# Dillard'S, Inc.: Form 10-K for the period ended Jan 30, 2010

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-K
- Filed: 2010-03-26
- Accepted by EDGAR: Mar 26, 2010, 16:31 ET
- Period: 2010-01-30
- Accession: 0001047469-10-002784
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000104746910002784/a2197591z10-k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000104746910002784/

## Business

As filed, 9,730 characters.

### General

Dillard's, Inc. (the "Company", "we", "us", "our" or "Registrant") ranks among the nation's largest apparel and home furnishing retailers. Our Company, originally founded in 1938 by William T. Dillard, was incorporated in Delaware in 1964. As of January 30, 2010, we operated 309 Dillard's stores, including 12 clearance centers, and one Internet store offering a wide selection of merchandise including fashion apparel for women, men and children, accessories, cosmetics, home furnishings and other consumer goods. On August 29, 2008, the Company purchased the remaining interest in CDI Contractors, LLC and CDI Contractors, Inc. ("CDI"), a former 50% equity method joint venture investment of the Company, for a cash purchase price of $9.8 million. CDI is a general contractor whose business includes constructing and remodeling stores for the Company. Based in Little Rock, Arkansas, CDI represented approximately 2% of the total assets of the consolidated Company at January 30, 2010.

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

| Retail operations segment: | Percentage of Net Sales Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| Cosmetics | 15% | 15% | 15% |
| Ladies' apparel and accessories | 36 | 37 | 37 |
| Juniors' and children's apparel | 8 | 9 | 9 |
| Men's apparel and accessories | 17 | 18 | 18 |
| Shoes | 14 | 13 | 13 |
| Home and furniture | 7 | 7 | 8 |
|  | 97 | 99 | 100 |
| Construction segment | 3 | 1 | — |
| Total | 100% | 100% | 100% |

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

We conduct our retail merchandise business 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, assortment, advertising, price, quality, 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, Dillard's lines of exclusive brand merchandise such as Antonio Melani, Gianni Bini, Roundtree & Yorke and Daniel Cremieux. Dillard's exclusive brand/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. Dillard's private label merchandise program allows us to ensure Dillard's high standards are achieved, while minimizing costs and differentiating our merchandise offerings from other retailers.

Dillard's exclusive brands/private label merchandise program allows us to maintain consistency of merchandise quality across seasons and product lines. Such reliability of brand assures customers that when they buy our exclusive brands, they are purchasing high quality, fashionable merchandise at a reasonable price. We feel such perception furthers our reputation as an upscale department store.

We have made a significant investment in our trademark and license portfolio, in terms of design function, advertising, quality control, manufacturing process and quick response to market trends in a quality manufacturing environment. Dillard's trademark registrations are maintained for as long as Dillard's maintains 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 for the Company, 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 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 its own employees. We regularly evaluate the performance of the licensed departments and require compliance with established customer service guidelines. The licensee for the fine jewelry department ceased operation of all licensed outlets during fiscal 2009.

GE Consumer Finance ("GE") owns and manages Dillard's proprietary credit cards ("proprietary cards") under a long-term marketing and servicing alliance ("Alliance") that expires in fiscal 2014. GE establishes and owns proprietary 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 Alliance, we receive on-going cash compensation from GE based upon the portfolio earnings. The compensation earned on the portfolio is determined monthly and has no recourse provisions. Further pursuant to this agreement, we have no continuing involvement other than to honor the proprietary cards in our stores. Although not obligated to a specific level of marketing commitment, we participate in the marketing of the proprietary cards and accept payments on the proprietary 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 GE.

We seek to expand the number and use of the proprietary cards by, among other things, providing incentives to sales associates to open new credit accounts, which generally can be opened while a customer is visiting one of our stores. Customers who open accounts are rewarded with discounts on future purchases. Proprietary card customers are sometimes offered private shopping nights, direct mail catalogs, special discounts and advance notice of sale events. GE has created various loyalty programs that reward customers for frequency and volume of proprietary 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, 2010, we employed approximately 41,300 full-time and part-time associates, of which approximately 29% 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 and consider our relationships to be strong and mutually beneficial.

Our fiscal year ends on the Saturday nearest January 31 of each year. Fiscal years 2009, 2008 and 2007 ended on January 30, 2010, January 31, 2009 and February 2, 2008, respectively. Fiscal years 2009, 2008 and 2007 included 52 weeks.

For additional information with respect to our business, reference is made to information contained under the descriptions "Net sales," "Net income (loss)" and "Total assets" under Item 6 hereof.

The information contained on our website is not incorporated by reference into this Form 10-K 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 amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act 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 Business 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 and committee charters for the Audit Committee of the Board of Directors and the Stock Option and Executive Compensation Committee.

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

## Risk factors

As filed, 14,957 characters.

The risks described in Item 1A, Risk Factors, in this Annual Report on Form 10-K for the year ended January 30, 2010, could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed below do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our 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 revenues, margins and market share.***

We conduct our retail merchandise business 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, Internet and mail-order retailers. Competition is characterized by many factors including location, reputation, fashion, merchandise assortment, advertising, price, quality, service and credit availability. We anticipate intense competition will continue. 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, market and other conditions could adversely affect our operating results.***

The retail merchandise business is affected by changes in international, national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer confidence, consumer credit availability, weather, traffic patterns, the type, number and location of competing stores, and the effects of war or terrorist activities and any governmental responses thereto. Factors such as inflation, apparel costs, labor and benefit costs, legal claims, and the availability of management and hourly employees also affect store operations and administrative expenses. Our ability to finance new store development, improvements and additions to existing stores, and the acquisition of stores from competitors is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the availability of borrowed funds.

***Current store locations may become less desirable, and desirable new locations may not be available for a reasonable price, if at all.***

The success of any store depends substantially upon its location. There can be no assurance that current locations will continue to be desirable as demographic patterns change. Neighborhood or economic conditions where stores are located could decline in the future, thus resulting in potentially reduced sales in those locations. If we cannot obtain desirable locations at reasonable prices, our cost structure will increase and our revenues will be adversely affected.

***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 the 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, as well as liability for environmental conditions. 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 78 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".

***We rely on third party suppliers to obtain materials and provide production facilities from which we source our merchandise.***

We may experience supply problems such as unfavorable pricing or untimely delivery of merchandise. The price and availability of materials from suppliers can be adversely affected by factors outside of our control, such as increased worldwide demand. Further, our suppliers who also serve the retail industry may experience financial difficulties due to a downturn in the industry or in other macroeconomic environments, such as credit markets, stifling their ability to obtain borrowed funds necessary to finance their operations. These supplier risks may have a material adverse effect on our business and results of operations.

***We may evaluate acquisitions, joint ventures and other strategic initiatives, any of which could distract management or otherwise have a negative effect on revenues, costs and stock price.***

Our future success may depend on opportunities to buy or obtain rights to other businesses or technologies that could complement, enhance or expand our current business or products or that might otherwise offer growth opportunities. In particular, we intend to evaluate potential mergers, acquisitions, joint venture investments, strategic initiatives, alliances, vertical integration opportunities and divestitures. Our attempt to engage in these transactions may expose us to various inherent risks, including:

assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates;

the potential loss of key personnel of an acquired business;

the ability to achieve projected economic and operating synergies;

difficulties successfully integrating, operating, maintaining and managing newly acquired operations or employees;

difficulties maintaining uniform standards, controls, procedures and policies;

unanticipated changes in business and economic conditions affecting an acquired business;

the possibility of impairment charges if an acquired business performs below expectations; and

the diversion of management's attention from the existing business to integrate the operations and personnel of the acquired or combined business or to implement the strategic initiative.

