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

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2016-09-01
- Accepted by EDGAR: Sep 1, 2016, 16:33 ET
- Period: 2016-07-30
- Accession: 0000028917-16-000368
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000002891716000368/dds-07302016x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000002891716000368/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-07-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-05-01 to 2016-07-30 | $1.49bn | us-gaap:Revenues |
| Revenue | 6 months, 2016-01-31 to 2016-07-30 | $3.03bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-05-01 to 2016-07-30 | $993.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2016-01-31 to 2016-07-30 | $1.93bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-05-01 to 2016-07-30 | $459.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2016-01-31 to 2016-07-30 | $1.02bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-05-01 to 2016-07-30 | $395.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-31 to 2016-07-30 | $793.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2016-05-01 to 2016-07-30 | $16.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-31 to 2016-07-30 | $31.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-05-01 to 2016-07-30 | $6.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-31 to 2016-07-30 | $48.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-05-01 to 2016-07-30 | $12.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-31 to 2016-07-30 | $89.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 6 months, 2016-01-31 to 2016-07-30 | $2.55 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2016-01-31 to 2016-07-30 | $86.7m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-31 to 2016-07-30 | $42.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2016-01-31 to 2016-07-30 | $5.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2016-01-31 to 2016-07-30 | $112.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-07-30 | $128.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-07-30 | $1.74bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-07-30 | $3.84bn | us-gaap:Assets |
| Current liabilities | at 2016-07-30 | $763.9m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-07-30 | $613.2m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2016-07-30 | $1.77bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,622 characters.

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended January 30, 2016.

### EXECUTIVE OVERVIEW

The Company's second quarter performance of fiscal 2016 reflected the current challenges facing apparel retailers, as disappointing sales pressured our gross margin and net income performance. During the three months ended July 30, 2016, comparable store sales declined 5% over last year's second quarter. Gross margin from retail operations decreased 92 basis points of net sales primarily due to increased markdowns. Selling, general and administrative expenses ("SG&A") from retail operations increased 60 basis points of net sales while SG&A decreased $9.2 million. Net income decreased $17.9 million to $12.1 million ($0.35 per share) for the current year second quarter from $30.0 million ($0.75 per share) for the prior year second quarter.

During the three months ended July 30, 2016, the Company purchased $54.1 million of Class A Common Stock under its $500 million stock repurchase plan. As of July 30, 2016, authorization of $387.5 million remained under the plan.

As of July 30, 2016, the Company had working capital of $972.8 million, cash and cash equivalents of $128.3 million and $813.2 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $86.7 million for the six months ended July 30, 2016.

The Company currently operates 272 Dillard's locations, 22 clearance centers and one internet store.

### Key Performance Indicators

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

|  | Three Months Ended July 30, 2016 | August 1, 2015 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,452.4 | $1,513.8 |
| Retail stores sales trend | (4)% | —% |
| Comparable retail stores sales trend | (5)% | 1% |
| Gross profit (in millions) | $459.1 | $493.4 |
| Gross profit as a percentage of net sales | 31.6% | 32.6% |
| Retail gross profit as a percentage of net sales | 32.6% | 33.5% |
| Selling, general and administrative expenses as a percentage of net sales | 27.2% | 26.7% |
| Cash flow from operations (in millions)\* | $86.7 | $62.0 |
| Total retail store count at end of period\*\* | 294 | 297 |
| Retail sales per square foot | $29 | $30 |
| Comparable retail store inventory trend | 2% | 3% |
| Annualized retail merchandise inventory turnover | 2.4 | 2.5 |

\*Cash flow from operations data is for the six months ended July 30, 2016 and August 1, 2015.

\*\* On August 3, 2016, the Company closed its clearance center in Arlington, Texas, which has been excluded from the total retail store count.

### General

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

**Service charges and other income.** Service charges and other income includes income generated through the long-term private label card alliance with Wells Fargo Bank, N.A. (“Wells Fargo Alliance”) and former private label card alliance with Synchrony Financial ("Synchrony Alliance"). Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.

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

**Selling, general and administrative expenses.** Selling, general and administrative expenses includes 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 includes expenses for store leases, including contingent rent, and data processing and other equipment rentals.

