# Dillard'S, Inc.: Form 10-Q for the period ended Oct 29, 2011

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2011-12-06
- Accepted by EDGAR: Dec 6, 2011, 17:12 ET
- Period: 2011-10-29
- Accession: 0001104659-11-067903
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000110465911067903/a11-29553_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000110465911067903/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-10-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-31 to 2011-10-29 | $1.42bn | us-gaap:Revenues |
| Revenue | 9 months, 2011-01-30 to 2011-10-29 | $4.39bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2011-07-31 to 2011-10-29 | $880.0m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2011-01-30 to 2011-10-29 | $2.74bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2011-07-31 to 2011-10-29 | $502.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2011-01-30 to 2011-10-29 | $1.55bn | us-gaap:GrossProfit |
| Income tax | 3 months, 2011-07-31 to 2011-10-29 | −$188.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-01-30 to 2011-10-29 | −$138.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-31 to 2011-10-29 | $228.2m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months, 2011-01-30 to 2011-10-29 | $322.4m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2011-07-31 to 2011-10-29 | $4.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2011-01-30 to 2011-10-29 | $5.80 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-31 to 2011-10-29 | $4.38 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2011-01-30 to 2011-10-29 | $5.90 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-31 to 2011-10-29 | 52,950,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2011-01-30 to 2011-10-29 | 55,574,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2011-01-30 to 2011-10-29 | $135.6m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2011-01-30 to 2011-10-29 | $80.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2011-01-30 to 2011-10-29 | $7.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2011-01-30 to 2011-10-29 | $392.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-10-29 | $106.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-10-29 | $1.97bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-10-29 | $4.72bn | us-gaap:Assets |
| Current liabilities | at 2011-10-29 | $1.30bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2011-10-29 | $634.8m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2011-10-29 | $57.2m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2011-10-29 | $142.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2011-10-29 | $2.03bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,768 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 29, 2011.

### EXECUTIVE OVERVIEW

Improved sales headlined our third quarter operating performance of fiscal 2011, contributing to record-setting earnings per share. Extending the sales momentum from our first two quarters, comparable store sales for the quarter ended October 29, 2011 increased 5% over the comparable prior year quarter as gross margin rates were held and operating expenses were leveraged. Net income for the quarter increased to $228.2 million, or $4.31 per share—our highest historical third quarter earnings per share—compared to $14.4 million, or $0.22 per share, in the comparable prior year quarter.

Included in net income for the quarter ended October 29, 2011 are:

- a $201.6 million tax benefit ($3.81 per share) due to a reversal of a valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of properties to our REIT and
- a $1.3 million pretax gain ($0.9 million after tax or $0.02 per share) related to the sale of two former retail store locations.

Included in net income for the quarter ended October 30, 2010 is a $1.1 million pretax loss ($0.7 million after tax or $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.

Highlights of the quarter ended October 29, 2011 included:

- record earnings per share for a third quarter of $4.31 per share compared to $0.22 per share for the prior year third quarter. Net income was $228.2 million for the quarter ended October 29, 2011 compared to net income of $14.4 million for the quarter ended October 30, 2010.
- a comparable store sales increase of 5% while maintaining gross margin from retail operations at 36.8% of sales and
- continued operating expense control, decreasing 30 basis points of sales.
- the repurchase of approximately $123.7 million (2.9 million shares) of Class A Common Stock.

As of October 29, 2011, we had working capital of $672.1 million, cash and cash equivalents of $106.4 million and $1,034.0 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $135.6 million for the nine months ended October 29, 2011. We operated 304 total stores, including 16 clearance centers, and one internet store as of October 29, 2011, 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 our business, including the following:

|  | Three Months Ended\* October 29, 2011 | October 30, 2010 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,382.6 | $1,344.1 |
| Net sales trend | 3% | (1)% |
| Gross profit (in millions) | $502.6 | $486.6 |
| Gross profit as a percentage of net sales | 36.4% | 36.2% |
| Cash flow from operations (in millions) | $135.6 | $158.9 |
| Total retail store count at end of period | 304 | 310 |
| Retail sales per square foot | $26 | $25 |
| Retail store sales trend | 4% | 0% |
| Comparable retail store sales trend | 5% | 1% |
| Comparable retail store inventory trend | 4% | (2)% |
| Retail merchandise inventory turnover | 2.4 | 2.4 |

\*Cash flow from operations data is for the nine months ended October 29, 2011 and October 30, 2010.

### General

**Net sales.** Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company. Comparable store sales 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 during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; and sales in clearance centers.