***Our annual and quarterly financial results may fluctuate depending on various factors, many of which are beyond our control, and if we fail to meet the expectations of securities analysts or investors, our share price may decline.***

Our sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond our control. Certain events and factors may directly and immediately decrease demand for our products or increase operating costs. If customer demand decreased or if operating costs increased rapidly, our results of operations would also decline precipitously. The recent passage of health care legislation will cause the Company's operating costs to rise in fiscal 2014 and beyond. The Company is currently in the process of assessing the extent of the effect of the legislation on its operating costs. Other events and factors include:

changes in competitive and economic conditions generally;

variations in the timing and volume of our sales;

sales promotions by us or our competitors;

changes in average same-store sales and customer visits;

changes in legislation, affecting such matters as credit card income;

variations in the price, availability and shipping costs of merchandise;

seasonal effects on demand for our products;

changes in the cost or availability of material or labor; and

weather and acts of God.

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

Lawsuits have been filed, and may continue to be filed, from customers alleging discrimination. We are also susceptible to claims filed by customers alleging responsibility for injury suffered during a visit to a store. Further, we may be subject to other claims in the future based on, among other things, employee discrimination, harassment, wrongful termination and wage issues, including those relating to overtime compensation. 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/or negatively impact operating results.

### Catastrophic events may disrupt our business.

Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt international trade and supply chain efficiencies, suppliers or customers, or result in political or economic instability. These events could result in property losses, reduce demand for our products or make it difficult or impossible to receive products from suppliers.

***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.

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

The protection of customer, employee and Company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. We receive certain personal information about our customers and employees. In addition, our online operations at www.dillards.com depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. A compromise of our security systems that results 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.

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

GE owns and manages our proprietary credit cards under the Alliance that expires in fiscal 2014. The Alliance provides for certain payments to be made by GE to the Company, including a revenue sharing and marketing reimbursement. The income and cash flow that the Company receives from the Alliance is dependent upon a number of factors including the level of sales on GE accounts, the level of balances carried on the GE accounts by GE customers, payment rates on GE accounts, finance charge rates and other fees on GE accounts, the level of credit losses for the GE accounts, GE's ability to extend credit to our customers as well as GE's funding costs, 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.

***The percentage-of-completion method of accounting for contract revenues 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 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, 2010, we operated 309 stores in 29 states totaling approximately 53.4 million square feet of which we owned approximately 46.4 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, 2010:

| Location | Number of stores | Owned Stores | Leased Stores | Owned Building on Leased Land | Partially Owned and Partially Leased |
| --- | ---: | ---: | ---: | ---: | ---: |
| Alabama | 11 | 10 | — | — | 1 |
| Arkansas | 8 | 7 | — | — | 1 |
| Arizona | 16 | 15 | — | 1 | — |
| California | 3 | 3 | — | — | — |
| Colorado | 10 | 9 | 1 | — | — |
| Florida | 44 | 40 | — | 4 | — |
| Georgia | 12 | 7 | 3 | 2 | — |
| Iowa | 5 | 5 | — | — | — |
| Idaho | 2 | 1 | 1 | — | — |
| Illinois | 3 | 2 | — | 1 | — |
| Indiana | 3 | 3 | — | — | — |
| Kansas | 7 | 3 | 2 | 2 | — |
| Kentucky | 6 | 5 | 1 | — | — |
| Louisiana | 14 | 12 | 1 | — | 1 |
| Missouri | 10 | 7 | 1 | 2 | — |
| Mississippi | 6 | 4 | 1 | 1 | — |
| Montana | 3 | 2 | 1 | — | — |
| North Carolina | 15 | 13 | 1 | 1 | — |
| Nebraska | 3 | 2 | 1 | — | — |
| New Mexico | 6 | 3 | 3 | — | — |
| Nevada | 4 | 4 | — | — | — |
| Ohio | 15 | 10 | 5 | — | — |
| Oklahoma | 11 | 7 | 4 | — | — |
| South Carolina | 8 | 8 | — | — | — |
| Tennessee | 10 | 7 | 1 | — | 2 |
| Texas | 59 | 42 | 11 | 1 | 5 |
| Utah | 6 | 4 | 2 | — | — |
| Virginia | 8 | 5 | 2 | 1 | — |
| Wyoming | 1 | 1 | — | — | — |
| Total | 309 | 241 | 42 | 16 | 10 |

8

At January 30, 2010, 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 | Nashville, TN | 285,000 | Leased |
| 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 |  | 3,329,000 |  |

Additional information is contained in Notes 1, 4, 14, 15 and 16 of "Notes to Consolidated Financial Statements," in Item 8 hereof.

## Legal proceedings

As filed, 2,213 characters.

On May 27, 2009, a lawsuit was filed in the United States District Court for the Eastern District of Arkansas styled Steven Harben, Derivatively on Behalf of Nominal Defendant Dillard's, Inc. v. William Dillard II et al, *Case Number 4:09-IV-395*. The lawsuit generally seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders. While it is too soon to predict the outcome of any litigation filed as recently as this suit, the named officers and directors intend to contest these allegations vigorously.

On June 10, 2009, a lawsuit was filed in the Circuit Court of Pulaski County, Arkansas styled Billy K. Berry, Derivatively on behalf of Dillard's, Inc. v. William Dillard II et al, *Case Number CV-09-4227-2.* The lawsuit generally seeks return of monies and alleges that certain officers and directors of the Company have been overcompensated and/or received improper benefits at the expense of the Company and its shareholders. On February 18, 2010, the Circuit Court entered an "Order of Dismissal with Prejudice and Final Judgment" dismissing the case as to all parties defendant. Plaintiff has appealed the Court's Order. The named officers and directors will continue to contest these allegations vigorously.

From time to time, the Company is involved in other litigation relating to claims arising out of the Company's operations in the normal course of business. This litigation may relate to claims by customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of March 26, 2010, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company's business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

## Management's discussion and analysis

As filed, 68,587 characters.

### EXECUTIVE OVERVIEW

Dillard's, Inc. operates 309 retail department stores in 29 states. Our retail stores are located in fashion-oriented shopping malls and open-air centers and offer a broad selection of fashion apparel and home furnishings. We offer an appealing and attractive assortment of merchandise to our customers at a fair price, including national brand merchandise as well as our exclusive brand merchandise. We seek to enhance our income by maximizing the sale of this merchandise to our customers by promoting and advertising our merchandise and by making our stores an attractive and convenient place for our customers to shop.

In August of 2008, we purchased the remaining interest in CDI, a former 50% equity method joint venture investment of the Company. CDI is a general contractor 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, the fiscal 2009, 2008 and 2007 reporting periods presented and discussed below ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively, and each contained 52 weeks.

