 clearance centers and one Internet store as of January 30, 2016.

### Key Performance Indicators

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

|  | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Net sales (in millions) | $6,595.6 | $6,621.1 | $6,531.6 |
| Gross profit (in millions) | $2,244.8 | $2,348.4 | $2,307.9 |
| Gross profit as a percentage of net sales | 34.0% | 35.5% | 35.3% |
| Retail gross profit as a percentage of net sales | 35.0% | 36.1% | 35.7% |
| Selling, general and administrative expenses as a percentage of net sales | 25.3% | 25.1% | 25.0% |
| Cash flow from operations (in millions) | $450.2 | $611.6 | $501.8 |
| Total retail store count at end of period | 297 | 297 | 296 |
| Retail sales per square foot | $130 | $131 | $130 |
| Retail stores sales trend | (2)% | 1% | 1% |
| Comparable retail store sales trend | (2)% | 1% | 1% |
| Comparable retail store inventory trend | —% | 2% | 5% |
| Retail merchandise inventory turnover | 2.7 | 2.8 | 2.8 |

### Trends and Uncertainties

Fluctuations in the following key trends and uncertainties may have a material effect on our operating results.

- Cash flow—Cash from operating activities is a primary source of our liquidity that is adversely affected when the retail industry faces economic challenges. Furthermore, operating cash flow can be negatively affected by competitive factors.
- Pricing—If our customers do not purchase our merchandise offerings in sufficient quantities, we respond by taking markdowns. If we have to reduce our retail selling prices, the cost of sales on our consolidated statement of income will correspondingly rise, thus reducing our income and cash flow.
- Success of brand—The success of our exclusive brand merchandise as well as merchandise we source from national vendors is dependent upon customer fashion preferences and how well we can predict and anticipate trends.
- Sourcing—Our store merchandise selection is dependent upon our ability to acquire appealing products from a number of sources. Our ability to attract and retain compelling vendors as well as in-house design talent, the adequacy and stable availability of materials and production facilities from which we source our merchandise and the speed at which we can respond to customer trends and preferences all have a significant impact on our merchandise mix and, thus, our ability to sell merchandise at profitable prices.
- Store growth—Our ability to open new stores is dependent upon a number of factors, such as the identification of suitable markets and locations and the availability of shopping developments, especially in a weak economic environment. Store growth can be further hindered by mall attrition and subsequent closure of underperforming properties.

### 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.

### 2016 Guidance

A summary of management's estimates of key financial measures for fiscal 2016 is shown below.

*(in millions of dollars)*

|  | Fiscal 2016 Estimated | Fiscal 2015 Actual |
| --- | ---: | ---: |
| Depreciation and amortization | $250 | $250 |
| Rentals | 27 | 27 |
| Interest and debt expense, net | 61 | 61 |
| Capital expenditures | 150 | 166 |

### General

**Net sales.** Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of 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 changes 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 include income generated through the Wells Fargo Alliance and former 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, 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 net gain or loss on the sale or disposal of investments.

**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. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

**Income on and equity in losses of joint ventures.** Income on and equity in losses 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.

### Critical Accounting Policies and Estimates

The Company's significant accounting policies are also described in Note 1 in the "Notes to Consolidated Financial Statements" in Item 8 hereof. As disclosed in that note, the preparation of financial 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 evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Since future events and their effects cannot be determined with absolute certainty, actual results could differ from those estimates.

Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Company's consolidated financial statements.

**Merchandise inventory.** Approximately 96% of the Company's inventories are valued at the lower of cost or market using the last-in, first-out ("LIFO") retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. The retail inventory method is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the retail inventory method calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. During periods of deflation, inventory values on the first-in, first-out ("FIFO") retail inventory method may be lower than the LIFO retail inventory method. Additionally, inventory values at LIFO cost may be in excess of net realizable value. At January 30, 2016 and January 31, 2015, merchandise inventories valued at LIFO, including adjustments as necessary to record inventory at the lower of cost or market, approximated the cost of such inventories using the FIFO retail inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales for fiscal 2015, 2014 or 2013. The remaining 4% of the inventories are valued at the lower of cost or market using the average cost or specific identified cost methods. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $11 million for fiscal 2015.

The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of merchandise inventory. Complete physical inventories of all of the Company's stores and warehouses are performed no less frequently than annually, with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts. The differences between the estimated amounts of shrinkage and the actual amounts realized during the past three years have not been material.