**Service charges and other income.** Service charges include 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. 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, amortization of financing costs and interest on capital lease obligations.

**(Gain) loss on disposal of assets. (**Gain) loss on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an interest in a mall joint venture.

**Asset impairment and store closing charges.** Asset impairment and store closing charges consist of write-downs to fair value of under-performing or available-for-sale 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.

**Income on and equity in (losses) of joint ventures.** Income on and equity in (losses) of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures as well as a distribution of excess cash from one of the Company’s mall joint ventures.

### 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. In response to recent economic volatility in Asia and to increasing fabric prices (including cotton) and overseas wages, we have sought solutions to help minimize the effects of these events on our operations during fiscal 2011 by (1) negotiating efficiencies through our longstanding relationships with our current suppliers, (2) considering alternative manufacturing sources, (3) redesigning our garments and incorporating other types of fibers where appropriate and (4) adjusting price points as necessary. Consequently, we believe the effects of these currently known trends on our gross margins in fiscal 2011 will be minimal.

### 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 29, 2011 | October 30, 2010 | Nine Months Ended October 29, 2011 | October 30, 2010 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.5 | 2.1 | 2.2 | 2.1 |
|  | 102.5 | 102.1 | 102.2 | 102.1 |
| Cost of sales | 63.6 | 63.8 | 63.8 | 64.5 |
| Advertising, selling, administrative and general expenses | 29.3 | 29.6 | 27.7 | 28.3 |
| Depreciation and amortization | 4.7 | 4.8 | 4.5 | 4.6 |
| Rentals | 0.8 | 0.9 | 0.8 | 0.9 |
| Interest and debt expense, net | 1.3 | 1.3 | 1.3 | 1.3 |
| (Gain) loss on disposal of assets | (0.1) | 0.1 | (0.1) | (0.1) |
| Asset impairment and store closing charges | 0.0 | 0.0 | 0.0 | 0.1 |
| Income before income taxes and income on and equity in (losses) of joint ventures | 2.9 | 1.6 | 4.2 | 2.5 |
| Income taxes (benefit) | (13.6) | 0.4 | (3.2) | 0.8 |
| Income on and equity in (losses) of joint ventures | 0.0 | (0.1) | 0.1 | 0.0 |
| Net income | 16.5% | 1.1% | 7.5% | 1.7% |

17

### Net Sales

*(in thousands of dollars)*

| Net sales: | Three Months Ended October 29, 2011 | October 30, 2010 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,366,362 | $1,320,568 | $45,794 |
| Construction segment | 16,250 | 23,550 | (7,300) |
| Total net sales | $1,382,612 | $1,344,118 | $38,494 |

The percent change by category in the Company’s retail operations segment sales for the three months ended October 29, 2011 compared to the three months ended October 30, 2010 as well as the percentage by segment and category to total net sales for the three months ended October 29, 2011 is as follows:

| Retail operations segment | Three Months % Change 2011-2010 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | 4.4% | 16% |
| Ladies’ apparel and accessories | 3.0 | 36 |
| Juniors’ and children’s apparel | 4.8 | 9 |
| Men’s apparel and accessories | 3.0 | 16 |
| Shoes | 4.8 | 17 |
| Home and furniture | (1.3) | 5 |
|  |  | 99 |
| Construction segment |  | 1 |
| Total |  | 100% |

Net sales from the retail operations segment increased 4%, exclusive of adjustments to the sales reserve, during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 while sales in comparable stores increased 5% between the same periods. Sales of shoes and juniors’ and children’s apparel increased significantly during the period. Sales of cosmetics, ladies’ apparel and accessories and men’s apparel and accessories increased moderately during the period while sales in the home and furniture category declined slightly during the period.

The number of sales transactions decreased 3% for the three months ended October 29, 2011 over the comparable prior year period while the average dollars per sales transaction increased significantly. We recorded an allowance for sales returns of $7.7 million and $7.2 million as of October 29, 2011 and October 30, 2010, respectively.

We believe that 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.

Net sales from the construction segment decreased $7.3 million or 31% during the three months ended October 29, 2011 compared to the three months ended October 30, 2010. We believe this decrease is primarily attributable to the negative impact that the weak United States economy has had in previous quarters and continues to have on demand for construction projects in private industry. During the first nine months of 2011, we have been awarded approximately $136 million in new contracts.

