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

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2010-12-03
- Accepted by EDGAR: Dec 3, 2010, 14:36 ET
- Period: 2010-10-30
- Accession: 0001104659-10-061077
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000110465910061077/a10-20419_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000110465910061077/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-10-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-08-01 to 2010-10-30 | $1.37bn | us-gaap:Revenues |
| Revenue | 9 months, 2010-01-31 to 2010-10-30 | $4.28bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2010-08-01 to 2010-10-30 | $857.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2010-01-31 to 2010-10-30 | $2.70bn | us-gaap:CostOfRevenue |
| Income tax | 3 months, 2010-08-01 to 2010-10-30 | $6.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2010-01-31 to 2010-10-30 | $33.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-08-01 to 2010-10-30 | $14.4m | us-gaap:ProfitLoss |
| Net income | 9 months, 2010-01-31 to 2010-10-30 | $70.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2010-08-01 to 2010-10-30 | $0.22 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2010-01-31 to 2010-10-30 | $1.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-08-01 to 2010-10-30 | $0.22 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2010-01-31 to 2010-10-30 | $1.02 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2010-01-31 to 2010-10-30 | $158.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2010-01-31 to 2010-10-30 | $73.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2010-01-31 to 2010-10-30 | $8.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2010-01-31 to 2010-10-30 | $241.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2010-10-30 | $167.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-10-30 | $1.99bn | us-gaap:AssetsCurrent |
| Total assets | at 2010-10-30 | $4.71bn | us-gaap:Assets |
| Current liabilities | at 2010-10-30 | $1.13bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2010-10-30 | $697.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2010-10-30 | $49.1m | us-gaap:LongTermDebtCurrent |

## Management's discussion and analysis

As filed, 40,298 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

Dillard’s, Inc. (the “Company”, “we”, “us” or “our”) experienced an improved third quarter of fiscal 2010 over the prior year. Net sales from retail operations were $1,320.6 million during the quarter ended October 30, 2010, an increase of $5.1 million, or less than 1%, from the quarter ended October 31, 2009, while sales in comparable stores increased 1%. Gross profit from retail operations improved 150 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 October 30, 2010 were $23.6 million, down $20.3 million or 46% from the quarter ended October 31, 2009. While gross profit from construction operations improved 80 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 $3.6 million during the quarter ended October 30, 2010 compared to the quarter ended October 31, 2009, primarily as a result of the Company’s cost control measures combined with store closures.

The Company recorded net income for the third quarter of 2010 of $14.4 million, or $0.22 per share, compared to net income of $8.0 million, or $0.11 per share, for the third quarter of 2009. Included in net income for the quarter ended October 30, 2010 is a $1.1 million loss ($0.02 per share) related to the sale of a closed store and a $1.2 million income tax benefit ($0.02 per share) for a decrease in a capital loss valuation allowance. Included in net income for the quarter ended October 31, 2009 was a $10.6 million tax benefit ($0.14 per share) primarily due to state administrative settlement and a decrease in a capital loss valuation allowance.

As of October 30, 2010, we had working capital of $862.8 million, cash and cash equivalents of $167.1 million and $946.8 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $158.9 million for the nine months ended October 30, 2010. Our improved cash position enabled us to repurchase $71.3 million (approximately 2.9 million shares) of our Class A Common Stock during the quarter.

As of October 30, 2010, we operated 310 total stores, including 14 clearance centers, and one internet store, a decrease of 3 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 Ended(2) October 30, 2010 | October 31, 2009 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,344.1 | $1,359.3 |
| Net sales trend(1) | (1)% | (11)% |
| Gross profit (in millions) | $486.6 | $466.3 |
| Gross profit as a percentage of net sales | 36.2% | 34.3% |
| Cash flow from operations (in millions) | $158.9 | $261.4 |
| Total retail store count at end of period | 310 | 313 |
| Retail sales per square foot | $25 | $24 |
| Retail store sales trend | 0% | (11)% |
| Comparable retail store sales trend | 1% | (9)% |
| Comparable retail store inventory trend | (2)% | (23)% |
| Retail merchandise inventory turnover | 2.4 | 2.3 |

(1)The net sales trend rate for the three months ended October 31, 2009 is based on retail segment sales only for comparability with the quarter ended November 1, 2008.