### Fiscal 2009

The recessionary environment that arose in fiscal 2008 continued to suppress consumer spending throughout most of fiscal 2009, having a significant impact on the Company's operations. Despite a significant decrease in sales, our gross margin improved during fiscal 2009 compared to fiscal 2008. We continued to benefit from our improvements in inventory management, focusing on more conservative purchasing and efforts to better match the timing of receipts with demand, which resulted in reduced markdowns. Our cost control initiatives that began during fiscal 2008 resulted in reduced operating expenses during fiscal 2009. Consequently, we reported an improvement to our operating results, with net income increasing to $68.5 million, or $0.93 per share, during fiscal 2009 compared to a net loss of $241.1 million, or $3.25 per share, during fiscal 2008.

Included in net income for fiscal 2009 are:

a $3.1 million pretax charge ($2.0 million after tax or $0.03 per share) for asset impairment and store closing charges;

a $5.7 million pretax gain ($3.6 million after tax or $0.05 per share) related to proceeds received from settlement of the Visa Check/Mastermoney Antitrust litigation;

a $10.6 million income tax benefit ($0.14 per diluted share) primarily due to state administrative settlement and a decrease in a capital loss valuation allowance;

a $1.7 million pretax gain ($1.0 million after tax or $0.01 per share) on the early extinguishment of debt; and

a $2.3 million pretax gain ($1.5 million after tax or $0.02 per share) related to the sale of a store.

Included in the net loss for fiscal 2008 are:

a $197.9 million pretax charge ($136.5 million after tax or $1.84 per share) for asset impairment and store closing charges;

a $7.3 million pretax charge ($4.6 million after tax or $0.06 per share) related to hurricane expenses; and

a $24.8 million pretax gain ($15.6 million after tax or $0.21 per share) related to the sale of an aircraft and a store.

Highlights of fiscal 2009 as compared to fiscal 2008 are:

net sales from retail operations were $5.9 billion, a decrease of $852.6 million or 13% while comparable stores sales fell 10%;

gross profit from retail operations improved 410 basis points of sales;

total inventory declined $73.7 million, with comparable store inventory down 5%;

operating expenses declined $288.6 million; and

year over year outstanding debt declined $233.9 million, with no short-term borrowings outstanding. Total availability under the Company's $1.2 billion revolving credit facility ranged from a high of $1,147.7 million to a low of $816.3 million during fiscal 2009.

As of January 30, 2010, we had working capital of $980.5 million, cash and cash equivalents of $341.7 million and $949.3 million of total debt outstanding. Cash flows from operating activities were $554.0 million for fiscal 2009. We operated 309 total stores as of January 30, 2010, a decrease of 6 stores from the same period last year.

### 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:

| (retail segment only, excluding cash flow data) | Fiscal Year Ended January 30, 2010 | January 31, 2009 | February 2, 2008 |
| --- | ---: | ---: | ---: |
| Net sales (in millions) | $5,890.0 | $6,742.6 | $7,207.4 |
| Sales per square foot | $110 | $124 | $128 |
| Total store count at end of period | 309 | 315 | 326 |
| Net sales trend | (13)% | (6)% | (6)% |
| Comparable store sales trend | (10)% | (7)% | (6)% |
| Gross profit (in millions) | $1,982.9 | $1,998.6 | $2,420.8 |
| Gross profit as a percentage of net sales | 33.7% | 29.6% | 33.6% |
| Comparable store inventory trend | (5)% | (20)% | (1)% |
| Merchandise inventory turnover | 2.6 | 2.6 | 2.5 |
| Cash flow from operations (in millions) | $554.0 | $350.0 | $254.4 |

### Trends and Uncertainties

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

Cash flow—Cash from operating activities is a primary source of liquidity that is adversely affected when the industry faces economic challenges. Furthermore, operating cash flow can be negatively affected when new and existing competitors seek areas of growth to expand their businesses.

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 goods sold on our income statement will correspondingly rise, thus reducing our income.

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 have a significant impact on our merchandise mix and, thus, our ability to sell merchandise at profitable prices.

Store growth—Although store growth is presently not a near-term goal, such growth is dependent upon a number of factors which could impede our ability to open new stores, such as the identification of suitable markets and locations and the availability of shopping developments, especially in a weak economic environment.

### 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, there can be no assurance that our business will not be affected by such factors in the future.

### 2010 Guidance

A summary of estimates on key financial measures for fiscal 2010 is shown below. There have been no changes in the estimates for 2010 since the Company released its fourth quarter earnings on March 1, 2010.

*(In millions of dollars)*

|  | Fiscal 2010 Estimated | Fiscal 2009 Actual |
| --- | ---: | ---: |
| Depreciation | $260 | $263 |
| Rental expense | 56 | 58 |
| Interest and debt expense, net | 74 | 74 |
| Capital expenditures | 100 | 83 |

### General

**Net sales.** Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI, a former 50% equity method joint venture investment of the Company that is a general contractor whose business includes constructing and remodeling stores for the Company. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. 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 in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.

**Service charges and other income.** Service charges and other income include income generated through the Alliance with GE. Other income includes rental income, shipping and handling fees and lease income on leased departments.

**Cost of sales.** Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific margin maintenance allowances 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.

**Advertising, selling, administrative and general expenses.** Advertising, selling, administrative and general 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 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, mortgage notes, term note and subordinated debentures, gains and losses on note repurchases, amortization of financing costs, call premiums 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.

**Asset impairment and store closing charges.** Asset impairment and store closing charges consist of write-downs to fair value of under-performing properties and 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.

**Equity in (losses) earnings of joint ventures.** Equity in (losses) earnings of joint ventures includes the Company's portion of the income or loss of the Company's unconsolidated joint ventures, including the equity in earnings of CDI prior to the purchase of its remaining interest and subsequent consolidation on August 29, 2008.

### Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements. As disclosed in this 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 will 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 Consolidated Financial Statements.

**Merchandise inventory.** Approximately 97% of the inventories are valued at the lower of cost or market using the last-in, first-out retail inventory method ("LIFO RIM"). Under LIFO RIM, 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. LIFO RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of LIFO RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the LIFO RIM 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. Management believes that the Company's LIFO RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 3% 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 $9 million for the year ended January 30, 2010.

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 $6.4 million and $4.7 million as of January 30, 2010 and January 31, 2009, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision were not material for the years ended January 30, 2010, January 31, 2009 and February 2, 2008.

The Company's share of income earned under the Alliance with GE involving the Dillard's branded proprietary credit cards is included as a component of service charges and other income. The Company received income of approximately $89 million, $110 million and $119 million from GE in fiscal 2009, 2008 and 2007, respectively. Pursuant to this Alliance, the Company has no continuing involvement other than to honor the proprietary cards in its stores. Although not obligated to a specific level of marketing commitment, the Company participates in the marketing of the proprietary credit cards and accepts payments on the proprietary cards in its stores as a convenience to customers who prefer to pay in person rather than by mailing their payments to GE.

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.