*(in thousands of dollars)*

| Net sales: | Nine Months Ended October 29, 2011 | October 30, 2010 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $4,247,462 | $4,108,112 | $139,350 |
| Construction segment | 46,095 | 78,512 | (32,417) |
| Total net sales | $4,293,557 | $4,186,624 | $106,933 |

The percent change by category in the Company’s retail operations segment sales for the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 as well as the percentage by segment and category to total net sales for the nine months ended October 29, 2011 is as follows:

| Retail operations segment | Nine Months % Change 2011-2010 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | 4.1% | 15% |
| Ladies’ apparel and accessories | 2.8 | 38 |
| Juniors’ and children’s apparel | 4.0 | 9 |
| Men’s apparel and accessories | 4.4 | 17 |
| Shoes | 5.3 | 15 |
| Home and furniture | (3.4) | 5 |
|  |  | 99 |
| Construction segment |  | 1 |
| Total |  | 100% |

Net sales from the retail operations segment increased 3% during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 while sales in comparable stores increased 4% between the same periods. Moderate sales increases were noted in most merchandise categories during the period, with the exception of shoes which experienced a significant sales increase and home and furniture which experienced a moderate sales decline.

The number of sales transactions decreased 2% for the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 while the average dollars per sales transaction increased significantly.

Net sales from the construction segment decreased $32.4 million or 41% during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010.

### Service Charges and Other Income

*(in thousands of dollars)*

| Service charges and other income: Retail operations segment | Three Months Ended October 29, 2011 | October 30, 2010 | Nine Months Ended October 29, 2011 | October 30, 2010 | Three Months $ Change 2011-2010 | Nine Months $ Change 2011-2010 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Leased department income | $2,372 | $2,311 | $7,106 | $6,844 | $61 | $262 |
| Income from GE marketing and servicing alliance | 25,297 | 20,926 | 70,515 | 64,133 | 4,371 | 6,382 |
| Shipping and handling income | 4,012 | 3,659 | 12,538 | 11,547 | 353 | 991 |
| Other | 2,115 | 2,000 | 6,475 | 6,896 | 115 | (421) |
|  | 33,796 | 28,896 | 96,634 | 89,420 | 4,900 | 7,214 |
| Construction segment | 130 | 23 | 156 | 444 | 107 | (288) |
| Total | $33,926 | $28,919 | $96,790 | $89,864 | $5,007 | $6,926 |

Service charges and other income is composed primarily of income from the Alliance with GE. Income from the Alliance increased $4.4 million during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 primarily due to decreased credit losses and increased late charge fee income. Income from the

Alliance increased $6.4 million during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 primarily due to decreased credit losses partially offset by reduced finance charge and late charge fee income.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: Three months ended | October 29, 2011 | October 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $502,140 | $485,629 | $16,511 | 3.4% |
| Construction segment | 475 | 1,015 | (540) | (53.2) |
| Total gross profit | $502,615 | $486,644 | $15,971 | 3.3% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,551,936 | $1,483,197 | $68,739 | 4.6% |
| Construction segment | 339 | 1,256 | (917) | (73.0) |
| Total gross profit | $1,552,275 | $1,484,453 | $67,822 | 4.6% |

| Gross profit as a percentage of segment net sales: | Three Months Ended October 29, 2011 | October 30, 2010 | Nine Months Ended October 29, 2011 | October 30, 2010 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 36.8% | 36.8% | 36.5% | 36.1% |
| Construction segment | 2.9 | 4.3 | 0.7 | 1.6 |
| **Total gross profit as a percentage of net sales** | 36.4 | 36.2 | 36.2 | 35.5 |

Gross profit improved 20 basis points of sales and 70 basis points of sales during the three and nine months ended October 29, 2011 compared to the three and nine months ended October 30, 2010, respectively.

Gross profit as a percentage of sales from retail operations remained flat during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 as a result of increased markdowns partially offset by increased markups. Gross profit as a percentage of sales from retail operations improved 40 basis points during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 as a result of increased markups and decreased markdowns.

During the three months ended October 29, 2011 as compared to the three months ended October 30, 2010, gross margin was flat in most merchandise categories, with the exception of a slight gross margin decline in ladies’ apparel and accessories and a significant gross margin improvement in home and furniture.

During the nine months ended October 29, 2011 as compared to the nine months ended October 30, 2010, gross margin improved moderately in home and furniture and improved slightly in shoes and juniors’ and children’s apparel. Gross margin was flat in cosmetics and ladies’ apparel and accessories while men’s apparel and accessories experienced a slight gross margin decline.

Inventory increased 4% in comparable stores as of October 29, 2011 compared to October 30, 2010 as management has planned more aggressively in light of improved sales trends. 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 29, 2011, respectively.