(2)Cash flow from operations data is for the nine months ended October 30, 2010 and October 31, 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. Recent economic volatility in Asia, including rising labor costs and an unstable supply of merchandise, as well as increasing costs of transportation and cotton may put pressure on the Company’s gross margin during fiscal 2011 though it is too soon to predict the effects of these changes.

### RESULTS OF OPERATIONS

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

|  | Three Months Ended October 30, 2010 | October 31, 2009 | Nine Months Ended October 30, 2010 | October 31, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.1 | 2.3 | 2.1 | 2.1 |
|  | 102.1 | 102.3 | 102.1 | 102.1 |
| Cost of sales | 63.8 | 65.7 | 64.5 | 67.4 |
| Advertising, selling, administrative and general expenses | 29.6 | 29.6 | 28.3 | 28.5 |
| Depreciation and amortization | 4.8 | 4.9 | 4.6 | 4.6 |
| Rentals | 0.9 | 1.0 | 0.9 | 1.0 |
| Interest and debt expense, net | 1.3 | 1.3 | 1.3 | 1.3 |
| Loss (gain) on disposal of assets | 0.1 | (0.0) | (0.1) | (0.0) |
| Asset impairment and store closing charges | 0.0 | 0.0 | 0.1 | 0.0 |
| Income (loss) before income taxes and equity in losses of joint ventures | 1.6 | (0.2) | 2.5 | (0.7) |
| Income taxes (benefit) | 0.4 | (0.9) | 0.8 | (0.5) |
| Equity in losses of joint ventures | (0.1) | (0.1) | 0.0 | (0.1) |
| Net income (loss) | 1.1% | 0.6% | 1.7% | (0.3)% |

### Net Sales

*(in thousands of dollars)*

| Net sales: | Three Months Ended October 30, 2010 | October 31, 2009 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,320,568 | $1,315,515 | $5,053 |
| Construction segment | 23,550 | 43,816 | (20,266) |
| Total net sales | $1,344,118 | $1,359,331 | $(15,213) |

The percent change by category in the Company’s retail operations segment sales for the three months ended October 30, 2010 compared to the three months ended October 31, 2009 as well as the percentage by segment and category to total net sales for the three months ended October 30, 2010 is as follows:

| Retail operations segment | Three Months % Change 2010-2009 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | 1.2% | 15% |
| Ladies’ apparel and accessories | 0.5 | 36 |
| Juniors’ and children’s apparel | 1.2 | 9 |
| Men’s apparel and accessories | (2.9) | 16 |
| Shoes | 3.9 | 16 |
| Home and furniture | (5.7) | 6 |
|  |  | 98 |
| Construction segment |  | 2 |
| Total |  | 100% |

Net sales from the retail operations segment increased $5.1 million, or less than 1%, during the three months ended October 30, 2010 compared to the three months ended October 31, 2009 while sales in comparable stores increased 1% between the same periods. Sales of ladies’ apparel and accessories were up slightly, and sales of cosmetics, juniors’ and children’s apparel and shoes were up moderately. Sales in the home and furniture category were down significantly for the three-month period.

The number of sales transactions decreased 1% for the three months ended October 30, 2010 over the comparable prior year period while the average dollars per sales transaction were up slightly. We recorded an allowance for sales returns of $7.2 million and $6.2 million as of October 30, 2010 and October 31, 2009, respectively.

Net sales from the construction segment decreased $20.3 million or 46% during the three months ended October 30, 2010 compared to the three months ended October 31, 2009 primarily because the fragile recovery of the United States economy continues to have a negative impact on demand for construction projects in private industry.

