# Dillard'S, Inc.: Form 10-Q for the period ended Jul 31, 2010

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2010-09-02
- Accepted by EDGAR: Sep 2, 2010, 15:51 ET
- Period: 2010-07-31
- Accession: 0001104659-10-047126
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000110465910047126/a10-14720_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000110465910047126/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-07-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-05-02 to 2010-07-31 | $1.42bn | us-gaap:Revenues |
| Revenue | 6 months, 2010-01-31 to 2010-07-31 | $2.90bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2010-05-02 to 2010-07-31 | $930.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2010-01-31 to 2010-07-31 | $1.84bn | us-gaap:CostOfRevenue |
| Income tax | 3 months, 2010-05-02 to 2010-07-31 | −$240.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2010-01-31 to 2010-07-31 | $27.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-05-02 to 2010-07-31 | $6.8m | us-gaap:ProfitLoss |
| Net income | 6 months, 2010-01-31 to 2010-07-31 | $55.7m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2010-05-02 to 2010-07-31 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2010-01-31 to 2010-07-31 | $0.80 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-05-02 to 2010-07-31 | $0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2010-01-31 to 2010-07-31 | $0.80 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 6 months, 2010-01-31 to 2010-07-31 | $128.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2010-01-31 to 2010-07-31 | $57.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2010-01-31 to 2010-07-31 | $5.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2010-01-31 to 2010-07-31 | $182.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2010-07-31 | $214.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-07-31 | $1.65bn | us-gaap:AssetsCurrent |
| Total assets | at 2010-07-31 | $4.41bn | us-gaap:Assets |
| Current liabilities | at 2010-07-31 | $740.8m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2010-07-31 | $746.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2010-07-31 | $1.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2010-07-31 | $2.18bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 38,402 characters.

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended January 30, 2010.

### EXECUTIVE OVERVIEW

Despite lackluster sales in the still fragile economy, Dillard’s, Inc. (the “Company”, “we”, “us” or “our”) experienced an improved second quarter of fiscal 2010 over the prior year. Net sales from retail operations were $1,358.7 million during the quarter ended July 31, 2010, a decrease of $7.2 million or 1% from the quarter ended August 1, 2009, while sales in comparable stores remained unchanged. Gross profit from retail operations improved 270 basis points of retail sales, primarily due to our inventory management efforts and resulting decrease in markdown activity.

Net sales from construction operations during the quarter ended July 31, 2010 were $30.2 million, down $31.7 million or 51% from the quarter ended August 1, 2009. Gross profit from construction operations decreased 50 basis points of construction sales. The construction industry continues to experience a decline in demand for construction services coupled with competitive pricing pressures.

Advertising, selling, administrative and general expenses company-wide were reduced by $4.7 million during the quarter ended July 31, 2010 compared to the quarter ended August 1, 2009, primarily as a result of the Company’s cost control measures combined with store closures.

The Company recorded net income for the second quarter of 2010 of $6.8 million, or $0.10 per share, compared to a net loss of $26.7 million, or $0.36 per share, for the second quarter of 2009. Included in net income for the quarter ended July 31, 2010 was a $4.0 million pretax gain ($2.6 million after tax or $0.04 per share) on the sale of a retail store building and a $2.0 million income tax benefit ($0.03 per share) related to a state administrative settlement.

As of July 31, 2010, we had working capital of $905.8 million, cash and cash equivalents of $214.7 million and $948.5 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $128.7 million for the six months ended July 31, 2010. Our improved cash position enabled us to repurchase $77.6 million (approximately 3.0 million shares) of our Class A Common Stock during the quarter.