Gross profit from the construction segment declined 140 basis points of sales and 90 basis points of sales during the three and nine months ended October 29, 2011 compared to the three and nine months ended October 30, 2010, respectively. The three-month gross margin decline from the prior year was the result of fewer projects caused by the reduction in demand for construction services combined with pricing pressures in an already competitive marketplace. The nine-month gross margin decline was also attributable to a $1.2 million loss recorded during the nine months ended October 29, 2011 on an electrical contract partially offset by a $2.2 million loss recorded in the prior year comparable period on certain electrical contracts stemming from job delays due to bad weather and job underperformance.

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

*(in thousands of dollars)*

| SG&A: Three months ended | October 29, 2011 | October 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $403,658 | $397,355 | $6,303 | 1.6% |
| Construction segment | 1,108 | 1,139 | (31) | (2.7) |
| Total SG&A | $404,766 | $398,494 | $6,272 | 1.6% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,186,492 | $1,180,737 | $5,755 | 0.5% |
| Construction segment | 3,578 | 3,453 | 125 | 3.6 |
| Total SG&A | $1,190,070 | $1,184,190 | $5,880 | 0.5% |

| SG&A as a percentage of segment net sales: | Three Months Ended October 29, 2011 | October 30, 2010 | Nine Months Ended October 29, 2011 | October 30, 2010 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 29.5% | 30.1% | 27.9% | 28.7% |
| Construction segment | 6.8 | 4.8 | 7.8 | 4.4 |
| **Total SG&A as a percentage of net sales** | 29.3 | 29.6 | 27.7 | 28.3 |

SG&A improved 30 basis points of sales during the three months ended October 29, 2011 compared to the three months ended October 30, 2010 while total SG&A dollars increased $6.3 million. The dollar increase was most noted in payroll and payroll related taxes ($4.9 million), primarily of selling payroll, and supplies ($3.3 million) partially offset by decreased net advertising expenditures ($2.8 million) and utilities ($2.3 million).

SG&A improved 60 basis points of sales during the nine months ended October 29, 2011 compared to the nine months ended October 30, 2010 while total SG&A dollars increased $5.9 million. The dollar increase was most noted in payroll and payroll related taxes ($10.4 million), primarily of selling payroll, and supplies ($6.7 million) partially offset by decreased net advertising expenditures ($8.7 million).

### Rentals

*(in thousands of dollars)*

| Rentals: Three months ended | October 29, 2011 | October 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $11,213 | $11,626 | $(413) | (3.6)% |
| Construction segment | 16 | 15 | 1 | 6.7 |
| Total rentals | $11,229 | $11,641 | $(412) | (3.5)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $34,763 | $36,537 | $(1,774) | (4.9)% |
| Construction segment | 35 | 61 | (26) | (42.6) |
| Total rentals | $34,798 | $36,598 | $(1,800) | (4.9)% |

The decrease in rental expense for the three and nine months ended October 29, 2011 compared to the three and nine months ended October 30, 2010, respectively, was 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 29, 2011 | October 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $17,791 | $18,118 | $(327) | (1.8)% |
| Construction segment | (41) | (75) | 34 | 45.3 |
| Total interest and debt expense, net | $17,750 | $18,043 | $(293) | (1.6)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $54,567 | $55,520 | $(953) | (1.7)% |
| Construction segment | (120) | (159) | 39 | 24.5 |
| Total interest and debt expense, net | $54,447 | $55,361 | $(914) | (1.7)% |

The decrease in net interest and debt expense for the nine months ended October 29, 2011 is primarily attributable to note maturities and repurchases during the period partially offset by an increase in credit facility interest. Total weighted average debt outstanding during the nine months ended October 29, 2011 increased approximately $35.9 million compared to the nine months ended October 30, 2010.

### (Gain) Loss on Disposal of Assets

*(in thousands of dollars)*

| (Gain) loss on disposal of assets: Three months ended | October 29, 2011 | October 30, 2010 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $(1,456) | $934 | $2,390 |
| Construction segment | — | — | — |
| Total (gain) loss on disposal of assets | $(1,456) | $934 | $2,390 |
| Nine months ended |  |  |  |
| Retail operations segment | $(3,911) | $(3,280) | $631 |
| Construction segment | 64 | (12) | (76) |
| Total (gain) loss on disposal of assets | $(3,847) | $(3,292) | $555 |

During the three months ended October 29, 2011, the Company received proceeds of $10.3 million from the sale of two former retail store locations, resulting in gains totaling $1.3 million that were recorded in (gain) loss on disposal of assets.