*(in thousands of dollars)*

| Net sales: | Nine Months Ended October 30, 2010 | October 31, 2009 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $4,108,112 | $4,096,064 | $12,048 |
| Construction segment | 78,512 | 164,908 | (86,396) |
| Total net sales | $4,186,624 | $4,260,972 | $(74,348) |

The percent change by category in the Company’s retail operations segment sales for the nine months ended October 30, 2010 compared to the nine months ended October 31, 2009 as well as the percentage by segment and category to total net sales for the nine months ended October 30, 2010 is as follows:

| Retail operations segment | Nine Months % Change 2010-2009 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | (0.8)% | 15% |
| Ladies’ apparel and accessories | 0.9 | 38 |
| Juniors’ and children’s apparel | (0.9) | 9 |
| Men’s apparel and accessories | (0.9) | 16 |
| Shoes | 4.8 | 15 |
| Home and furniture | (7.6) | 5 |
|  |  | 98 |
| Construction segment |  | 2 |
| Total |  | 100% |

Net sales from the retail operations segment increased $12.0 million, or less than 1% during the nine months ended October 30, 2010 compared to the nine months ended October 31, 2009 while sales in comparable stores increased 1% between the same periods. Sales of ladies’ apparel and accessories were up slightly, and sales of shoes were up moderately. Sales in the home and furniture category were down significantly for the nine-month period.

The number of sales transactions decreased 1% for the nine months ended October 30, 2010 over the comparable prior year period while the average dollars per sales transaction were up slightly.

Net sales from the construction segment decreased $86.4 million or 52% during the nine months ended October 30, 2010 compared to the nine months ended October 31, 2009 primarily because the fragile recovery of the 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 effect 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 October 30, 2010 | October 31, 2009 | Nine Months Ended October 30, 2010 | October 31, 2009 | Three Months $ Change 2010-2009 | Nine Months $ Change 2010-2009 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Leased department income | $2,311 | $2,184 | $6,844 | $8,245 | $127 | $(1,401) |
| Income from GE marketing and servicing alliance | 20,926 | 24,049 | 64,133 | 65,780 | (3,123) | (1,647) |
| Shipping and handling income | 3,659 | 3,303 | 11,547 | 10,419 | 356 | 1,128 |
| Other | 2,000 | 1,823 | 6,896 | 5,496 | 177 | 1,400 |
|  | 28,896 | 31,359 | 89,420 | 89,940 | (2,463) | (520) |
| Construction segment | 23 | 26 | 444 | 269 | (3) | 175 |
| Total | $28,919 | $31,385 | $89,864 | $90,209 | $(2,466) | $(345) |

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 decreased during the three and nine months ended October 30, 2010 compared to the three and nine months ended October 31, 2009 primarily due to reduced finance charge and late charge fee income related to recent credit regulation legislation partially offset by decreased credit losses. Leased department income declined during the nine months ended October 30, 2010 compared to the nine months ended October 31, 2009 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 | October 30, 2010 | October 31, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $485,629 | $464,768 | $20,861 | 4.5% |
| Construction segment | 1,015 | 1,555 | (540) | (34.7) |
| Total gross profit | $486,644 | $466,323 | $20,321 | 4.4% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,483,197 | $1,380,430 | $102,767 | 7.4% |
| Construction segment | 1,256 | 6,944 | (5,688) | (81.9) |
| Total gross profit | $1,484,453 | $1,387,374 | $97,079 | 7.0% |

| Gross profit as a percentage of segment net sales: | Three Months Ended October 30, 2010 | October 31, 2009 | Nine Months Ended October 30, 2010 | October 31, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 36.8% | 35.3% | 36.1% | 33.7% |
| Construction segment | 4.3 | 3.5 | 1.6 | 4.2 |
| **Total gross profit as a percentage of net sales** | 36.2 | 34.3 | 35.5 | 32.6 |

Gross profit improved 190 basis points of sales and 290 basis points of sales during the three and nine months ended October 30, 2010 compared to the three and nine months ended October 31, 2009, respectively.