As of July 31, 2010, we operated 310 total stores, including 14 clearance centers, and one internet store, a decrease of 4 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 our business, including the following:

|  | Three Months Ended2 July 31, 2010 | August 1, 2009 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,388.9 | $1,427.8 |
| Net sales trend1 | (3)% | (15)% |
| Gross profit (in millions) | $458.5 | $426.8 |
| Gross profit as a percentage of net sales | 33.0% | 29.9% |
| Cash flow from operations (in millions) | $128.7 | $183.1 |
| Total store count at end of period | 310 | 314 |
| Retail sales per square foot | $25 | $25 |
| Retail store sales trend | (1)% | (15)% |
| Comparable retail store sales trend | 0% | (13)% |
| Comparable retail store inventory trend | (6)% | (18)% |
| Retail merchandise inventory turnover | 2.7 | 2.5 |

1The net sales trend rate for the three months ended August 1, 2009 is based on retail segment sales only for comparability with the quarter ended August 2, 2008.

2Cash flow from operations data is for the six months ended July 31, 2010 and August 1, 2009.

### 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 in the future.

### RESULTS OF OPERATIONS

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

|  | Three Months Ended July 31, 2010 | August 1, 2009 | Six Months Ended July 31, 2010 | August 1, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.3 | 1.9 | 2.1 | 2.0 |
|  | 102.3 | 101.9 | 102.1 | 102.0 |
| Cost of sales | 67.0 | 70.1 | 64.9 | 68.3 |
| Advertising, selling, administrative and general expenses | 28.2 | 27.8 | 27.6 | 27.9 |
| Depreciation and amortization | 4.6 | 4.6 | 4.5 | 4.5 |
| Rentals | 0.9 | 1.0 | 0.9 | 1.0 |
| Interest and debt expense, net | 1.3 | 1.3 | 1.3 | 1.3 |
| Gain on disposal of assets | (0.3) | (0.0) | (0.1) | (0.0) |
| Asset impairment and store closing charges | 0.0 | 0.0 | 0.0 | 0.0 |
| Income (loss) before income taxes and equity in losses of joint ventures | 0.6 | (2.9) | 3.0 | (1.0) |
| Income taxes (benefit) | (0.0) | (1.0) | 0.9 | (0.3) |
| Equity in losses of joint ventures | (0.1) | (0.0) | (0.1) | (0.0) |
| Net income (loss) | 0.5% | (1.9)% | 2.0% | (0.7)% |

15

### Net Sales

*(in thousands of dollars)*

| Net sales: | Three Months Ended July 31, 2010 | August 1, 2009 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,358,694 | $1,365,858 | $(7,164) |
| Construction segment | 30,216 | 61,913 | (31,697) |
| Total net sales | $1,388,910 | $1,427,771 | $(38,861) |

The percent change by category in the Company’s retail operations segment sales for the three months ended July 31, 2010 compared to the three months ended August 1, 2009 as well as the percentage by segment and category to total net sales is as follows:

| Retail operations segment | Three Months % Change 2010-2009 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (0.5)% | 14% |
| Ladies’ apparel and accessories | 1.0 | 40 |
| Juniors’ and children’s apparel | (3.3) | 8 |
| Men’s apparel and accessories | (2.8) | 17 |
| Shoes | 2.2 | 14 |
| Home and furniture | (8.0) | 5 |
|  |  | 98 |
| Construction segment |  | 2 |
| Total |  | 100% |

Net sales from the retail operations segment decreased $7.2 million or 1% during the three months ended July 31, 2010 compared to the three months ended August 1, 2009 while sales in comparable stores remained flat between the same periods. Sales of home and furniture items declined significantly during the quarter. Sales of ladies’ apparel and accessories were up slightly over the same quarter last year, and sales of shoes were up moderately.

The number of sales transactions was flat for the three months ended July 31, 2010 over the comparable prior year period while the average dollars per sales transaction decreased less than 1%. We recorded an allowance for sales returns of $8.0 million and $6.6 million as of July 31, 2010 and August 1, 2009, respectively.

Net sales from the construction segment decreased $31.7 million or 51% during the three months ended July 31, 2010 compared to the three months ended August 1, 2009 primarily because the fragile United States economy continues to have a negative impact on demand for construction projects in private industry.