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

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

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

### Seasonality

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

### RESULTS OF OPERATIONS

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

|  | Three Months Ended July 30, 2016 | August 1, 2015 | Six Months Ended July 30, 2016 | August 1, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.5 | 2.4 | 2.4 | 2.5 |
|  | 102.5 | 102.4 | 102.4 | 102.5 |
| Cost of sales | 68.4 | 67.4 | 65.4 | 64.2 |
| Selling, general and administrative expenses | 27.2 | 26.7 | 26.8 | 26.2 |
| Depreciation and amortization | 4.2 | 4.0 | 4.1 | 3.9 |
| Rentals | 0.4 | 0.4 | 0.4 | 0.4 |
| Interest and debt expense, net | 1.1 | 1.0 | 1.1 | 1.0 |
| Gain on disposal of assets | (0.1) | — | — | — |
| Income before income taxes and income on and equity in earnings of joint ventures | 1.3 | 3.0 | 4.7 | 6.9 |
| Income taxes | 0.4 | 1.0 | 1.6 | 2.4 |
| Income on and equity in earnings of joint ventures | — | — | — | — |
| Net income | 0.8% | 2.0% | 3.0% | 4.5% |

16

### Net Sales

*(in thousands of dollars)*

| Net sales: | Three Months Ended July 30, 2016 | August 1, 2015 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,403,410 | $1,467,709 | $(64,299) |
| Construction segment | 49,035 | 46,069 | 2,966 |
| Total net sales | $1,452,445 | $1,513,778 | $(61,333) |

The percent change in the Company’s sales by segment and product category for the three months ended July 30, 2016 compared to the three months ended August 1, 2015 as well as the sales percentage by segment and product category to total net sales for the three months ended July 30, 2016 are as follows:

| Retail operations segment | % Change 2016-2015 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (4.2)% | 13% |
| Ladies’ apparel | (3.4) | 25 |
| Ladies’ accessories and lingerie | (5.0) | 16 |
| Juniors’ and children’s apparel | (5.9) | 8 |
| Men’s apparel and accessories | (3.3) | 17 |
| Shoes | (4.1) | 15 |
| Home and furniture | (12.1) | 3 |
|  |  | 97 |
| Construction segment | 6.4 | 3 |
| Total |  | 100% |

Net sales from the retail operations segment decreased $64.3 million during the three months ended July 30, 2016 compared to the three months ended August 1, 2015, decreasing 4% in total and 5% in comparable stores. Sales of ladies' accessories and lingerie, juniors' and children's apparel and home and furniture decreased significantly over the second quarter last year. Sales of ladies' apparel, men's apparel and accessories, cosmetics and shoes decreased moderately.

The number of sales transactions decreased 7% for the three months ended July 30, 2016 compared to the three months ended August 1, 2015 while the average dollars per sales transaction increased 2%. We recorded an allowance for sales returns of $7.1 million as of July 30, 2016 and August 1, 2015.

During the three months ended July 30, 2016, net sales from the construction segment increased $3.0 million or 6.4% compared to the three months ended August 1, 2015 due to an increase in construction projects. The backlog of awarded construction contracts at July 30, 2016 totaled $339.6 million, increasing approximately 103% from January 30, 2016 and increasing approximately 18% from August 1, 2015.

*(in thousands of dollars)*

| Net sales: | Six Months Ended July 30, 2016 | August 1, 2015 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $2,852,798 | $2,986,069 | $(133,271) |
| Construction segment | 102,889 | 101,202 | 1,687 |
| Total net sales | $2,955,687 | $3,087,271 | $(131,584) |

17

The percent change in the Company’s sales by segment and product category for the six months ended July 30, 2016 compared to the six months ended August 1, 2015 as well as the sales percentage by segment and product category to total net sales for the six months ended July 30, 2016 are as follows:

| Retail operations segment | % Change 2016-2015 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (4.2)% | 14% |
| Ladies’ apparel | (3.9) | 24 |
| Ladies’ accessories and lingerie | (7.1) | 15 |
| Juniors’ and children’s apparel | (5.6) | 9 |
| Men’s apparel and accessories | (3.6) | 16 |
| Shoes | (2.1) | 16 |
| Home and furniture | (9.1) | 3 |
|  |  | 97 |
| Construction segment | 1.7 | 3 |
| Total |  | 100% |

Net sales from the retail operations segment decreased $133.3 million during the six months ended July 30, 2016 compared to the six months ended August 1, 2015, decreasing 4% in total and 5% in comparable stores. Sales of ladies' accessories and lingerie, juniors' and children's apparel and home and furniture decreased significantly over the prior year period. Sales of ladies' apparel, cosmetics, men's apparel and accessories and shoes decreased moderately over the prior year period.

The number of sales transactions decreased 6% for the six months ended July 30, 2016 compared to the six months ended August 1, 2015 while the average dollars per sales transaction increased 2%.