Gross profit from retail operations improved 150 basis points of sales and 240 basis points of sales during the three and nine months ended October 30, 2010 compared to the three and nine months ended October 31, 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 2% in both total and comparable stores as of October 30, 2010 compared to October 31, 2009. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $6 million for the three and nine months ended October 30, 2010, respectively.

During the three months ended October 30, 2010 as compared to the three months ended October 31, 2009, gross margin improved moderately in juniors’ and children’s apparel, men’s apparel and accessories and shoes while gross margin was relatively flat in cosmetics, ladies’ apparel and accessories and home and furniture.

During the nine months ended October 30, 2010 as compared to the nine months ended October 31, 2009, all merchandise categories experienced moderate gross margin improvements with the exception of cosmetics, which improved slightly.

Gross profit from the construction segment improved 80 basis points of sales during the three months ended October 30, 2010 compared to the three months ended October 31, 2009. Gross profit from the construction segment declined 260 basis points of sales during the nine months ended October 30, 2010 compared to the nine months ended October 31, 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 | October 30, 2010 | October 31, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $397,355 | $400,887 | $(3,532) | (0.9)% |
| Construction segment | 1,139 | 1,233 | (94) | (7.6) |
| Total SG&A | $398,494 | $402,120 | $(3,626) | (0.9)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,180,737 | $1,209,255 | $(28,518) | (2.4)% |
| Construction segment | 3,453 | 3,870 | (417) | (10.8) |
| Total SG&A | $1,184,190 | $1,213,125 | $(28,935) | (2.4)% |

| SG&A as a percentage of segment net sales: | Three Months Ended October 30, 2010 | October 31, 2009 | Nine Months Ended October 30, 2010 | October 31, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 30.1% | 30.5% | 28.7% | 29.5% |
| Construction segment | 4.8 | 2.8 | 4.4 | 2.3 |
| **Total SG&A as a percentage of net sales** | 29.6 | 29.6 | 28.3 | 28.5 |

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 advertising ($7.9 million) and payroll and payroll related taxes ($0.8 million) partially offset by an increase in services purchased ($4.3 million) and supplies ($1.1 million).

The nine-month decline in SG&A was most noted in advertising ($22.5 million), payroll and payroll related taxes ($20.3 million) and utilities ($2.5 million) partially offset by an increase in services purchased ($8.4 million) and supplies ($5.4 million).

The decline in payroll and payroll related taxes for the three and nine-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 nine-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 | October 30, 2010 | October 31, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $64,906 | $66,097 | $(1,191) | (1.8)% |
| Construction segment | 47 | 38 | 9 | 23.7 |
| Total depreciation and amortization expense | $64,953 | $66,135 | $(1,182) | (1.8)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $192,987 | $197,927 | $(4,940) | (2.5)% |
| Construction segment | 137 | 123 | 14 | 11.4 |
| Total depreciation and amortization expense | $193,124 | $198,050 | $(4,926) | (2.5)% |

The decrease of depreciation and amortization expense for the three and nine months ended October 30, 2010 compared to the three and nine months ended October 31, 2009 is primarily a result of store closures and the Company’s continuing efforts to reduce capital expenditures.

### Rentals

*(in thousands of dollars)*

| Rentals: Three months ended | October 30, 2010 | October 31, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $11,626 | $13,942 | $(2,316) | (16.6)% |
| Construction segment | 15 | 23 | (8) | (34.8) |
| Total rentals | $11,641 | $13,965 | $(2,324) | (16.6)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $36,537 | $42,334 | $(5,797) | (13.7)% |
| Construction segment | 61 | 67 | (6) | (9.0) |
| Total rentals | $36,598 | $42,401 | $(5,803) | (13.7)% |

The decrease in rental expense for the three and nine months ended October 30, 2010 compared to the three and nine months ended October 31, 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 | October 30, 2010 | October 31, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $18,118 | $18,409 | $(291) | (1.6)% |
| Construction segment | (75) | (52) | (23) | 44.2 |
| Total interest and debt expense, net | $18,043 | $18,357 | $(314) | (1.7)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $55,520 | $55,943 | $(423) | (0.8)% |
| Construction segment | (159) | (167) | 8 | (4.8) |
| Total interest and debt expense, net | $55,361 | $55,776 | $(415) | (0.7)% |