**Merchandise vendor allowances.** The Company receives concessions from its merchandise 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 LIFO RIM, 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 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, 2010 and January 31, 2009, insurance accruals of $51.7 million and $53.7 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. Adjustments resulting from changes in historical loss trends have reduced expenses during the years ended January 30, 2010 and January 31, 2009, partially due to recently implemented 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 $3.3 million for the fiscal year ended January 30, 2010.

**Finite-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; or

Store closings.

The Company performs an analysis of the anticipated undiscounted future net cash flows of the related finite-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 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.

The total amount of unrecognized tax benefits as of January 30, 2010 and January 31, 2009 was $18.2 million and $27.3 million, respectively, of which $13.8 million and $19.5 million, respectively, would, if recognized, affect the effective tax rate. The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements as income tax expense. The total interest and penalties recognized in the consolidated statements of operations as of January 30, 2010, January 31, 2009 and February 2, 2008 was $(2.0) million, $0.6 million, and $(4.4) million, respectively. The total accrued interest and penalties in the consolidated balance sheets as of January 30, 2010 and January 31, 2009 was $7.1 million and $9.4 million, respectively.

The Company is currently being examined by the Internal Revenue Service ("IRS") for the fiscal tax years 2006 through 2007. During fiscal 2008, the IRS completed its examination of the Company's federal income tax returns for the fiscal tax years 2003 through 2005. Certain issues relating to this examination are currently under appeal. The Company is also under examination by various state and local taxing jurisdictions for various fiscal years. During fiscal 2009, the Company reached a settlement with a state taxing jurisdiction which resulted in a reduction in the liability for unrecognized tax benefits. The tax years that remain subject to examination for major tax jurisdictions are fiscal tax years 2003 and forward, with the exception of fiscal 1997 through 2002 amended state and local tax returns related to the reporting of federal audit adjustments. 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.

The Company has taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the finalization of the Company's federal and various state income tax audits. The Company's federal income tax audit uncertainties primarily relate to research and development credits, while various state income tax audit uncertainties primarily relate to income from intangible assets. The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $4 million and $8 million. Changes in the Company's assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.

**Pension obligations.** The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate decreased to 5.7% as of January 30, 2010 from 6.6% as of January 31, 2009. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $130 million is appropriately stated as of January 30, 2010; 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 generate an experience gain or loss of approximately $7.8 million. The Company expects to make a contribution to the pension plan of approximately $5.7 million in fiscal 2010. The Company expects pension expense to be approximately $13.2 million in fiscal 2010 with a liability of $137.9 million at January 29, 2011.

### 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, 2010 Amount | % of Net Sales | January 31, 2009 Amount | % of Net Sales | February 2, 2008 Amount | % of Net Sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $6,094,948 | 100.0% | $6,830,543 | 100.0% | $7,207,417 | 100.0% |
| Service charges and other income | 131,680 | 2.2 | 157,897 | 2.3 | 163,389 | 2.3 |
|  | 6,226,628 | 102.2 | 6,988,440 | 102.3 | 7,370,806 | 102.3 |
| Cost of sales | 4,102,892 | 67.3 | 4,827,769 | 70.7 | 4,786,655 | 66.4 |
| Advertising, selling, administrative and general expenses | 1,644,091 | 27.0 | 1,932,732 | 28.3 | 2,065,288 | 28.7 |
| Depreciation and amortization | 262,877 | 4.3 | 284,287 | 4.2 | 298,927 | 4.2 |
| Rentals | 58,363 | 1.0 | 61,481 | 0.9 | 59,987 | 0.8 |
| Interest and debt expense, net | 74,003 | 1.2 | 88,821 | 1.3 | 91,556 | 1.3 |
| Gain on disposal of assets | (3,207) | (0.1) | (24,567) | (0.4) | (12,625) | (0.2) |
| Asset impairment and store closing charges | 3,084 | 0.1 | 197,922 | 2.9 | 20,500 | 0.3 |
| Income (loss) before income taxes and equity in (losses) earnings of joint ventures | 84,525 | 1.4 | (380,005) | (5.6) | 60,518 | 0.8 |
| Income taxes (benefit) | 12,690 | 0.2 | (140,520) | (2.1) | 13,010 | 0.2 |
| Equity in (losses) earnings of joint ventures | (3,304) | (0.1) | (1,580) | 0.0 | 6,253 | 0.1 |
| Net income (loss) | $68,531 | 1.1% | $(241,065) | (3.5)% | $53,761 | 0.7% |

### Sales

*(in thousands of dollars)*

| Net sales: | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $5,889,961 | $6,742,600 | $7,207,417 |
| Construction segment | 204,987 | 87,943 | — |
| Total net sales | 6,094,948 | 6,830,543 | 7,207,417 |

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

|  | Percent Change Fiscal 2009-2008 | Fiscal 2008-2007 |
| --- | ---: | ---: |
| Cosmetics | (8.7)% | (6.1)% |
| Ladies' apparel and accessories | (13.2) | (5.7) |
| Juniors' and children's apparel | (14.3) | (11.6) |
| Men's apparel and accessories | (14.1) | (5.7) |
| Shoes | (6.5) | (3.0) |
| Home and furniture | (22.4) | (12.0) |

23

### 2009 Compared to 2008

Net sales from the retail operations segment decreased $852.6 million or 13% during fiscal 2009 as compared to fiscal 2008 while sales in comparable stores declined 10%. All merchandise categories experienced significant sales declines, with the most noted decline in the home and furniture category.

The net sales decrease reflected a 16% decrease in the number of sales transactions while the average dollars per sales transaction increased approximately 4%.

We believe sales in all categories were affected by the continued challenging economic environment prevalent throughout fiscal 2009. In light of recent signs of modest economic improvement, we may see some sales growth over the coming months; however, there is no guarantee of improved sales performance. Any further deterioration in the United States economy could have an adverse affect on consumer confidence and consumer spending habits, which could result in reduced customer traffic and comparable store sales, higher inventory levels and markdowns, and lower overall profitability.

### 2008 Compared to 2007

Net sales from the retail operations segment decreased $464.8 million or 6% during fiscal 2008 as compared to fiscal 2007 while comparable store sales declined 7%. All merchandise categories experienced sales declines, with significant declines noted in the home and furniture and juniors' and children's apparel categories. We believe sales in all categories were affected by the decline in the general economic environment during fiscal 2008.

The net sales decrease reflected a 6% decrease in the number of sales transactions while the average dollars per sales transaction remained flat.

### Exclusive Brand Merchandise

Sales penetration of exclusive brand merchandise for fiscal years 2009, 2008 and 2007 was 23.8%, 24.0% and 24.2% of total net sales, respectively.