Storewide sales penetration of exclusive brand merchandise for the six months ended July 30, 2016 and August 1, 2015 was 22.1%.

During the six months ended July 30, 2016, net sales from the construction segment increased $1.7 million or 1.7% compared to the six months ended August 1, 2015 due to an increase in construction activity.

### Service Charges and Other Income

*(in thousands of dollars)*

| Service charges and other income: Retail operations segment | Three Months Ended July 30, 2016 | August 1, 2015 | Six Months Ended July 30, 2016 | August 1, 2015 | Three Months $ Change 2016-2015 | Six Months $ Change 2016-2015 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income from Wells Fargo Alliance and former Synchrony Alliance | $24,026 | $23,991 | $47,891 | $50,727 | $35 | $(2,836) |
| Shipping and handling income | 6,594 | 6,021 | 13,057 | 11,800 | 573 | 1,257 |
| Leased department income | 1,876 | 1,798 | 3,453 | 3,413 | 78 | 40 |
| Other | 3,492 | 5,210 | 7,104 | 10,732 | (1,718) | (3,628) |
|  | 35,988 | 37,020 | 71,505 | 76,672 | (1,032) | (5,167) |
| Construction segment | 317 | 46 | 355 | 319 | 271 | 36 |
| Total service charges and other income | $36,305 | $37,066 | $71,860 | $76,991 | $(761) | $(5,131) |

Service charges and other income is composed primarily of income from the Wells Fargo Alliance and former Synchrony Alliance. Income from the alliances decreased during the six months ended July 30, 2016 compared to the six months ended August 1, 2015 primarily due to a decrease in income from the former Synchrony Alliance.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: Three months ended | July 30, 2016 | August 1, 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $457,275 | $491,645 | $(34,370) | (7.0)% |
| Construction segment | 1,811 | 1,802 | 9 | 0.5 |
| Total gross profit | $459,086 | $493,447 | $(34,361) | (7.0)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $1,019,454 | $1,102,639 | $(83,185) | (7.5)% |
| Construction segment | 4,295 | 3,882 | 413 | 10.6 |
| Total gross profit | $1,023,749 | $1,106,521 | $(82,772) | (7.5)% |

| Gross profit as a percentage of segment net sales: | Three Months Ended July 30, 2016 | August 1, 2015 | Six Months Ended July 30, 2016 | August 1, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 32.6% | 33.5% | 35.7% | 36.9% |
| Construction segment | 3.7 | 3.9 | 4.2 | 3.8 |
| **Total gross profit as a percentage of net sales** | 31.6 | 32.6 | 34.6 | 35.8 |

Gross profit declined 99 basis points of net sales and 120 basis points of net sales during the three and six months ended July 30, 2016 compared to the three and six months ended August 1, 2015, respectively.

Gross profit from retail operations declined 92 basis points of net sales during the three months ended July 30, 2016 compared to the three months ended August 1, 2015 primarily due to higher markdowns. Gross margin declined moderately in ladies' accessories and lingerie, juniors' and children's apparel and home and furniture. Gross margin declined slightly in men’s apparel and accessories. Gross margin increased slightly in shoes, while remaining essentially flat in ladies' apparel and cosmetics.

Gross profit from retail operations declined 119 basis points of net sales during the six months ended July 30, 2016 compared to the six months ended August 1, 2015 primarily due to higher markdowns. Gross margin declined moderately in ladies' accessories and lingerie, men’s apparel and accessories and home and furniture. Gross margin declined slightly in juniors’ and children’s apparel, while remaining essentially flat in cosmetics and shoes and ladies' apparel.

Gross profit from the construction segment decreased 22 basis point points and increased 33 basis points of construction sales for the three and six months ended July 30, 2016, respectively.

Inventory increased 1% in total and 2% in comparable stores as of July 30, 2016 compared to August 1, 2015. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $3 million and $5 million for the three and six months ended July 30, 2016, respectively.