Additionally, during the nine months ended October 29, 2011, the Company received proceeds of $11.0 million from the sale of an interest in a mall joint venture, resulting in a gain of $2.1 million that was recorded in (gain) loss on disposal of assets.

During the three 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 (gain) loss 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 (gain) loss on disposal of assets.

### Asset Impairment and Store Closing Charges

*(in thousands of dollars)*

| Asset impairment and store closing charges: Nine months ended | October 29, 2011 | October 30, 2010 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,200 | $2,208 | $(1,008) |
| Construction segment | — | — | — |
| Total asset impairment and store closing charges | $1,200 | $2,208 | $(1,008) |

There were no asset impairment and store closing costs recorded during the three months ended October 29, 2011 and October 30, 2010.

During the nine months ended October 29, 2011, the Company recorded a pretax charge of $1.2 million for asset impairment and store closing costs. The charge was for the write-down of a property currently held for sale.

During the nine months ended October 30, 2010, the Company recorded a pretax charge of $2.2 million for asset impairment and store closing costs. The charge was for the write-down of a property currently held for sale.

### Income Taxes

The total amount of unrecognized tax benefits as of October 29, 2011 and October 30, 2010 was $8.2 million and $14.0 million, respectively, of which $5.6 million and $10.3 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 accrued interest and penalties in the condensed consolidated balance sheets as of October 29, 2011 and October 30, 2010 was $3.4 million and $4.6 million, respectively. The estimated range of the reasonably possible unrecognized tax benefit decrease in the next twelve months is between $0.5 million and $1.5 million. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

In January 2011, the Company formed a wholly-owned subsidiary intended to operate as a real estate investment trust (“REIT”) and transferred certain properties to this subsidiary. The Company entered into this transaction in order to enhance its financial flexibility by providing additional sources of liquidity. At the time, the Company believed that a tax election might be available to the Company that would result in a taxable gain on the transfer of these properties to the REIT. In May 2011, the Company requested that the Internal Revenue Service (“IRS”) review the REIT transaction and a potential tax election available to the Company, through the IRS’s voluntary Pre-Filing Agreement Program (“PFA”). Through the PFA, in September 2011, the Company and the IRS entered into a Closing Agreement On Final Determination Covering Specific Matters under which agreement the IRS agreed with the Company regarding the tax treatment of the transfer of the properties to the REIT and the availability of the tax election to the Company. Based on the agreement with the IRS, during the three months ended October 29, 2011 the Company determined to make the tax election in its tax return for the fiscal year ended January 29, 2011 (fiscal 2010) which was filed during the quarter. This tax election increases the tax basis of the properties transferred to the REIT to their fair values at the date of the transfer. The income tax that would otherwise be payable because of the gain recognized by this election was largely reduced by the utilization of a capital loss carryforward, that would otherwise have expired as of January 29, 2011, against a portion of the recognized gain. Because of the Company’s past uncertainty regarding the incurrence of capital gain income, the deferred tax asset associated with that capital loss carryforward had been offset by a full valuation allowance since its recognition in fiscal 2005. During the three months ended October 29, 2011, income taxes included the recognition of approximately $201.6 million in tax benefit due to the reversal of the valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of the properties to the REIT. Approximately $134.4 million of the tax benefit relates to increased basis in depreciable property while approximately $67.2 million of the benefit relates to increased basis in land. Due to the increased tax basis of the depreciable properties transferred to the REIT, the Company will recognize increased tax depreciation deductions in the future which are expected to yield cash tax benefits of approximately $5 million annually in years one through twenty and approximately $2 million annually in years twenty-one through forty beginning with the year ending January 28, 2012. Due to the uncertainty surrounding whether the REIT will dispose of any of its land assets in the future, the Company cannot estimate when or if the cash tax benefits related to the increased basis in land will be received.

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately (473.1)% and 29.6% for the three months ended October 29, 2011 and October 30, 2010, respectively. During the three months ended October 29, 2011, income taxes included the recognition of: a tax benefit of approximately $201.6 million due to the reversal of a valuation allowance related to a capital loss carryforward; tax benefits related to federal tax credits; and net decreases in unrecognized tax benefits, interest and penalties. 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.