### Service Charges and Other Income

*(in millions of dollars)*

| Service charges and other income: | Fiscal 2009 2009-2008 | Fiscal 2008 2008-2007 | Fiscal 2007 2009-2008 | Dollar Change 2008-2007 |  | Percent Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Income from GE marketing and servicing alliance | $88.7 | $109.7 | $118.8 | $(21.0) | $(9.1) | (19.1)% | (7.7)% |
| Leased department income | 10.8 | 13.8 | 13.0 | (3.0) | 0.8 | (21.7) | 6.2 |
| Shipping and handling income | 15.4 | 15.7 | 14.3 | (0.3) | 1.4 | (1.9) | 9.8 |
| Visa Check/Mastermoney Antitrust settlement proceeds | 5.7 | 0.4 | — | 5.3 | 0.4 | +100.0 | — |
| Other | 11.1 | 18.3 | 17.3 | (7.2) | 1.0 | (39.3) | 5.8 |
| Total | $131.7 | $157.9 | $163.4 | $(26.2) | $(5.5) | (16.6)% | (3.4)% |

### 2009 Compared to 2008

Service charges and other income is composed primarily of income from the Alliance with GE. Income from the Alliance decreased $21.0 million in fiscal 2009 compared to fiscal 2008 due to a lower penetration rate of Dillard's branded proprietary credit card and increased credit losses partially offset by lower funding costs. Also included in service charges and other income were proceeds of

$5.7 million and $0.4 million during fiscal 2009 and 2008, respectively, from the Visa Check/Mastermoney Antitrust litigation settlement.

### 2008 Compared to 2007

Service charges and other income decreased in fiscal 2008 compared to fiscal 2007 primarily as a result of lower income from the Alliance with GE. Income from the Alliance decreased $9.1 million in fiscal 2008 compared to fiscal 2007 primarily due to a lower penetration rate of Dillard's branded proprietary credit card.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,982,858 | $1,998,623 | $2,420,762 |
| Construction segment | 9,198 | 4,151 | — |
| Total gross profit | $1,992,056 | $2,002,774 | $2,420,762 |
| **Gross profit as a percentage of segment net sales:** |  |  |  |
| Retail operations segment | 33.7% | 29.6% | 33.6% |
| Construction segment | 4.5 | 4.7 | — |
| Total gross profit as a percentage of net sales | 32.7 | 29.3 | 33.6 |

### 2009 Compared to 2008

Gross profit improved 340 basis points of sales during fiscal 2009 compared to fiscal 2008. Gross profit from retail operations improved 410 basis points of sales during the same periods due to the Company's focused inventory management efforts resulting in lower inventory levels and decreased markdown activity. Inventory in both total and comparable stores declined 5% as of January 30, 2010 compared to January 31, 2009.

Most merchandise categories experienced significant improvements in gross margin during fiscal 2009 compared to fiscal 2008, while shoes improved moderately and cosmetics was up only slightly.

### 2008 Compared to 2007

Gross profit declined 430 basis points of sales during fiscal 2008 compared to fiscal 2007. Gross profit from retail operations declined 400 basis points of sales during the same periods as the Company responded to notably weak consumer demand by increasing markdown activity. In anticipation of the weakened economy, the Company purchased substantially less inventory for the fall season. These combined efforts resulted in a 23% decline in total store inventory and a 20% decline in comparable store inventory as of January 31, 2009 compared to February 2, 2008.

All merchandise categories experienced gross margin declines during fiscal 2008 compared to fiscal 2007. Cosmetics was down only slightly while home and furniture experienced a significant decline.

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

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| **SG&A** | $1,644,091 | $1,932,732 | $2,065,288 |
| **SG&A as a percentage of net sales** | 27.0% | 28.3% | 28.7% |

25

### 2009 Compared to 2008

SG&A decreased $288.6 million during fiscal 2009 compared to fiscal 2008 primarily as a result of the Company's cost control measures enacted during fiscal 2008 and store closures that occurred primarily during fiscal 2008. The decline was most noted in payroll and related payroll taxes ($193.3 million), advertising ($31.6 million), services purchased ($20.0 million) and supplies ($13.0 million).

### 2008 Compared to 2007

SG&A decreased $132.6 million during fiscal 2008 from fiscal 2007 primarily as a result of the Company's cost control measures and store closures. Notable areas of savings during the year were in payroll and related payroll taxes ($73.5 million), advertising ($31.6 million), services purchased ($15.7 million) and supplies ($12.3 million). These savings were partially offset by charges of $7.3 million related to losses and remediation expenses incurred during the current year as a result of Hurricane Ike.

### Depreciation and Amortization

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| **Depreciation and amortization** | $262,877 | $284,287 | $298,927 |

### 2009 Compared to 2008

Depreciation and amortization expense decreased $21.4 million during fiscal 2009 compared to fiscal 2008 primarily as a result of the Company's continuing efforts to reduce capital expenditures and of store closures that occurred and impairment charges that were recorded mainly during the fourth quarter of fiscal 2008.

### 2008 Compared to 2007

Depreciation and amortization expense decreased $14.6 million during fiscal 2008 compared to fiscal 2007 primarily as a result of the Company's plan to reduce capital expenditures.

### Rentals

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| **Rentals** | $58,363 | $61,481 | $59,987 |

### 2009 Compared to 2008

Rental expense declined $3.1 million or 5.1% in fiscal 2009 compared to fiscal 2008 primarily due to store closures that occurred during the second half of fiscal 2008 as the Company executed its plan to exit under-performing locations.

### 2008 Compared to 2007

Rental expense increased $1.5 million or 2.5% in fiscal 2008 compared to fiscal 2007 primarily due to the increase of leased equipment.

### Interest and Debt Expense, Net

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| **Interest and debt expense, net** | $74,003 | $88,821 | $91,556 |

### 2009 Compared to 2008

Net interest and debt expense declined $14.8 million in fiscal 2009 compared to fiscal 2008 primarily due to lower average debt levels and a $1.7 million pretax gain on discounted repurchases of outstanding notes in 2009 partially offset by reduced capitalized interest of $1.2 million. Total weighted average debt outstanding during fiscal 2009 decreased approximately $285.6 million compared to fiscal 2008.

### 2008 Compared to 2007

Net interest and debt expense declined $2.7 million in fiscal 2008 compared to fiscal 2007 primarily due to expense savings of $9.4 million attributable to a lower average interest rate and lower average debt partially offset by lower capitalized interest of $3.7 million and lower investment income of $2.8 million.

### Gain on Disposal of Assets

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| **Gain on disposal of assets** | $3,207 | $24,567 | $12,625 |

### Fiscal 2009

During fiscal 2009, the Company sold a vacant store location in Kansas City, Missouri resulting in a $2.3 million pretax gain.

### Fiscal 2008

During fiscal 2008, the Company sold its store location at Rivercenter in San Antonio, Texas for $8.0 million, resulting in a pretax gain of $7.2 million on the sale. The Company also purchased a corporate aircraft by exercising its option under a synthetic lease and by issuing a $23.6 million note payable, secured by letters of credit. The Company then sold the aircraft for $44.5 million. A pretax gain of $17.6 million was recognized related to the sale.

### Fiscal 2007

During fiscal 2007, the Company recognized a $14.1 million pretax gain relating to hurricane recovery for two stores damaged by the hurricanes of 2005 as the Company completed the cleanup of the damaged locations during fiscal 2007. This gain was partially offset when the Company sold its properties in Longmont, Colorado and Richardson, Texas for $5.8 million, recognizing a pretax net loss of $2.5 million on the sales.

### Asset Impairment and Store Closing Charges

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
| --- | ---: | ---: | ---: |
| **Asset impairment and store closing charges** | $3,084 | $197,922 | $20,500 |

27

### Fiscal 2009

Asset impairment and store closing charges for fiscal 2009 consisted of the write-down of property of $3.9 million on two stores closed in fiscal 2008. This amount was partially offset by the renegotiation of a lease that resulted in the reduction of a future rent accrual of $0.8 million on a store closed in fiscal 2008.