*(in thousands of dollars)*

| Net sales: | Six Months Ended July 31, 2010 | August 1, 2009 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $2,787,544 | $2,780,549 | $6,995 |
| Construction segment | 54,962 | 121,092 | (66,130) |
| Total net sales | $2,842,506 | $2,901,641 | $(59,135) |

The percent change by category in the Company’s retail operations segment sales for the six months ended July 31, 2010 compared to the six months ended August 1, 2009 as well as the percentage by segment and category to total net sales is as follows:

| Retail operations segment | Six Months % Change 2010-2009 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (1.8)% | 15% |
| Ladies’ apparel and accessories | 1.1 | 39 |
| Juniors’ and children’s apparel | (1.9) | 8 |
| Men’s apparel and accessories | 0.1 | 17 |
| Shoes | 5.3 | 14 |
| Home and furniture | (8.6) | 5 |
|  |  | 98 |
| Construction segment |  | 2 |
| Total |  | 100% |

Net sales from the retail operations segment increased $7.0 million, or less than 1%, during the six months ended July 31, 2010 compared to the six months ended August 1, 2009 while sales in comparable stores increased 1% between the same periods. Sales of shoes were up significantly during the period. Sales of cosmetics and juniors’ and children’s apparel declined moderately during the period while sales of home and furniture items declined significantly.

The number of sales transactions decreased 1% for the six months ended July 31, 2010 over the comparable prior year period while the average dollars per sales transaction were up slightly.

Storewide sales penetration of exclusive brand merchandise for the six months ended July 31, 2010 was 23.1% compared to 24.1% during the six months ended August 1, 2009.

Net sales from the construction segment decreased $66.1 million or 55% during the six months ended July 31, 2010 compared to the six months ended August 1, 2009 primarily because the fragile United States economy continues to have a negative impact on demand for construction projects in private industry. We expect this decreased demand will continue throughout fiscal 2010 and into the first half of fiscal 2011.

We continue to believe that in light of recent signs of modest economic improvement in the United States, we may continue to see some sales growth in the retail operations segment during 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.

### Service Charges and Other Income

*(in thousands of dollars)*

| Service charges and other income: Retail operations segment | Three Months Ended July 31, 2010 | August 1, 2009 | Six Months Ended July 31, 2010 | August 1, 2009 | Three Months $ Change 2010-2009 | Six Months $ Change 2010-2009 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Leased department income | $2,331 | $2,622 | $4,532 | $6,061 | $(291) | $(1,529) |
| Income from GE marketing and servicing alliance | 23,013 | 19,369 | 43,207 | 41,731 | 3,644 | 1,476 |
| Shipping and handling income | 3,951 | 3,556 | 7,889 | 7,116 | 395 | 773 |
| Other | 2,529 | 1,809 | 4,896 | 3,673 | 720 | 1,223 |
|  | 31,824 | 27,356 | 60,524 | 58,581 | 4,468 | 1,943 |
| Construction segment | 56 | 42 | 421 | 243 | 14 | 178 |
| Total | $31,880 | $27,398 | $60,945 | $58,824 | $4,482 | $2,121 |

Service charges and other income is composed primarily of income generated through the long-term marketing and servicing alliance (“Alliance”) with GE Consumer Finance (“GE”), which owns and manages the Dillard’s branded proprietary credit cards. Income from the Alliance increased during the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009 primarily due to decreased credit losses partially offset by a lower penetration rate of Dillard’s branded proprietary card. Leased department income declined primarily because the licensee for the fine jewelry department ceased operations of all licensed outlets during fiscal 2009.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: Three months ended | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $457,261 | $423,956 | $33,305 | 7.9% |
| Construction segment | 1,213 | 2,804 | (1,591) | (56.7) |
| Total gross profit | $458,474 | $426,760 | $31,714 | 7.4% |
| Six months ended |  |  |  |  |
| Retail operations segment | $997,568 | $915,662 | $81,906 | 8.9% |
| Construction segment | 241 | 5,389 | (5,148) | (95.5) |
| Total gross profit | $997,809 | $921,051 | $76,758 | 8.3% |

| Gross profit as a percentage of segment net sales: | Three Months Ended July 31, 2010 | August 1, 2009 | Six Months Ended July 31, 2010 | August 1, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 33.7% | 31.0% | 35.8% | 32.9% |
| Construction segment | 4.0 | 4.5 | 0.4 | 4.5 |
| **Total gross profit as a percentage of net sales** | 33.0 | 29.9 | 35.1 | 31.7 |

Gross profit improved 310 basis points of sales and 340 basis points of sales during the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009, respectively.