**Revenue recognition.** The Company's retail operations segment recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns of merchandise. The provision for sales returns is based on historical evidence of our return rate. We recorded an allowance for sales returns of $4.9 million and $5.0 million as of January 30, 2016 and January 31, 2015, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision were not material for fiscal years 2015, 2014 or 2013.

The Company's share of income earned under the Wells Fargo Alliance and former Synchrony Alliance involving the Dillard's branded private label credit cards is included as a component of service charges and other income. The Company received income of approximately $105 million, $112 million and $113 million from the alliances in fiscal 2015, 2014 and 2013, respectively. The Company participates in the marketing of the private label credit cards and accepts payments on the private label credit cards in its stores as a convenience to customers who prefer to pay in person rather than by paying online or mailing their payments to Wells Fargo.

Revenues from CDI construction contracts are generally recognized by applying percentages of completion for each period to the total estimated revenue for the respective contracts. The length of each contract varies but is typically nine to eighteen months. The percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. Any anticipated losses on completed contracts are recognized as soon as they are determined.

**Vendor allowances.** The Company receives concessions from vendors through a variety of programs and arrangements, including co-operative advertising, payroll reimbursements and margin maintenance programs.

Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. Similarly, we are not able to assess the impact of vendor advertising allowances on creating additional revenues, as such allowances do not directly generate revenues for our stores.

Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred.

Amounts of margin maintenance allowances are recorded only when an agreement has been reached with the vendor and the collection of the concession is deemed probable. All such merchandise margin maintenance allowances are recognized as a reduction of cost purchases. Under the retail inventory method, a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory.

**Insurance accruals.** The Company's consolidated balance sheets include liabilities with respect to claims for self-insured workers' compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $1 million per claim and a one-time $1 million corridor). The Company's retentions are insured through a wholly-owned captive insurance subsidiary. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As of January 30, 2016 and January 31, 2015, insurance accruals of $44.4 million and $45.9 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. Adjustments resulting from changes in historical loss trends have helped control expenses during fiscal 2015 and 2014, partially due to Company programs that have helped decrease both the number and cost of claims. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. A 10% change in our self-insurance reserve would have affected net earnings by $3.0 million for fiscal 2015.

**Long-lived assets.** The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

- Significant changes in the manner of our use of assets or the strategy for the overall business;
- Significant negative industry or economic trends;
- A current-period operating or cash flow loss combined with a history of operating or cash flow losses; and
- Store closings.

The Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company's strategies change, the conclusion regarding impairment may differ from the current estimates.

**Income taxes.** Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management's estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company's actual results differ from estimated results due to changes in tax laws, changes in store locations, settlements of tax audits or tax planning, the Company's effective tax rate and tax balances could be affected. As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change. Changes in the Company's assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.

The total amount of unrecognized tax benefits as of January 30, 2016 and January 31, 2015 was $4.3 million and $4.8 million, respectively, of which $2.5 million and $2.6 million, respectively, would, if recognized, affect the Company's effective tax rate. The Company does not expect a significant change in unrecognized tax benefits in the next twelve months. The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements as income tax expense. The total amounts of interest and penalties were not material.

The fiscal tax years that remain subject to examination for the federal tax jurisdiction are 2013 and forward and for major state tax jurisdictions are 2012 and forward. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company's consolidated financial statements.

**Pension obligations.** The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup Above Median Pension Index Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate increased to 4.2% as of January 30, 2016 from 3.5% as of January 31, 2015. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $184.8 million is appropriately stated as of January 30, 2016; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would increase or decrease the pension liability by approximately $12.6 million. The Company expects to make a contribution to the pension plan of approximately $4.0 million in fiscal 2016. The Company expects pension expense to be approximately $12.8 million in fiscal 2016 with a liability of $193.6 million at January 28, 2017.

### RESULTS OF OPERATIONS

The following table sets forth the results of operations and percentage of net sales, for the periods indicated:

*(in thousands of dollars)*

|  | For the years ended January 30, 2016 Amount | % of Net Sales | January 31, 2015 Amount | % of Net Sales | February 1, 2014 Amount | % of Net Sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $6,595,626 | 100.0% | $6,621,054 | 100.0% | $6,531,647 | 100.0% |
| Service charges and other income | 158,919 | 2.4 | 159,075 | 2.4 | 160,130 | 2.5 |
|  | 6,754,545 | 102.4 | 6,780,129 | 102.4 | 6,691,777 | 102.5 |
| Cost of sales | 4,350,805 | 66.0 | 4,272,605 | 64.5 | 4,223,715 | 64.7 |
| Selling, general and administrative expenses | 1,669,916 | 25.3 | 1,663,859 | 25.1 | 1,632,036 | 25.0 |
| Depreciation and amortization | 250,011 | 3.8 | 250,683 | 3.8 | 255,490 | 3.9 |
| Rentals | 26,732 | 0.4 | 26,977 | 0.4 | 26,833 | 0.4 |
| Interest and debt expense, net | 60,923 | 0.9 | 61,306 | 0.9 | 64,505 | 1.0 |
| Gain on disposal of assets | (12,626) | (0.2) | (6,069) | (0.1) | (12,379) | (0.2) |
| Asset impairment and store closing charges | — | — | — | 0.0 | 5,353 | 0.1 |
| Income before income taxes and income on and equity in losses of joint ventures | 408,784 | 6.2 | 510,768 | 7.7 | 496,224 | 7.6 |
| Income taxes | 140,770 | 2.1 | 179,480 | 2.7 | 173,400 | 2.7 |
| Income on and equity in losses of joint ventures | 1,356 | — | 565 | — | 847 | — |
| Net income | $269,370 | 4.1% | $331,853 | 5.0% | $323,671 | 5.0% |

21

### Sales

*(in thousands of dollars)*

| Net sales: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $6,388,769 | $6,490,387 | $6,439,304 |
| Construction segment | 206,857 | 130,667 | 92,343 |
| Total net sales | $6,595,626 | $6,621,054 | $6,531,647 |

The percent change by segment and product category in the Company's sales for the past two years is as follows:

| Retail operations segment | Percent Change Fiscal 2015 - 2014 | Fiscal 2014 - 2013 |
| --- | ---: | ---: |
| Cosmetics | (0.9)% | (0.3)% |
| Ladies' apparel | (1.3) | 2.2 |
| Ladies' accessories and lingerie | (1.2) | 0.8 |
| Juniors' and children's apparel | (1.0) | 3.9 |
| Men's apparel and accessories | (2.4) | 1.6 |
| Shoes | (0.5) | 0.8 |
| Home and furniture | (7.4) | (9.9) |
| Construction segment | 58.3 | 41.5 |

### 2015 Compared to 2014

Net sales from the retail operations segment decreased $101.6 million during fiscal 2015 as compared to fiscal 2014, decreasing 2% in both total and comparable stores. During fiscal 2015, sales of ladies' apparel, ladies' accessories and lingerie, shoes, juniors' and children's apparel and cosmetics decreased slightly from the prior year. Sales of men's apparel and accessories decreased moderately over the prior year. Sales of home and furniture declined significantly from last year.

The number of sales transactions during fiscal 2015 decreased 5% over fiscal 2014 while the average dollars per sales transaction increased 3%.

Net sales from the construction segment increased $76.2 million or 58% during fiscal 2015 as compared to fiscal 2014 due to an increase in construction projects. The backlog of awarded construction contracts at January 30, 2016 totaled $167.3 million, decreasing approximately 45% from January 31, 2015.

### 2014 Compared to 2013

Net sales from the retail operations segment increased $51.1 million or 1% during fiscal 2014 as compared to fiscal 2013. During fiscal 2014 as compared to fiscal 2013, total sales and sales in comparable stores increased 1%. During fiscal 2014, sales of juniors' and children's apparel, ladies' apparel and men's apparel and accessories increased moderately over the prior year. Sales of shoes and ladies' accessories and lingerie increased slightly over last year while sales of cosmetics remained essentially flat. Sales of home and furniture declined significantly from last year.

The number of sales transactions during fiscal 2014 decreased 2% over fiscal 2013 while the average dollars per sales transaction increased 3%.

Net sales from the construction segment increased $38.3 million or 42% during fiscal 2014 as compared to fiscal 2013 due to an increase in construction projects. The backlog of awarded construction contracts at January 31, 2015 totaled $304.0 million, increasing approximately 55% from February 1, 2014.

### Exclusive Brand Merchandise

Sales penetration of exclusive brand merchandise for fiscal years 2015, 2014 and 2013 was 21.7%, 21.6% and 21.5% of total net sales, respectively.