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

*(in thousands of dollars)*

| SG&A: Three months ended | July 30, 2016 | August 1, 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $393,827 | $403,007 | $(9,180) | (2.3)% |
| Construction segment | 1,317 | 1,271 | 46 | 3.6 |
| Total SG&A | $395,144 | $404,278 | $(9,134) | (2.3)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $790,654 | $805,260 | $(14,606) | (1.8)% |
| Construction segment | 2,834 | 2,578 | 256 | 9.9 |
| Total SG&A | $793,488 | $807,838 | $(14,350) | (1.8)% |

| SG&A as a percentage of segment net sales: | Three Months Ended July 30, 2016 | August 1, 2015 | Six Months Ended July 30, 2016 | August 1, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 28.1% | 27.5% | 27.7% | 27.0% |
| Construction segment | 2.7 | 2.8 | 2.8 | 2.5 |
| **Total SG&A as a percentage of net sales** | 27.2 | 26.7 | 26.8 | 26.2 |

SG&A increased 50 basis points of net sales during the three months ended July 30, 2016 compared to the three months ended August 1, 2015 while total SG&A decreased $9.1 million. SG&A from retail operations increased 60 basis points of net sales during the three months ended July 30, 2016 compared to the three months ended August 1, 2015 while total SG&A from retail operations decreased by $9.2 million. This decrease was primarily due to a decrease in supplies ($3.4 million), advertising expense ($2.1 million), services purchased ($2.0 million), selling payroll expense ($2.0 million) and utilities expense ($1.5 million) partially offset by an increase in insurance expense ($1.4 million).

SG&A increased 68 basis points of net sales during the six months ended July 30, 2016 compared to the six months ended August 1, 2015 while total SG&A decreased $14.4 million. SG&A from retail operations increased 75 basis points of net sales during the six months ended July 30, 2016 compared to the six months ended August 1, 2015 while total SG&A from retail operations decreased by $14.6 million. This decrease was primarily due to a decrease in supplies ($5.1 million), advertising expense ($4.7 million), services purchased ($4.4 million), and utilities expense ($3.1 million) partially offset by an increase in insurance expense ($3.5 million).

### Depreciation and Amortization

*(in thousands of dollars)*

| Depreciation and amortization: Three months ended | July 30, 2016 | August 1, 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $60,433 | $60,415 | $18 | —% |
| Construction segment | 174 | 85 | 89 | 104.7 |
| Total depreciation and amortization | $60,607 | $60,500 | $107 | 0.2% |
| Six months ended |  |  |  |  |
| Retail operations segment | $120,908 | $121,477 | $(569) | (0.5)% |
| Construction segment | 344 | 176 | 168 | 95.5 |
| Total depreciation and amortization | $121,252 | $121,653 | $(401) | (0.3)% |

Depreciation and amortization expense for the three and six months ended July 30, 2016 compared to the three and six months ended August 1, 2015 remained essentially flat due to the timing and composition of capital expenditures.

### Interest and Debt Expense, Net

*(in thousands of dollars)*

| Interest and debt expense (income), net: Three months ended | July 30, 2016 | August 1, 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $15,994 | $14,780 | $1,214 | 8.2% |
| Construction segment | (15) | (15) | — | — |
| Total interest and debt expense, net | $15,979 | $14,765 | $1,214 | 8.2% |
| Six months ended |  |  |  |  |
| Retail operations segment | $31,723 | $30,020 | $1,703 | 5.7% |
| Construction segment | (30) | (28) | (2) | (7.1) |
| Total interest and debt expense, net | $31,693 | $29,992 | $1,701 | 5.7% |

The increase in net interest and debt expense for the three months ended July 30, 2016 compared to the three months ended August 1, 2015 was primarily attributable to a decrease in capitalized interest and an increase in short term borrowings. The increase in net interest and debt expense for the six months ended July 30, 2016 compared to the six months ended August 1, 2015 was primarily attributable to a decrease in capitalized interest and interest income. Total weighted average debt increased by $45.6 million and $22.8 million during the three and six months ended July 30, 2016 compared to the three and six months ended August 1, 2015, respectively.

### Income Taxes

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 34.9% and 34.3% for the three months ended July 30, 2016 and August 1, 2015, respectively. During the three months ended July 30, 2016, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits. During the three months ended August 1, 2015, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes, which included benefits for legislatively-enacted state income tax rate reductions.

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 35.2% and 34.6% for the six months ended July 30, 2016 and August 1, 2015, respectively. During the six months ended July 30, 2016, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits. During the six months ended August 1, 2015, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.

The Company expects the fiscal 2016 federal and state effective income tax rate to approximate 35%. This rate may change if results of operations for fiscal 2016 differ from management’s current expectations. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

### FINANCIAL CONDITION

A summary of net cash flows for the six months ended July 30, 2016 and August 1, 2015 follows:

*(in thousands of dollars)*

|  | Six Months Ended July 30, 2016 | August 1, 2015 | $ Change |
| --- | ---: | ---: | ---: |
| Operating Activities | $86,744 | $61,974 | $24,770 |
| Investing Activities | (41,033) | (79,452) | 38,419 |
| Financing Activities | (120,330) | (211,137) | 90,807 |
| Total Cash Used | $(74,619) | $(228,615) | $153,996 |

Net cash flows from operations increased $24.8 million during the six months ended July 30, 2016 compared to the six months ended August 1, 2015. This increase was primarily attributable to an increase of $75.9 million related to changes in working capital items, primarily due to increases in accounts payable and accrued expenses. This increase in cash flow from operations was partially offset by an increase in inventory and decrease in gross profit.