Gross profit from retail operations improved 270 basis points of sales and 290 basis points of sales during the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009, respectively, as a result of continuing inventory management measures leading to reduced markdown activity. These inventory management measures include considerable adjustments to receipt cadence to shorten the period of time from receipt to sale, to reduce markdown risk and to keep customers engaged with a more continuous flow of fresh merchandise selections throughout the season. Inventory declined 6% in both total and comparable stores as of July 31, 2010 compared to August 1, 2009. A 1% change in markdowns would have impacted net income by approximately $2 million and $4 million for the three and six months ended July 31, 2010, respectively.

All merchandise categories experienced gross margin improvement during the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009. During the three months ended July 31, 2010, slight gross margin improvements were noted in cosmetics and ladies’ apparel and accessories, moderate improvements were noted in home and furniture, juniors’ and children’s apparel and shoes and significant improvements were noted in men’s apparel and accessories. During the six months ended July 31, 2010, all merchandise categories experienced moderate improvements in gross margin compared to the six months ended August 1, 2009 with the exception of cosmetics, which improved slightly.

Gross profit from the construction segment declined 50 basis points of sales and 410 basis points of sales during the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009. This decrease was the result of the decline in demand for construction services that has created pricing pressures in an already competitive marketplace. This decrease was also due to job delays from bad weather and job underperformance resulting in the recognition of a $2.2 million loss during the first quarter of fiscal 2010 on certain electrical contracts.

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

*(in thousands of dollars)*

| SG&A: Three months ended | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $390,938 | $395,576 | $(4,638) | (1.2)% |
| Construction segment | 1,116 | 1,145 | (29) | (2.5) |
| Total SG&A | $392,054 | $396,721 | $(4,667) | (1.2)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $783,382 | $808,368 | $(24,986) | (3.1)% |
| Construction segment | 2,314 | 2,637 | (323) | (12.2) |
| Total SG&A | $785,696 | $811,005 | $(25,309) | (3.1)% |

| SG&A as a percentage of segment net sales: | Three Months Ended July 31, 2010 | August 1, 2009 | Six Months Ended July 31, 2010 | August 1, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 28.8% | 29.0% | 28.1% | 29.1% |
| Construction segment | 3.7 | 1.8 | 4.2 | 2.2 |
| **Total SG&A as a percentage of net sales** | 28.2 | 27.8 | 27.6 | 27.9 |

The decline in SG&A during the periods presented primarily resulted from the Company’s expense savings measures combined with store closures.

The three-month decline in SG&A was most noted in payroll and payroll related taxes ($5.5 million) and advertising ($4.5 million) partially offset by an increase in services purchased ($3.3 million) and supplies ($2.6 million).

The six-month decline in SG&A was most noted in payroll and payroll related taxes ($19.6 million) and advertising ($14.6 million) partially offset by an increase in supplies ($4.3 million) and services purchased ($4.1 million).

The decline in payroll and payroll related taxes for the three and six-month periods presented was a direct result of the Company’s continued efforts to match the appropriate levels of staff to its current needs. The decline in advertising expense for the three and six-month periods was primarily a result of the Company’s migration from newspaper media to less expensive internet marketing sources.