### Service Charges and Other Income

*(in millions of dollars)*

| Service charges and other income: Retail operations segment | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 | Dollar Change 2015 - 2014 | 2014 - 2013 | Percent Change 2015 - 2014 | 2014- 2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Income from Wells Fargo Alliance and former Synchrony Alliance | $105.4 | $111.6 | $113.1 | $(6.2) | $(1.5) | (5.6)% | (1.3)% |
| Leased department income | 7.2 | 8.7 | 9.2 | (1.5) | (0.5) | (17.2) | (5.4) |
| Shipping and handling income | 26.1 | 22.3 | 20.3 | 3.8 | 2.0 | 17.0 | 9.9 |
| Other | 17.7 | 15.6 | 17.2 | 2.1 | (1.6) | 13.5 | (9.3) |
|  | 156.4 | 158.2 | 159.8 | (1.8) | (1.6) | (1.1) | (1.0) |
| Construction segment | 2.5 | 0.9 | 0.3 | 1.6 | 0.6 | 177.8 | 200.0 |
| Total | $158.9 | $159.1 | $160.1 | $(0.2) | $(1.0) | (0.1)% | (0.6)% |

### 2015 Compared to 2014

Service charges and other income is composed primarily of income from the Wells Fargo Alliance and former Synchrony Alliance. Income from the alliances decreased $6.2 million in fiscal 2015 compared to fiscal 2014 primarily due to increased credit losses partially resulting from the portfolio transition.

### 2014 Compared to 2013

Income from the alliances decreased $1.5 million in fiscal 2014 compared to fiscal 2013 primarily due to increased credit losses and the discontinuation of a credit product previously offered by Synchrony partially offset by increases in finance charge income.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $2,237,077 | $2,342,109 | $2,301,271 |
| Construction segment | 7,744 | 6,340 | 6,661 |
| Total gross profit | $2,244,821 | $2,348,449 | $2,307,932 |
| **Gross profit as a percentage of segment net sales:** |  |  |  |
| Retail operations segment | 35.0% | 36.1% | 35.7% |
| Construction segment | 3.7 | 4.9 | 7.2 |
| **Total gross profit as a percentage of net sales** | 34.0 | 35.5 | 35.3 |

### 2015 Compared to 2014

Gross profit as a percentage of net sales declined 144 basis points of sales during fiscal 2015 compared to fiscal 2014. Gross profit from retail operations declined 107 basis points of segment net sales during the same periods primarily due to increased markdowns.

During fiscal 2015, gross margin declined slightly in juniors' and children's apparel and in men's apparel and accessories. Gross margin declined moderately in ladies' accessories and lingerie and home and furniture. Gross margin was essentially flat in cosmetics, ladies' apparel and shoes.

Gross profit from the construction segment increased $1.4 million but declined, on a percentage basis, by 111 basis points of segment net sales. The decrease as a percentage of sales was due to lower fee percentages on new larger contracts.

Inventory in comparable stores remained flat at January 30, 2016 compared to January 31, 2015.

### 2014 Compared to 2013

Gross profit improved 14 basis points of sales during fiscal 2014 compared to fiscal 2013. Gross profit from retail operations improved 35 basis points of segment net sales during the same periods primarily due to increased initial markups.

During fiscal 2014, gross margin improved slightly in juniors' and children's apparel and ladies' apparel. Gross margin was essentially flat in all other product categories.

Inventory in comparable stores increased 2% as of January 31, 2015 compared to February 1, 2014.

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

*(in thousands of dollars)*

| SG&A: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,664,301 | $1,658,994 | $1,627,053 |
| Construction segment | 5,615 | 4,865 | 4,983 |
| Total SG&A | $1,669,916 | $1,663,859 | $1,632,036 |
| **SG&A as a percentage of segment net sales:** |  |  |  |
| Retail operations segment | 26.1% | 25.6% | 25.3% |
| Construction segment | 2.7 | 3.7 | 5.4 |
| **Total SG&A as a percentage of net sales** | 25.3 | 25.1 | 25.0 |

### 2015 Compared to 2014

SG&A increased $6.1 million or 19 basis points of sales during fiscal 2015 compared to fiscal 2014. The increase was primarily driven by increased selling payroll expense ($15.1 million) partially offset by decreased advertising expense ($6.2 million).

### 2014 Compared to 2013

SG&A increased $31.8 million or 14 basis points of sales during fiscal 2014 compared to fiscal 2013. The increase was most noted in payroll and payroll related taxes ($34.1 million), primarily of selling payroll as the Company focused on increasing pay for selling associates, partially offset by reduced advertising expenditures ($9.0 million).