Synchrony Financial ("Synchrony") owned and managed Dillard’s private label credit cards under the Synchrony Alliance that expired in November 2014. Following that scheduled expiration, Wells Fargo Bank, N.A. ("Wells Fargo") purchased the Dillard's private label card portfolio from Synchrony and began managing Dillard's private label cards under 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 recognizes 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, Wells Fargo's ability to extend credit to our customers as well as the cost of customer rewards programs. 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 $47.9 million and $50.7 million from the Wells Fargo Alliance and former Synchrony Alliance during the six months ended July 30, 2016 and August 1, 2015, respectively.

Capital expenditures were $42.0 million and $87.0 million for the six months ended July 30, 2016 and August 1, 2015, respectively. The decline in capital expenditures was primarily related to the construction of new stores and the remodeling of existing stores during the comparable prior year period. Capital expenditures for fiscal 2016 are expected to be approximately $120 million compared to actual expenditures of $166 million during fiscal 2015.

Changes in restricted cash balances are reflected as an investment activity in the accompanying condensed consolidated statements of cash flows. During the six months ended August 1, 2015, payments of $7.3 million were made from restricted cash for like-kind property.

We closed the Aiken store in Aiken, South Carolina (105,000 square feet) in May 2016, the South Towne clearance center in Sandy, Utah (100,000 square feet) in July 2016 and the Six Flags clearance center in Arlington, Texas (85,000 square feet) in August 2016. We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

As of August 31, 2016, the Company had executed an agreement to invest $20.0 million in our shopping mall joint venture located in Bonita Springs, Florida. The investment will be funded using cash on hand. The joint venture will use these funds to refinance its debt maturing in December 2016.

The Company had cash on hand of $128.3 million as of July 30, 2016. As part of our overall liquidity management strategy and for peak working capital requirements, the Company maintains a $1.0 billion unsecured credit facility. The credit facility is available for working capital needs and general corporate purposes. The rate of interest on borrowings is LIBOR plus 1.375%, and the commitment fee for unused borrowings is 0.20% per annum. 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 Company's coverage ratio cannot be less than 2.5 to 1.0. At July 30, 2016, the Company was in compliance with all financial covenants related to the credit agreement.

At July 30, 2016, no borrowings were outstanding, and letters of credit totaling $26.4 million were issued under the credit agreement leaving unutilized availability under the facility of approximately $973.6 million.

During the six months ended July 30, 2016, the Company repurchased 1.6 million shares of Class A Common Stock at an average price of $70.08 per share for $112.5 million. During the six months ended August 1, 2015, the Company repurchased 1.8 million shares of its Common Stock at an average price of $112.83 for $208.0 million (including the accrual of $5.0 million of share repurchases that had not settled as of August 1, 2015). At July 30, 2016, $387.5 million of authorization remained under the Company's stock repurchase plan. The ultimate disposition of the repurchased stock has not been determined.

During fiscal 2016, the Company expects to finance its capital expenditures, working capital requirements and stock repurchases from cash on hand, cash flows generated from operations and utilization of the credit facility. Depending on conditions in the capital markets and other factors, the Company may from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.

There have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

### OFF-BALANCE-SHEET ARRANGEMENTS

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

### NEW ACCOUNTING STANDARDS

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 12 to the accompanying interim condensed financial statements.

### FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company’s future occurrences, plans and objectives, including statements regarding management’s expectations and forecasts for the remainder of fiscal 2016 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements concerning capital expenditures and sources of liquidity, statements concerning share repurchases, statements concerning pension contributions and statements concerning estimated taxes. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company’s stores are located and the effect of these factors on the buying patterns of the Company’s customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company’s future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended January 30, 2016, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.

## Market risk

As filed, 235 characters.

There have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

## Controls and procedures

As filed, 877 characters.

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

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

## Risk factors

As filed, 189 characters.

There have been no material changes in the information set forth under caption “Item 1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

Filed Sep 1, 2016.
Source: SEC EDGAR, the filing index for accession 0000028917-16-000368. Last ingested by Listed: Nov 12, 2026, 17:30 ET. No prices; not investment advice.