### Fiscal 2008

Asset impairment and store closing charges for fiscal 2008 consisted of (1) the write-off of $31.9 million of goodwill on seven stores and a write-down of $58.8 million of investment in two mall joint ventures where the estimated future cash flows were unable to sustain the amount of goodwill and investment; (2) an accrual of $0.9 million for future rent, property tax and utility payments on one store that was closed during the year; (3) a write-down of property and equipment and an accrual for future rent, property tax and utility payments of $5.7 million on a store and distribution center that were closed during the year and (4) a write-down of property and equipment on 32 stores that were closed, scheduled to close or impaired based on the inability of the stores' estimated future cash flows to sustain their carrying value.

A breakdown of the asset impairment and store closing charges for fiscal 2008 follows:

*(in thousands of dollars)*

|  | Number of Locations | Impairment Amount |
| --- | ---: | ---: |
| Store closed in prior year | 1 | $800 |
| Stores closed in fiscal 2008 | 9 | 31,993 |
| Stores to close in fiscal 2009 | 5 | 18,811 |
| Stores impaired based on cash flows | 25 | 86,094 |
| Non-operating facility | 1 | 493 |
| Distribution center | 1 | 925 |
| Joint ventures | 2 | 58,806 |
| Total | 44 | $197,922 |

### Fiscal 2007

Asset impairment and store closing charges for fiscal 2007 consisted of a write-off of goodwill on one store of $2.6 million that was closed during the year, an accrual for future rent, property tax and utility payments on two stores of $1.0 million that were also closed during the year and a write-down of property and equipment on 14 stores of $16.9 million that were closed, scheduled to close or impaired based on the inability of the stores' estimated future cash flows to sustain their carrying value.

A breakdown of the asset impairment and store closing charges for fiscal 2007 follows:

*(in thousands of dollars)*

|  | Number of Locations | Impairment Amount |
| --- | ---: | ---: |
| Store closed in prior year | 1 | $687 |
| Stores closed in fiscal 2007 | 4 | 3,647 |
| Stores to close in fiscal 2008 | 5 | 5,083 |
| Stores impaired based on cash flows | 6 | 9,113 |
| Non-operating facility | 1 | 1,970 |
| Total | 17 | $20,500 |

28

### Income Taxes

The Company's estimated federal and state income tax rate, inclusive of equity in (losses) earnings of joint ventures and exclusive of the effect of nondeductible goodwill write-off, was 15.6% in fiscal 2009, 40.2% in fiscal 2008 and 18.8% in fiscal 2007.

### Fiscal 2009

During fiscal 2009, income taxes included the net decrease in unrecognized tax benefits, interest, and penalties of approximately $6.3 million and included the recognition of tax benefits of approximately $1.3 million for a decrease in deferred liabilities due to a decrease in the state effective tax rate, approximately $4.4 million for a decrease in a capital loss valuation allowance resulting from capital gain income, and approximately $2.4 million due to federal tax credits. The Company is currently being examined by the IRS for the fiscal tax year 2006 and 2007. During fiscal 2008, the IRS completed its examination of the Company's federal income tax returns for the fiscal years 2003 through 2005. Certain issues relating to this examination are currently under appeal. The Company is also under examination by various state and local taxing jurisdictions for various fiscal years. During fiscal 2009, the Company reached a settlement with a state taxing jurisdiction which resulted in a reduction in unrecognized tax benefits, interest, and penalties. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company's financial statements.

### Fiscal 2008

During fiscal 2008, income taxes included the net increase in unrecognized tax benefits, interest, and penalties of approximately $2.5 million and included the recognition of tax benefits of approximately $10.5 million for a decrease in a capital loss valuation allowance resulting from capital gain income and approximately $4.1 million due to federal tax credits.

### Fiscal 2007

During fiscal 2007, income taxes included the net decrease in unrecognized tax benefits, interest, and penalties of approximately $5.9 million, and a recognition of tax benefits of approximately $1.7 million for a decrease in a capital loss valuation allowance resulting from capital gain income, approximately $1.3 million for a reduction in state tax liabilities due to a restructuring that occurred during this period and approximately $3.3 million due to federal tax credits.

### LIQUIDITY AND CAPITAL RESOURCES

### Financial Position Summary

*(in thousands of dollars)*

|  | January 30, 2010 | January 31, 2009 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $341,693 | $96,823 | $244,870 | 252.9% |
| Other short-term borrowings | — | 200,000 | (200,000) | (100.0) |
| Current portion of long-term debt | 1,719 | 25,535 | (23,816) | (93.3) |
| Long-term debt | 747,587 | 757,689 | (10,102) | (1.3) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders' equity | 2,304,103 | 2,251,115 | 52,988 | 2.4 |
| Current ratio | 2.28 | 1.85 |  |  |
| Debt to capitalization | 29.2% | 34.5% |  |  |

The Company's current non-operating priorities for its use of cash are:

debt reduction;

stock repurchase plan;

strategic investments to enhance the value of existing properties; and

dividend payments to shareholders.

At present, there are numerous general business and economic factors affecting the retail industry. These factors include: (1) consumer confidence; (2) competitive conditions; (3) the recession in the U.S. and numerous economies around the globe; (4) high levels of unemployment in various sectors and (5) other factors that are both separate from, and outgrowths of, the above. These conditions may impact our comparable store sales which may result in reduced cash flows if we are not appropriately managing our inventory levels or expenses. Further, if one or more of these conditions continue or worsen, we may experience a further adverse effect on our business, financial condition and results of operations, including our ability to access capital.

Cash flows for the three fiscal years ended were as follows:

*(in thousands of dollars)*

|  | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 | Percent Change 2009-2008 | 2008-2007 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating Activities | $554,007 | $350,005 | $254,449 | 58.3% | 37.6% |
| Investing Activities | (63,453) | (118,191) | (331,987) | 46.3 | 64.4 |
| Financing Activities | (245,684) | (223,903) | (27,544) | (9.7) | (712.9) |
| Total Cash Provided (Used) | $244,870 | $7,911 | $(105,082) |  |  |

### Operating Activities

The primary source of the Company's liquidity is cash flows from operations. Due to the seasonality of the Company's business, it has 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% and 96.5% of total revenues in fiscal 2009 and 2008, respectively.

Operating cash inflows also include revenue and reimbursements from the Alliance with GE, which owns and manages the Company's private label credit card business under the Alliance, and cash distributions from joint ventures. Operating cash outflows include payments to vendors for inventory, services and supplies, payments to employees, and payments of interest and taxes.

The Alliance provides for certain payments to be made by GE to the Company, including a revenue sharing and marketing reimbursement. The Company received income of approximately $89 million and $110 million from GE in fiscal 2009 and 2008, respectively. While future cash flows under this Alliance are difficult to predict, the Company expects the 2010 amounts to be reduced from current year levels due to the challenging economy and new credit regulations. The amount the Company receives is dependent on the level of sales on GE accounts, the level of balances carried on the GE accounts by GE customers, payment rates on GE accounts, finance charge rates and other fees on GE accounts, the level of credit losses for the GE accounts as well as GE's funding costs. The Alliance expires in fiscal 2014.