### Depreciation and Amortization

*(in thousands of dollars)*

| Depreciation and amortization: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $249,508 | $250,371 | $255,240 |
| Construction segment | 503 | 312 | 250 |
| Total depreciation and amortization | $250,011 | $250,683 | $255,490 |

### 2014 Compared to 2013

Depreciation and amortization expense decreased $4.8 million during fiscal 2014 compared to fiscal 2013, 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: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $60,989 | $61,352 | $64,572 |
| Construction segment | (66) | (46) | (67) |
| Total interest and debt expense, net | $60,923 | $61,306 | $64,505 |

### 2015 Compared to 2014

Net interest and debt expense declined $0.4 million in fiscal 2015 compared to fiscal 2014 primarily due to an increase in capitalized interest and a decrease in credit facility commitment fees, partially offset by an increase in short term borrowings. Total weighted average debt outstanding during fiscal 2015 increased approximately $28.2 million compared to fiscal 2014, due to an increase in short term borrowings of the credit facility.

### 2014 Compared to 2013

Net interest and debt expense declined $3.2 million in fiscal 2014 compared to fiscal 2013 primarily due to an increase in capitalized interest and lower average debt levels. Total weighted average debt outstanding during fiscal 2014 decreased approximately $32.5 million compared to fiscal 2013.

### Gain on Disposal of Assets

*(in thousands of dollars)*

| Gain on disposal of assets: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $(12,619) | $(6,068) | $(12,376) |
| Construction segment | (7) | (1) | (3) |
| Total gain on disposal of assets | $(12,626) | $(6,069) | $(12,379) |

### Fiscal 2015

During fiscal 2015, the Company received proceeds of $25.5 million primarily from the sales of four retail store locations in Huntsville, Alabama, Sandy, Utah, Tampa, Florida and Arlington, TX, resulting in a gain of $12.6 million that was recorded in gain on disposal of assets.

### Fiscal 2014

During fiscal 2014, the Company received proceeds of $14.5 million from the sales of a retail store location in Longmont, Colorado, that was held for sale due to eminent domain, and an operating store location in Sarasota, Florida, resulting in a gain of $6.3 million that was recorded in gain on disposal of assets.

During fiscal 2014, the Company also received a final distribution of $1.1 million from its investment in a property located in Toledo, Ohio, resulting in a loss of $0.3 million that was recorded in gain on disposal of assets.

### Fiscal 2013

During fiscal 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands ("Acumen"), 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 fiscal 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

*(in thousands of dollars)*

| Asset impairment and store closing charges: | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $— | $— | $5,353 |
| Construction segment | — | — | — |
| Total asset impairment and store closing charges | $— | $— | $5,353 |

### Fiscal 2013

Asset impairment and store closing charges for fiscal 2013 consisted of the write-down of certain cost method investments.

### Income Taxes

The Company's estimated federal and state effective income tax rate, inclusive of income on and equity in losses of joint ventures, was 34.3% in fiscal 2015, 35.1% in fiscal 2014, and 34.9% in fiscal 2013. The Company expects the fiscal 2016 federal and state effective income tax rate to approximate 35%.

### Fiscal 2015

During fiscal 2015, income taxes included the recognition of tax benefits of approximately $2.0 million related to federal tax credits and $1.5 million due to net decreases in valuation allowances related to state net operating loss carryforwards.

### Fiscal 2014

During fiscal 2014, income taxes included the recognition of tax benefits of approximately $2.8 million related to federal tax credits and $1.4 million due to net decreases in unrecognized tax benefits, interest and penalties. These tax benefits were partially offset by tax expense of approximately $1.5 million due to net increases in valuation allowances related to state net operating loss carryforwards. In addition, during fiscal 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.

### Fiscal 2013

During fiscal 2013, income taxes included the recognition of tax benefits of approximately $5.5 million related to decreases in valuation allowances related to state net operating loss carryforwards and $3.0 million related to federal tax credits.

### LIQUIDITY AND CAPITAL RESOURCES

The Company's current non-operating priorities for its use of cash are stock repurchases, strategic investments to enhance the value of existing properties and dividend payments to stockholders.

Cash flows for the Company's most recent three fiscal years were as follows:

*(in thousands of dollars)*

|  | Fiscal 2015 | Fiscal 2014 | Fiscal 2013 | Percent Change 2015 - 2014 | 2014 - 2013 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating Activities | $450,226 | $611,589 | $501,757 | (26.4)% | 21.9% |
| Investing Activities | (132,939) | (143,412) | (76,628) | 7.3 | (87.2) |
| Financing Activities | (518,170) | (301,559) | (312,055) | (71.8) | 3.4 |
| Total Cash (Used) Provided | $(200,883) | $166,618 | $113,074 |  |  |

### Operating Activities

The primary source of the Company's liquidity is cash flows from operations. Due to the seasonality of the Company's business, we have historically realized a significant portion of the cash flows from operating activities during the second half of the fiscal year. Retail operations sales are the key operating cash component, providing 94.6%, 95.7% and 96.2% of total revenues in fiscal 2015, 2014 and 2013, respectively.