### Depreciation and Amortization Expense

*(in thousands of dollars)*

| Depreciation and amortization expense: Three months ended | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $64,410 | $66,350 | $(1,940) | (2.9)% |
| Construction segment | 45 | 41 | 4 | 9.8 |
| Total depreciation and amortization expense | $64,455 | $66,391 | $(1,936) | (2.9)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $128,081 | $131,830 | $(3,749) | (2.8)% |
| Construction segment | 90 | 85 | 5 | 5.9 |
| Total depreciation and amortization expense | $128,171 | $131,915 | $(3,744) | (2.8)% |

The decrease of depreciation and amortization expense for the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009 is primarily a result of the Company’s continuing efforts to reduce capital expenditures and of store closures.

### Rentals

*(in thousands of dollars)*

| Rentals: Three months ended | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $11,920 | $13,914 | $(1,994) | (14.3)% |
| Construction segment | 23 | 22 | 1 | 4.5 |
| Total rentals | $11,943 | $13,936 | $(1,993) | (14.3)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $24,911 | $28,392 | $(3,481) | (12.3)% |
| Construction segment | 46 | 44 | 2 | 4.5 |
| Total rentals | $24,957 | $28,436 | $(3,479) | (12.2)% |

The decrease in rental expense for the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009 is primarily due to a decrease in the amount of equipment leased by the Company.

### Interest and Debt Expense, Net

*(in thousands of dollars)*

| Interest and debt expense (income), net: Three months ended | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $18,503 | $19,083 | $(580) | (3.0)% |
| Construction segment | (41) | (72) | 31 | (43.1) |
| Total interest and debt expense, net | $18,462 | $19,011 | $(549) | (2.9)% |
| Six months ended |  |  |  |  |
| Retail operations segment | $37,402 | $37,534 | $(132) | (0.4)% |
| Construction segment | (84) | (115) | 31 | (27.0) |
| Total interest and debt expense, net | $37,318 | $37,419 | $(101) | (0.3)% |

The decrease of net interest and debt expense for the three-month period is primarily attributable to lower average debt.

The decrease of net interest and debt expense for the six-month period is primarily attributable to lower average debt levels partially offset by a gain on repurchased debt recorded during the six months ended August 1, 2009.

Total weighted average debt outstanding at July 31, 2010 decreased approximately $130.1 million and $124.0 million during the three and six months ended July 31, 2010 compared to the three and six months ended August 1, 2009, respectively.

### Gain on Disposal of Assets

*(in thousands of dollars)*

| Gain on disposal of assets: Three months ended | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $4,110 | $589 | $3,521 | 597.8% |
| Construction segment | 12 | — | 12 | — |
| Total gain on disposal of assets | $4,122 | $589 | $3,533 | 599.8% |
| Six months ended |  |  |  |  |
| Retail operations segment | $4,214 | $653 | $3,561 | 545.3% |
| Construction segment | 12 | 4 | 8 | 200.0 |
| Total gain on disposal of assets | $4,226 | $657 | $3,569 | 543.2% |

During the three months ended July 31, 2010, we received proceeds of $4.0 million from the sale of a retail store location, resulting in a gain of $4.0 million that was recorded in gain on disposal of assets.

### Asset Impairment and Store Closing Charges

There were no asset impairment and store closing charges recorded during the three months ended July 31, 2010 and the three and six months ended August 1, 2009.

During the six months ended July 31, 2010, the Company’s retail operations segment recorded a pretax charge of $2.2 million for asset impairment and store closing costs. The charge was for the write-down of one property currently held for sale.

### Income Taxes

The total amount of unrecognized tax benefits as of July 31, 2010 and August 1, 2009 was $14.7 million and $27.6 million, respectively, of which $10.8 million and $19.8 million, respectively, would, if recognized, affect the effective tax rate. The Company classifies accrued interest expense and penalties relating to income tax in the condensed consolidated financial statements as income tax expense. The total interest and penalties recognized in the condensed consolidated statements of income and retained earnings during the three months ended July 31, 2010 and August 1, 2009 were $(1.4) million and $0.0 million, respectively, and during the six months ended July 31, 2010 and August 1, 2009 were $(1.4) million and $0.3 million, respectively. The total accrued interest and penalties in the condensed consolidated balance sheets as of July 31, 2010 and August 1, 2009 were $4.9 million and $9.7 million, respectively. The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $3 million and $5 million. No significant changes occurred in the tax years subject to examination by major tax jurisdictions during the three and six months ended July 31, 2010. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.