The decrease of net interest and debt expense for the three-month period is primarily attributed to lower average debt and earned interest on invested cash partially offset by the reduction of capitalized interest. The decrease of net interest and debt expense for the nine-month period is primarily attributed to lower average debt and earned interest on invested cash partially offset by the reduction of capitalized interest and a prior year gain on the repurchase of debt. Total weighted average debt decreased approximately $12.5 million and $88.9 million during the three and nine months ending October 30, 2010 compared to the three and nine months ending October 31, 2009, respectively.

### Loss (Gain) on Disposal of Assets

*(in thousands of dollars)*

| Loss (gain) on disposal of assets: Three months ended | October 30, 2010 | October 31, 2009 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $934 | $(116) | $1,050 |
| Construction segment | — | — | — |
| Total loss (gain) on disposal of assets | $934 | $(116) | $1,050 |
| Nine months ended |  |  |  |
| Retail operations segment | $(3,280) | $(769) | $(2,511) |
| Construction segment | (12) | (4) | (8) |
| Total loss (gain) on disposal of assets | $(3,292) | $(773) | $(2,519) |

During the three and nine months ended October 30, 2010, the Company received proceeds of $1.9 million from the sale of a former retail store location, resulting in a loss of $1.1 million that was recorded in loss (gain) on disposal of assets.

Additionally, during the nine months ended October 30, 2010, the Company received proceeds of $4.0 million from the sale of a former retail store location, resulting in a gain of $4.0 million that was recorded in loss (gain) on disposal of assets.

### Asset Impairment and Store Closing Charges

There were no asset impairment and store closing costs recorded during the three months ended October 30, 2010 or three and nine months ended October 31, 2009.

During the nine months ended October 30, 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 October 30, 2010 and October 31, 2009 was $14.0 million and $20.7 million, respectively, of which $10.3 million and $15.3 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 October 30, 2010 and October 31, 2009 was $0.0 million and $(1.2) million, respectively, and during the nine months ended October 30, 2010 and October 31, 2009 was $(1.4) million and $(0.9) million, respectively. The total accrued interest and penalties in the condensed consolidated balance sheets as of October 30, 2010 and October 31, 2009 was $4.6 million and $8.5 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 nine months ended October 30, 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 29.6% and 276.1% for the three months ended October 30, 2010 and October 31, 2009, respectively. During the three months ended October 30, 2010, income taxes included the recognition of tax benefits primarily due to a decrease in a capital loss valuation allowance. During the three months ended October 31, 2009, income taxes included the recognition of tax benefits primarily due to a state administrative settlement, decrease in a capital loss valuation allowance, and federal tax credits.

The Company’s estimated federal and state income tax rate, inclusive of equity in losses of joint ventures, was approximately 32.1% and 67.6% for the nine months ended October 30, 2010 and October 31, 2009, respectively. During the nine months ended October 30, 2010, income taxes included the recognition of tax benefits primarily due to a state administrative settlement, a decrease in a capital loss valuation allowance, and federal tax credit refund claims. During the nine months ended October 31, 2009, income taxes included the recognition of tax benefits primarily due to a state administrative settlement, decrease in a capital loss valuation allowance, and 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)*

|  | October 30, 2010 | January 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $167,119 | $341,693 | $(174,574) | (51.1)% |
| Long-term debt, including current portion | 746,849 | 749,306 | (2,457) | (0.3) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders’ equity | 2,116,565 | 2,304,103 | (187,538) | (8.1) |
| Current ratio | 1.76 | 2.28 |  |  |
| Debt to capitalization | 30.9% | 29.2% |  |  |

*(in thousands of dollars)*

|  | October 30, 2010 | October 31, 2009 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $167,119 | $74,077 | $93,042 | 125.6% |
| Long-term debt, including current portion | 746,849 | 749,724 | (2,875) | (0.4) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders’ equity | 2,116,565 | 2,233,966 | (117,401) | (5.3) |
| Current ratio | 1.76 | 1.80 |  |  |
| Debt to capitalization | 30.9% | 29.8% |  |  |