Operating cash inflows also include revenue and reimbursements from the Wells Fargo Alliance and former Synchrony 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 taxes.

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 purchased the Dillard's private label card portfolio from Synchrony and began managing Dillard's private label cards under the 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 $105 million, $112 million and $113 million from the Wells Fargo Alliance and former Synchrony Alliance during fiscal 2015, 2014 and 2013, respectively.

Net cash flows from operations decreased $161.4 million during fiscal 2015 compared to fiscal 2014. This decrease was primarily attributable to a decrease of $87.1 million related to changes in working capital items, primarily of decreases in trade accounts payable and accrued expenses and income taxes payable and a decrease in gross profit.

Net cash flows from operations increased $109.8 million during fiscal 2014 compared to fiscal 2013. This improvement was primarily attributable to an increase of $129.2 million related to changes in working capital items, primarily of increases in trade accounts payable and accrued expenses.

### Investing Activities

Cash inflows from investing activities generally include proceeds from sales of property and equipment. Investment cash outflows generally include payments for capital expenditures such as property and equipment.

Capital expenditures increased $13.9 million for fiscal 2015 compared to fiscal 2014. The fiscal 2015 expenditures of $165.8 million were primarily for the remodeling of existing stores and for the construction of our three new stores: Fashion Place in Murray, Utah (200,000 square feet replacing 190,000 square feet), Fremaux Town Center in Slidell, Louisiana (126,000 square feet) and Liberty Center in Cincinnati, Ohio (155,000 square feet), all of which opened during the third quarter of fiscal 2015.

Capital expenditures increased $57.0 million for fiscal 2014 compared to fiscal 2013. The fiscal 2014 expenditures of $151.9 million were primarily for the remodeling of existing stores and for the construction of our two new stores: The Shops at Summerlin in Las Vegas, Nevada (200,000 square feet) and The Mall at University Town Center in Sarasota, Florida (180,000 square feet), both of which opened during the third quarter of fiscal 2014.

Capital expenditures for fiscal 2016 are expected to be approximately $150 million. These expenditures are primarily for the construction and remodeling of stores.

During fiscal 2015, we closed two clearance store locations: Madison Square Mall in Huntsville, Alabama (67,000 square feet) and Tri County Mall in Cincinnati, Ohio (178,000 square feet). We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

During fiscal 2015, 2014 and 2013, we received proceeds from the sale of property and equipment of $25.5 million, $14.8 million and $2.5 million, respectively, and recorded related gains of $12.6 million, $6.4 million and $0.6 million, respectively. At January 31, 2015, $7.3 million of the fiscal 2014 proceeds were being 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 Consolidated Statements of Cash Flows. During fiscal 2015, payments of $7.3 million were made from restricted cash for like-kind property.

During fiscal 2014, the Company received a final distribution of $1.1 million from its investment in a property located in Toledo, Ohio, resulting in a loss of $0.3 million that was recorded in gain on disposal of assets.

During fiscal 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen, resulting in a gain of $11.7 million that was recorded in gain on disposal of assets.

### Financing Activities

Our primary source of cash inflows from financing activities is generally our $1.0 billion senior unsecured revolving credit facility. Financing cash outflows generally include the repayment of borrowings under the revolving credit facility, the repayment of mortgage notes or long-term debt, capital lease obligations, the payment of dividends and the purchase of treasury stock.

Cash used in financing activities increased to $518.2 million in fiscal 2015 from $301.6 million in fiscal 2014. This increase in cash used of $216.6 million was primarily due to an increase in stock repurchases.

Cash used in financing activities decreased to $301.6 million in fiscal 2014 from $312.1 million in fiscal 2013. This increase in cash flow of $10.5 million was primarily due to a reduction in treasury stock purchases.

**Stock Repurchase.** In November 2014, the Company's Board of Directors authorized the Company to repurchase up to $500 million of the Company's Class A Common Stock under an open-ended plan ("November 2014 Stock Plan"). During fiscal 2015, the Company repurchased 5.3 million shares for $500.0 million at an average price of $94.22 per share, which completed the authorization under the November 2014 Stock Plan.