Net cash flows from operations increased $204.0 million during fiscal 2009 compared to fiscal 2008. This increase is primarily attributable to higher net income, as adjusted for non-cash items, of $131.4 million for fiscal 2009 compared to fiscal 2008. The increase was also influenced by an increase of $72.6 million related to changes in working capital items, primarily of changes in accounts payable and income taxes partially offset by changes in inventory as the Company worked to control inventory levels, including a 13% decrease in inventory purchases over the prior year.

We received insurance proceeds of $5.9 million during fiscal 2007 related to inventory damages incurred during the 2005 hurricane season. Combined with the hurricane insurance proceeds recorded in investing activities, the Company recorded related gains in fiscal 2007 of $14.1 million and $4.1 million in gain on disposal of assets and cost of sales, respectively.

### 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 decreased $114.5 million for fiscal 2009 compared to fiscal 2008, mainly as a result of the construction of fewer stores. The fiscal 2009 expenditures of $75.1 million consisted primarily of the construction of two new stores, remodeling of existing stores and investments in technology equipment and software. There were no new store openings during fiscal 2009. Store closures during fiscal 2009 were:

| Closed Locations—Fiscal 2009 | City | Square Feet |
| --- | --- | ---: |
| Northgate Mall | Tullahoma, Tennessee | 64,000 |
| Desoto Square Mall | Bradenton, Florida | 100,000 |
| Sarasota Square | Sarasota, Florida | 100,000 |
| Chesapeake Square | Chesapeake, Virginia | 160,000 |
| Northgate Mall | Cincinnati, Ohio | 185,000 |
| Ward Parkway (clearance center) | Kansas City, Missouri | 202,000 |
| Total closed square footage |  | 811,000 |

Capital expenditures for 2010 are expected to be approximately $100 million. During February 2010, we opened our new locations at The Domain in Austin, Texas (200,000 square feet) and The Village at Fairview in Fairview, Texas (155,000 square feet). There are no other planned store openings for fiscal 2010.

We received insurance proceeds of $16.1 million during fiscal 2007 for the construction of property and fixtures for stores damaged during the 2005 hurricane season.

We have approximately 78 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" in fiscal

2010\. Therefore, repair and replacement costs will be borne by us for damage to any of these stores from "named storms" in fiscal 2010. We have created early response teams to assess and coordinate cleanup efforts should some stores be impacted by storms. We have also redesigned certain store features to lessen the impact of storms and have equipment available to assist in the efforts to ready the stores for normal operations.

During fiscal 2009, 2008 and 2007, we received proceeds from the sale of property and equipment of $11.6 million, $67.1 million and $48.2 million, respectively, and recorded related gains of $3.2 million and $24.6 million for fiscal 2009 and 2008, respectively, and a related loss in operating activities of $1.5 million during fiscal 2007. During fiscal 2008, we also recorded a $3.9 million loss related to property damages sustained on one store during Hurricane Ike.

On August 29, 2008, the Company purchased the remaining interest in CDI for a cash purchase price of $9.8 million. This acquisition was accounted for under the purchase method and, accordingly, (1) the purchase price has been allocated to CDI's assets and liabilities based on their estimated fair values as of the date of purchase and (2) CDI's results of operations have been included in the Company's results of operations since the date of purchase. Upon recognition of the acquisition, the Company acquired $14.1 million in cash.

### Financing Activities

Our primary source of cash inflows from financing activities is our $1.2 billion 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, the payment of dividends and the purchase of treasury stock.

Cash used in financing activities increased to $245.7 million in fiscal 2009 from $223.9 million in fiscal 2008. This decrease in cash flow of $21.8 million was primarily due to the repayment of short-term borrowings partially offset by a decrease in principal debt payments.

**Revolving Credit Agreement.** At January 30, 2010, the Company maintained a $1.2 billion revolving credit facility ("credit agreement") with JPMorgan Chase Bank ("JPMorgan") as agent for various banks, secured by the inventory of Dillard's, Inc. operating subsidiaries. The credit agreement expires December 12, 2012. Borrowings under the credit agreement accrued interest at either JPMorgan's Base Rate minus 0.5% or LIBOR plus 1.0% (1.23% at January 30, 2010) subject to certain availability thresholds as defined in the credit agreement. During the period April 1, 2009 through June 30, 2009, interest on borrowings under the credit agreement accrued interest at either JPMorgan's Base Rate minus 0.25% or LIBOR plus 1.25% due to lower average availability (which is analyzed each calendar quarter).

Limited to 85% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was approximately $816.3 million at January 30, 2010. No borrowings were outstanding at January 30, 2010. Letters of credit totaling $89.6 million were issued under this credit agreement leaving unutilized availability under the facility of $726.7 million at January 30, 2010. There are no financial covenant requirements under the credit agreement provided that availability for borrowings and letters of credit exceeds $100 million. The Company pays an annual commitment fee to the banks of 0.25% of the committed amount less outstanding borrowings and letters of credit. The Company had weighted-average borrowings of $57.2 million and $251.3 million during fiscal 2009 and 2008, respectively.

**Long-term Debt.** At January 30, 2010, the Company had $749.3 million of long-term debt, comprised of unsecured notes, a term note and a mortgage note outstanding. The unsecured notes bear interest at rates ranging from 6.63% to 9.13% with due dates from 2011 through 2028, and the mortgage note bears interest at 9.25% with a due date of 2013. The term note, with an outstanding balance of $22.2 million as of January 30, 2010, was issued during fiscal 2008 towards the purchase of a corporate aircraft and bears interest at 5.93% with a due date of 2012.

We reduced our net level of outstanding debt and capital leases during fiscal 2009 by $33.9 million compared to a reduction of $199.5 million in fiscal 2008. The debt decline in both periods was primarily due to regular maturities of outstanding notes and scheduled payments of mortgage principal.

During fiscal 2009, the Company also repurchased $8.4 million face amount of 9.125% notes with an original maturity on August 1, 2011. This repurchase resulted in a pretax gain of approximately $1.7 million which was recorded in net interest and debt expense. No notes were repurchased during fiscal 2008 or 2007.

As of January 30, 2010, maturities of long-term debt over the next five years are $2 million, $49 million, $77 million, $0 and $0.

**Stock Repurchase.** In May 2005, the Company's Board of Directors approved the repurchase of up to $200 million of the Company's Class A Common Stock ("2005 Stock Plan"). Availability under the 2005 Stock Plan at the beginning of fiscal 2007 was $112 million. During fiscal 2007, the Company repurchased 5.2 million shares for $112 million which completed the authorization under the 2005 Stock Plan.

In November 2007, the Company's Board of Directors authorized another share repurchase plan under which the Company may repurchase up to $200 million of its Class A Common Stock ("2007 Stock Plan"). This open-ended authorization permits the Company to repurchase its Class A Common Stock in the open market or through privately negotiated transactions. No repurchases were made during fiscal 2007 under the 2007 Stock Plan. During fiscal 2008, the Company repurchased 1,826,600 shares for $17.4 million at an average price of $9.55 per share. No repurchases were made during fiscal 2009 leaving $182.6 million in share repurchase authorization remaining under the 2007 Stock Plan at January 30, 2010.