Net cash flows from operations decreased to $158.9 million during the nine months ended October 30, 2010 compared to $261.4 million for the nine months ended October 31, 2009. This decrease of $102.5 million was largely a result of a decrease of $179.5 million related to changes in working capital items, primarily of changes in income tax accruals, the collection of an income tax receivable and of changes in inventory. This decrease was partially offset by higher net income, as adjusted for non-cash items, of $77.0 million for the nine months ended October 30, 2010 as compared to the nine months ended October 31, 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 $64.1 million and $65.8 million from GE during the nine months ended October 30, 2010 and October 31, 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 nine months ended October 30, 2010, the Company received proceeds of $1.9 million from the sale of a former retail store location, resulting in a loss of $1.1 million that was recorded in loss (gain) on disposal of assets. Additionally, during the nine months ended October 30, 2010, the Company 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 loss (gain) on disposal of assets.

Capital expenditures were $73.8 million and $51.1 million for the nine months ended October 30, 2010 and October 31, 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 nine months ended October 30, 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 nine months ended October 30, 2010, we closed our store location in Helena, Montana (65,000 square feet) and recorded a negligible amount for store closing costs. We have also announced the upcoming closures of our stores located at Coral Square Mall in Coral Springs, Florida (98,000 square feet) and Miami International Mall in Miami, Florida (98,000 square feet). These locations are expected to close during the fourth quarter of fiscal 2010 with minimal 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 $167.1 million as of October 30, 2010. As part of our overall liquidity management strategy and for peak working capital requirements, the Company has a $1.0 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 $1.0 billion at October 30, 2010. No borrowings were outstanding at October 30, 2010. Letters of credit totaling $89.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $911 million at October 30, 2010.

Under the credit agreement, the Company unilaterally reduced the previous $1.2 billion credit facility by $200 million to $1.0 billion, effective September 1, 2010, in order to reduce the amount of commitment 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 time of the permanent reduction through the remaining term of the credit facility are approximately $1.1 million.

Cash used in financing activities for the nine months ended October 30, 2010 totaled $265.8 million compared to cash used in financing activities of $241.9 million for the nine months ended October 31, 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 nine months ended October 30, 2010 partially offset by short-term borrowing and debt payments during the nine months ended October 31, 2009.

During the nine months ended October 30, 2010, the Company repurchased 10.1 million shares of stock for approximately $253.9 million (including the accrual of $12.3 million of share repurchase that had not settled as of October 30, 2010) at an average price of $25.24 per share. At October 30, 2010, $178.7 million remained available for repurchase pursuant to authorization granted by the Company’s board of directors.

During the nine months ended October 30, 2010, the Company made principal payments on long-term debt and capital lease obligations of $16.5 million, including the payoff of approximately $13 million in capital lease obligations for two corporate aircraft. During the nine months ended October 31, 2009, the Company made principal payments on long-term debt and capital lease obligations of $33.1 million, including the repurchase of $8.4 million face amount of 9.125% notes maturing on August 1, 2011. This repurchase resulted in a pretax gain of approximately $1.7 million and was recorded in net interest and debt expense.

During the nine months ended October 31, 2009, the Company also paid $200.0 million of short-term borrowings under the Company’s credit facility. No short-term borrowings were outstanding under the credit facility during the nine months ended October 30, 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, net of invested cash, 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; (b) statements regarding matters that are not historical facts; and (c) statements about the Company’s future occurrences, plans and objectives, including statements regarding management’s expectations and forecasts for the remainder of fiscal 2010 and fiscal 2011. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company’s stores are located and the effect of these factors on the buying patterns of the Company’s customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company’s future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended January 30, 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, 776 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 October 30, 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 Dec 3, 2010.
Source: SEC EDGAR, the filing index for accession 0001104659-10-061077. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.