In November 2013, the Company's Board of Directors authorized the Company to repurchase up to $250 million of the Company's Class A Common Stock under an open-ended plan ("November 2013 Stock Plan"). During fiscal 2014, the Company repurchased 2.3 million shares for $250.0 million at an average price of $107.44 per share, which completed the authorization under the November 2013 Stock Plan.

In March 2013, the Company's Board of Directors authorized the Company to repurchase up to $250 million of the Company's Class A Common Stock under an open-ended plan ("March 2013 Stock Plan"). During fiscal 2013, the Company repurchased 2.7 million shares for $209.6 million at an average price of $77.93 per share. During fiscal 2014, the Company repurchased 0.5 million shares for $40.4 million at an average price of $89.04 per share, which completed the authorization under the March 2013 Stock Plan.

The ultimate disposition of the repurchased stock has not been determined.

**Revolving Credit Agreement.** In May 2015, the Company entered into a new $1.0 billion senior unsecured revolving credit facility ("credit agreement"), replacing the Company's prior secured credit facility. The credit agreement expires May 13, 2020 and is available to the Company for working capital needs and general corporate purposes including, among other uses, working capital financing, the issuance of letters of credit, capital expenditures and, subject to certain restrictions, the repayment of existing indebtedness and share repurchases.

The Company pays a variable rate of interest on borrowings under the credit agreement and a commitment fee to the participating banks based on the Company's debt rating. The rate of interest on borrowings is LIBOR plus 1.375%, and the commitment fee for unused borrowings is 0.20% per annum.

No borrowings were outstanding at January 30, 2016. Letters of credit totaling $25.8 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $974 million at January 30, 2016. The Company had weighted-average borrowings of $41.3 million and $13.1 million and $45.5 million during fiscal 2015, 2014 and 2013, respectively.

Peak borrowings under the credit facility were $310 million during fiscal 2015.

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, as defined in the credit agreement. At January 30, 2016, the Company was in compliance with all financial covenants related to the credit agreement.

**Long-term Debt.** At January 30, 2016, the Company had $614.8 million of long-term debt, comprised of unsecured notes. The unsecured notes bear interest at rates ranging from 6.625% to 7.875% with due dates from fiscal 2017 through fiscal 2028.

Long-term debt maturities over the next five years are (in millions):

| Fiscal Year | Long-Term Debt Maturities |
| --- | ---: |
| 2016 | $— |
| 2017 | 87.2 |
| 2018 | 161.0 |
| 2019 | — |
| 2020 | — |

During fiscal 2015, the Company increased its net level of outstanding debt and capital leases by $3.8 million, specifically related to capital leases, compared to a reduction of $0.8 million in fiscal 2014. No debt matured during fiscal 2015, 2014 or 2013.

**Subordinated Debentures.** As of January 30, 2016, the Company had $200 million outstanding of its 7.5% subordinated debentures due August 1, 2038. All of these subordinated debentures were held by Dillard's Capital Trust I, a 100% owned, unconsolidated finance subsidiary of the Company. The Company has the right to defer the payment of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters; however, the Company has no present intention of exercising this right to defer interest payments.

### Fiscal 2016 Outlook

During fiscal 2016, the Company expects to finance its capital expenditures and its working capital requirements, as well as stock repurchases and the payment of dividends from cash on hand, cash flows generated from operations and utilization of the credit facility. At present, there are numerous general business and economic factors impacting the retail industry that could affect the Company's liquidity. These factors include: consumer confidence; high levels of unemployment in various sectors; economic instability around the globe; and other factors that are both separate from, and outgrowths of, these factors. These conditions could impact our net sales which may result in reduced cash flows if we are unable to appropriately manage our inventory levels and expenses. Depending upon our actual and anticipated sources and uses of liquidity, the Company will from time to time consider possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.

### OFF-BALANCE-SHEET ARRANGEMENTS

The Company has not 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.

### CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

To facilitate an understanding of the Company's contractual obligations and commercial commitments, the following data is provided:

### PAYMENTS DUE BY PERIOD

| (in thousands of dollars) Contractual Obligations | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt | $614,785 | $— | $248,160 | $— | $366,625 |
| Interest on long-term debt | 343,397 | 44,507 | 77,944 | 54,601 | 166,345 |
| Subordinated debentures | 200,000 | — | — | — | 200,000 |
| Interest on subordinated debentures | 337,726 | 14,959 | 30,205 | 29,918 | 262,644 |
| Capital lease obligations, including interest | 12,149 | 3,791 | 5,127 | 2,505 | 726 |
| Benefit plan participant payments | 187,770 | 4,475 | 13,347 | 16,588 | 153,360 |
| Purchase obligations(1) | 1,270,193 | 1,270,193 | — | — | — |
| Operating leases(2) | 54,333 | 21,269 | 26,289 | 5,986 | 789 |
| Total contractual cash obligations(3)(4) | $3,020,353 | $1,359,194 | $401,072 | $109,598 | $1,150,489 |

(1) The Company's purchase obligations principally consist of purchase orders for merchandise and store construction commitments. Amounts committed under open purchase orders for merchandise inventory represent $1,254.1 million of the purchase obligations, of which a significant portion are cancelable without penalty prior to a date that precedes the vendor's scheduled shipment date.

(2) The operating leases included in the above table do not include contingent rent based upon sales volume, which represented approximately 23% of minimum lease obligations in fiscal 2015.

(3) The total liability for unrecognized tax benefits is $3.2 million, including tax, penalty, and interest. The Company is not able to reasonably estimate the timing of future cash flows and has excluded these liabilities from the table above; however, at this time, the Company does not expect a significant change in unrecognized tax benefits in the next twelve months.

(4) The Company is unable to reasonably estimate the timing of future cash flows of workers' compensation and general liability insurance reserves of $26.9 million and gift card liabilities of $18.7 million and have excluded these from the table above.

### AMOUNT OF COMMITMENT EXPIRATION PER PERIOD

| (in thousands of dollars) Other Commercial Commitments | Total Amounts Committed | Within 1 year | 2 - 3 years | 4 - 5 years | After 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| $1.0 billion line of credit, none outstanding(1) | $— | $— | $— | $— | $— |
| Standby letters of credit | 25,680 | 22,680 | 3,000 | — | — |
| Import letters of credit | 119 | 119 | — | — | — |
| Total commercial commitments | $25,799 | $22,799 | $3,000 | $— | $— |

(1) At January 30, 2016, letters of credit totaling $25.8 million were issued under the credit agreement.

### NEW ACCOUNTING PRONOUNCEMENTS

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 in the "Notes to Consolidated Financial Statements" in Item 8 hereof.

### 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," "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 those statements included under the headings "2016 Guidance" and "Fiscal 2016 Outlook" included in this Management's Discussion and Analysis and other statements regarding management's expectations and forecasts for fiscal 2016, 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 confidence, spending patterns, debt levels and their ability to meet credit obligations; high levels of unemployment; 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, and other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the SEC, particularly those set forth under the caption "Item 1A, Risk Factors" in this Annual Report.

## Market risk

As filed, 1,309 characters.

The table below provides information about the Company's obligations that are sensitive to changes in interest rates. The table presents maturities of the Company's long-term debt and subordinated debentures along with the related weighted-average interest rates by expected maturity dates.

*(in thousands of dollars)*

| Expected Maturity Date (fiscal year) | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Long-term debt | $— | $87,201 | $160,959 | $— | $— | $366,625 | $614,785 | $695,058 |
| Average fixed interest rate | —% | 6.6% | 7.1% | —% | —% | 7.5% | 7.3% |  |
| Subordinated debentures | $— | $— | $— | $— | $— | $200,000 | $200,000 | $204,080 |
| Average interest rate | — | — | — | — | — | 7.5% | 7.5% |  |

The Company is exposed to market risk from changes in the interest rates under its $1.0 billion senior unsecured revolving credit facility. Outstanding balances under this facility bear interest at a variable rate of LIBOR plus 1.375%. The Company had weighted average borrowings of $41.3 million during fiscal 2015. Based on the average amount outstanding during fiscal 2015, a 100 basis point change in interest rates would result in an approximate $0.4 million annual change to interest expense.

## Controls and procedures

As filed, 2,164 characters.

#### Evaluation of Disclosure Controls and Procedures

The Company has established and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). 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 year covered by this annual 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.

#### Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Co-Principal Financial Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in *2013 Internal Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in *2013 Internal Control - Integrated Framework*, our management concluded that our internal control over financial reporting was effective as of January 30, 2016.

Our independent registered public accounting firm, KPMG LLP ("KPMG"), has audited our consolidated financial statements included in this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting as of January 30, 2016. Please refer to KPMG's "Report of Independent Registered Public Accounting Firm" on page F-2 of this Annual Report.

#### Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended January 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Mar 23, 2016.
Source: SEC EDGAR, the filing index for accession 0000028917-16-000262. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.