The Company’s estimated federal and state income tax rate, inclusive of equity in losses of joint ventures, was approximately (3.6)% and 36.1% for the three months ended July 31, 2010 and August 1, 2009, respectively. During the three months ended July 31, 2010, income taxes included the recognition of tax benefits of approximately $2.0 million primarily due to a state administrative settlement. During the three months ended August 1, 2009, income taxes included the recognition of tax benefits primarily due to federal tax credits.

The Company’s estimated federal and state income tax rate, inclusive of equity in losses of joint ventures, was approximately 32.7% and 35.4% for the six months ended July 31, 2010 and August 1, 2009, respectively. During the six months ended July 31, 2010, income taxes included the recognition of tax benefits of approximately $2.7 million primarily due to a state administrative settlement and federal tax credit refund claims. During the six months ended August 1, 2009, income taxes included the increase in unrecognized tax benefits, interest and penalties and the recognition of tax benefits primarily due to federal tax credits.

Our income tax rate for the remainder of fiscal 2010 is dependent upon results of operations and may change if the results for fiscal 2010 are different from current expectations. We currently estimate that our effective rate for the remainder of fiscal 2010 will approximate 36%.

### FINANCIAL CONDITION

### Financial Position Summary

*(in thousands of dollars)*

|  | July 31, 2010 | January 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $214,713 | $341,693 | $(126,980) | (37.2)% |
| Other short-term borrowings | — | — | — | — |
| Current portion of long-term debt | 1,758 | 1,719 | 39 | 2.3 |
| Long-term debt | 746,698 | 747,587 | (889) | (0.1) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders’ equity | 2,175,667 | 2,304,103 | (128,436) | (5.6) |
| Current ratio | 2.22 | 2.28 |  |  |
| Debt to capitalization | 30.4% | 29.2% |  |  |

*(in thousands of dollars)*

|  | July 31, 2010 | August 1, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $214,713 | $116,902 | $97,811 | 83.7% |
| Other short-term borrowings | — | 67,000 | (67,000) | (100.0) |
| Current portion of long-term debt | 1,758 | 25,571 | (23,813) | (93.1) |
| Long-term debt | 746,698 | 751,839 | (5,141) | (0.7) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders’ equity | 2,175,667 | 2,228,589 | (52,922) | (2.4) |
| Current ratio | 2.22 | 2.04 |  |  |
| Debt to capitalization | 30.4% | 31.9% |  |  |

Net cash flows from operations decreased to $128.7 million during the six months ended July 31, 2010 compared to $183.1 million for the six months ended August 1, 2009. This decrease of $54.4 million was largely a result of a decrease of $125.1 million related to changes in working capital items, primarily of changes in income tax accruals and collection of an income tax receivable. This decrease was partially offset by higher net income, as adjusted for non-cash items, of $70.7 million for the six months ended July 31, 2010 as compared to the six months ended August 1, 2009.

GE owns and manages Dillard’s branded proprietary credit card business 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 Company received income of approximately $43.2 million and $41.7 million from GE during the six months ended July 31, 2010 and August 1, 2009, respectively. While future cash flows under this Alliance are difficult to predict, the Company expects fiscal 2010 amounts to be reduced from prior year’s 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.

During the six months ended July 31, 2010, we received proceeds of $4.0 million from the sale of a retail store location, resulting in a gain of $4.0 million that was recorded in gain on disposal of assets.

Capital expenditures were $57.6 million and $20.6 million for the six months ended July 31, 2010 and August 1, 2009, respectively. These expenditures consisted primarily of the construction of new stores, remodeling of existing stores and investments in technology equipment and software. During the six months ended July 31, 2010, the Company purchased two corporate aircraft for approximately $34 million that were previously leased under operating leases, and we opened our new store 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. Capital expenditures for fiscal 2010 are expected to be approximately $105 million compared to actual expenditures of $75.1 million during fiscal 2009.