**Subordinated Debentures.** 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.

### Fiscal 2010

During fiscal 2010, the Company expects to finance its capital expenditures and its working capital requirements including required debt repayments and stock repurchases, if any, from cash on hand, cash flows generated from operations and utilization of the credit facility. The peak borrowings incurred under the credit facilities were approximately $208 million during 2009, and borrowings for fiscal 2010 are expected to be minimal. Depending on conditions in the capital markets and other factors, 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 or off-balance-sheet entities for the purpose of raising capital, incurring debt or operating the Company's business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company's liquidity 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 | $749,306 | $1,719 | $125,955 | $— | $621,632 |
| Interest on long-term debt | 636,474 | 55,124 | 102,493 | 89,930 | 388,927 |
| Subordinated debentures | 200,000 | — | — | — | 200,000 |
| Interest on subordinated debentures | 419,999 | 14,959 | 30,164 | 29,918 | 344,958 |
| Capital lease obligations, including interest | 32,910 | 3,568 | 17,295 | 3,104 | 8,943 |
| Defined benefit plan participant payments | 136,878 | 6,417 | 12,834 | 12,969 | 104,658 |
| Other liabilities | 1,513 | 775 | 738 | — | — |
| Purchase obligations(1) | 1,144,317 | 1,144,317 | — | — | — |
| Operating leases(2) | 179,044 | 44,163 | 78,927 | 21,172 | 34,782 |
| Total contractual cash obligations(3)(4) | $3,500,441 | $1,271,042 | $368,406 | $157,093 | $1,703,900 |

(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 $1,137.4 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 5% of minimum lease obligations in fiscal 2009.

(3)

The total liability for unrecognized tax benefits is $25.3 million, including tax, penalty, and interest (refer to Note 8 to the consolidated financial statements). 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 believes the estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $4 million and $8 million.

(4)

The Company is unable to reasonably estimate the timing of future cash flows of workers' compensation and general liability insurance reserves of $32.8 million, gift card liabilities of $15.3 million and other liabilities of $3.1 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 |
| --- | ---: | ---: | ---: | ---: | ---: |
| $1.2 billion line of credit, none outstanding(1) | $— | $— | $— | $— | $— |
| Standby letters of credit | 86,818 | 86,818 | — | — | — |
| Import letters of credit | 2,832 | 2,832 | — | — | — |
| Total commercial commitments | $89,650 | $89,650 | $— | $— | $— |

(1)

Availability under the credit facility is limited to 85% of the inventory of certain Company subsidiaries (approximately $816 million at January 30, 2010) which has not been reduced by outstanding letters of credit of $89.6 million.

### NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board ("FASB") released the *FASB Accounting Standards Codification™* and the Hierarchy of Generally Accepted Accounting Principles (the "Codification"), effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP, but does significantly change the way in which the accounting literature is organized, combining all authoritative standards in a comprehensive, topically organized database. All existing accounting standards documents were superseded and all other accounting literature not included in the Codification is considered nonauthoritative, other than guidance issued by the SEC. The Company adopted the provisions of this guidance during the fiscal quarter ended October 31, 2009, which had no impact on the Company's consolidated financial statements.

#### Derivative Instruments and Hedging Activities

In March 2008, the FASB issued new accounting guidance related to disclosures about derivative instruments and hedging activities. This guidance amends and expands disclosure requirements to provide a better understanding related to how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and their effect on an entity's financial statements. The Company adopted this guidance on February 1, 2009, and it did not have a material impact on the Company's consolidated financial statements.

#### Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued new accounting guidance related to the accounting for noncontrolling interests in consolidated financial statements. The objective of the guidance is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling company's balance sheet. The Company adopted this guidance on February 1, 2009, and it did not have a material impact on the Company's consolidated financial statements.

#### Fair Value Measurements and Disclosure

In September 2006, the FASB issued new accounting guidance related to fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This guidance applies under other accounting pronouncements that require or permit fair value measurements, the FASB having concluded in those other accounting pronouncements that fair value is the relevant measurement attribute. This guidance was effective for financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2007. The adoption of this portion of the guidance did not have a material impact on the Company's consolidated financial statements. In February 2008, the FASB permitted the delayed application of this fair value guidance for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company adopted this remaining portion of the statement on February 1, 2009, and the adoption did not have a material impact on the Company's consolidated financial statements.

In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about fair value of financial instruments in interim as well as in annual financial statements. The guidance was effective for interim and annual periods ending after June 15, 2009. The Company adopted these provisions on August 1,

2009, which resulted in a new disclosure in the Company's consolidated financial statements (see Note 17 of these Notes to Condensed Consolidated Financial Statements).

#### Consolidation of Variable Interest Entities

In June 2009, the FASB issued new accounting guidance relating to the consolidation of variable interest entities. This guidance requires an enterprise to perform an analysis:

to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity;

to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity;

to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity;

to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity's economic performance; and

to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a variable interest entity.

This guidance becomes effective for the Company for its fiscal year beginning on January 31, 2010. The Company adopted this guidance on January 31, 2010, and the adoption did not have a material impact on the Company's consolidated financial statements.

### FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: statements including (a) words such as "may," "will," "could," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "estimate," "continue," or the negative or other variations thereof, and (b) statements regarding matters that are not historical facts. 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, including the matters described under the caption "Risk Factors" above. 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; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security; 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.

## Market risk

As filed, 1,327 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) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Long-term debt | $1,719 | $49,166 | $76,789 | $— | $— | $621,632 | $749,306 | $645,045 |
| Average fixed interest rate | 7.5% | 9.1% | 7.4% | — | — | 7.3% | 7.3% |  |
| Subordinated debentures | $— | $— | $— | $— | $— | $200,000 | $200,000 | $150,000 |
| Average interest rate | —% | —% | —% | —% | —% | 7.5% | 7.5% |  |

The Company is exposed to market risk from changes in the interest rates under its $1.2 billion revolving credit facility. Outstanding balances under this facility bear interest at a variable rate based on JPMorgan's Base Rate minus 0.5% or LIBOR plus 1.0%. The Company had average borrowings of $57.2 million during fiscal 2009. Based on the average amount outstanding during fiscal 2009, a 100 basis point change in interest rates would result in an approximate $0.6 million annual change to interest expense.

## Controls and procedures

As filed, 2,086 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 CEO and CFO, 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 CEO and CFO 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 CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in *Internal Control—Integrated Framework*, our management concluded that our internal control over financial reporting was effective as of January 30, 2010.

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited our Consolidated Financial Statements included in this Annual Report on Form 10-K and have issued a report on the effectiveness of our internal control over financial reporting as of January 30, 2010. Their report appears as part of the "Report of Independent Registered Public Accounting Firm" on page F-2 of this Annual Report on Form 10-K, which is incorporated herein by reference.

#### Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended January 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Mar 26, 2010.
Source: SEC EDGAR, the filing index for accession 0001047469-10-002784. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.