During the six months ended July 31, 2010, we closed our store location in Helena, Montana (65,000 square feet) and recorded a negligible amount for store closing costs. We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

The Company had cash on hand of $214.7 million as of July 31, 2010. As part of our overall liquidity management strategy and for peak working capital requirements, the Company has a $1.2 billion credit facility. Limited to 85% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $813.7 million at July 31, 2010. No borrowings were outstanding at July 31, 2010. Letters of credit totaling $89.2 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $725 million at July 31, 2010.

Under the credit agreement, the Company unilaterally reduced the $1.2 billion credit facility by $200 million to $1.0 billion, effective September 1, 2010, in order to save on unused fees. Planned inventory levels would not allow for utilization of the full $1.2 billion. All other aspects of the credit agreement remain unchanged. Expected savings from the permanent reduction over the remaining term of the credit facility are approximately $1.1 million.

Cash used in financing activities for the six months ended July 31, 2010 totaled $202.2 million compared to cash used in financing activities of $144.0 million for the six months ended August 1, 2009. This decrease of cash flow was primarily due to the repurchase of the Company’s Class A Common Stock and the payment of debt and capital lease obligations during the six months ended July 31, 2010 partially offset by debt and short-term borrowing payments during the six months ended August 1, 2009.

During the six months ended July 31, 2010, the Company repurchased 7.2 million shares of Class A Common Stock for $182.6 million at an average price of $25.39 per share under its Stock Plan, which completed the remaining authorization under the Stock Plan. No shares were repurchased under the Stock Plan during the six months ended August 1, 2009. In August 2010, the Company was authorized by its board of directors to repurchase up to $250 million of its Class A Common Stock under a new open-ended plan. This authorization permits the Company to repurchase its Class A Common Stock in the open market or through privately negotiated transactions.

During the six months ended July 31, 2010, the Company made principal payments on long-term debt and capital lease obligations of $14.5 million, including the payoff of approximately $13 million in capital lease obligations for two corporate aircraft. During the six months ended August 1, 2009, the Company made principal payments on long-term debt and capital lease obligations of $5.1 million, including the repurchase of $5.0 million face amount of 9.125% notes maturing on August 1, 2011. This repurchase resulted in a pretax gain of approximately $1.5 million and was recorded in net interest and debt expense.

During the six months ended August 1, 2009, the Company also paid $133.0 million of short-term borrowings under the Company’s credit facility. No short-term borrowings were outstanding under the credit facility during the six months ended July 31, 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 Company expects peak borrowings under the credit facility during fiscal 2010 to be minimal. Depending on conditions in the capital markets and other factors, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.

There have been no material changes in the information set forth under the caption “Contractual Obligations and Commercial Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

### OFF-BALANCE-SHEET ARRANGEMENTS

The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditures or capital resources that is material to investors.

### NEW ACCOUNTING STANDARDS

#### Consolidation of Variable Interest Entities

On January 31, 2010, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to accounting for variable interest entities. These changes require 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 solely 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. The adoption of these changes had no material impact on the Company’s condensed consolidated financial statements.

#### Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06, an update to Topic 820, *Fair Value Measurements and Disclosures.* ASU 2010-06 provides an update specifically to Subtopic 820-10 that requires new disclosures including, details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers and a gross presentation of activity within the Level 3 roll forward, presenting separately information about purchases, sales, issuances, and settlements. ASU 2010-06 is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward, which is required for interim and annual reporting periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on the Company’s condensed consolidated financial statements.

### FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: 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. 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 breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company’s future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended January 30, 2010, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.

## Market risk

As filed, 235 characters.

There have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

## Controls and procedures

As filed, 773 characters.

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

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended July 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 189 characters.

There have been no material changes in the information set forth under caption “Item 1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

Filed Sep 2, 2010.
Source: SEC EDGAR, the filing index for accession 0001104659-10-047126. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.