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately (75.4)% and 32.1% for the nine months ended October 29, 2011 and October 30, 2010, respectively. During the nine months ended October 29, 2011, income taxes included the recognition of: a tax benefit of approximately $201.6 million due to the reversal of a valuation allowance related to a capital loss carryforward; tax benefits related to federal tax credits; net decreases in unrecognized tax benefits, interest and penalties; decreases in net operating loss valuation allowances; and decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions. Additionally, during the nine months ended October 29, 2011, the IRS concluded its examination of the Company’s federal income tax returns for the fiscal tax years 2008 through 2009, and no significant changes occurred in these tax years as a result of such examination. 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.

The Company’s income tax rate for the remainder of fiscal 2011 is dependent upon results of operations and may change if the results for fiscal 2011 are different from current expectations. The Company’s effective tax rate for the remainder of fiscal 2011 is estimated to approximate 36%.

### FINANCIAL CONDITION

### Financial Position Summary

*(in thousands of dollars)*

|  | October 29, 2011 | January 29, 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $106,383 | $343,291 | $(236,908) | (69.0)% |
| Restricted cash | 24,901 | — | 24,901 | \* |
| Other short-term borrowings | 142,000 | — | 142,000 | \* |
| Long-term debt, including current portion | 692,031 | 746,412 | (54,381) | (7.3) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders’ equity | 1,832,367 | 2,086,720 | (254,353) | (12.2) |
| Current ratio | 1.52 | 2.05 |  |  |
| Debt to capitalization | 36.1% | 31.2% |  |  |

*(in thousands of dollars)*

|  | October 29, 2011 | October 30, 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $106,383 | $167,119 | $(60,736) | (36.3)% |
| Restricted cash | 24,901 | — | 24,901 | \* |
| Other short-term borrowings | 142,000 | — | 142,000 | \* |
| Long-term debt, including current portion | 692,031 | 746,849 | (54,818) | (7.3) |
| Subordinated debentures | 200,000 | 200,000 | — | — |
| Stockholders’ equity | 1,832,367 | 2,116,565 | (284,198) | (13.4) |
| Current ratio | 1.52 | 1.76 |  |  |
| Debt to capitalization | 36.1% | 30.9% |  |  |

\*percentage not meaningful

Net cash flows from operations decreased to $135.6 million during the nine months ended October 29, 2011 compared to $158.9 million for the nine months ended October 30, 2010. This $23.3 million decrease was primarily attributable to a decrease of $55.3 million related to changes in working capital items, primarily due to increases in inventories as the Company responds to improved sales trends. This decrease was partially offset by higher net income, as adjusted for non-cash items, of $31.9 million for the nine months ended October 29, 2011 as compared to the nine months ended October 30, 2010.

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 $70.5 million and $64.1 million from GE during the nine months ended October 29, 2011 and October 30, 2010, respectively. While future cash flows under this Alliance are difficult to predict, the Company expects income from the Alliance to improve moderately during fiscal 2011 compared to fiscal 2010. 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 29, 2011, the Company received proceeds of $10.3 million from the sale of two former retail store locations, resulting in gains totaling $1.3 million that were recorded in (gain) loss on disposal of assets. Additionally, during the nine months ended October 29, 2011, the Company received proceeds of $11.0 million from the sale of an interest in a mall joint venture, resulting in a gain of $2.1 million that was recorded in (gain) loss on disposal of assets.

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 (gain) loss on disposal of assets. The Company also 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 (gain) loss on disposal of assets.

Capital expenditures were $80.3 million and $73.8 million for the nine months ended October 29, 2011 and October 30, 2010, respectively. The current year expenditures were primarily for the remodeling of existing stores and equipment upgrades, including installation of the Company’s new internet fulfillment center located in Maumelle, Arkansas which is expected to be fully operational by early fiscal 2012. Capital expenditures for fiscal 2011 are expected to be approximately $125 million compared to actual expenditures of $98.2 million during fiscal 2010. There are no planned new store openings for fiscal 2011.

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.

During the nine months ended October 29, 2011, we closed our Highland Mall location in Austin, Texas (190,000 square feet), our Decatur Mall location in Decatur, Alabama (128,000 square feet), our Westminster Mall location in Westminster, Colorado (159,000 square feet), and our Virginia Center Commons location in Glenn Allen, Virginia (96,000 square feet). We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

During the three months ended October 29, 2011, our wholly-owned captive insurance subsidiary entered into an agreement in which $24.9 million was placed into a trust for the benefit of a third party insurance provider. The purpose of the trust (and additional standby letters of credit of $24.9 million) is to collateralize a third party insurer for workers’ compensation and general liability obligations under casualty insurance programs for policy years through fiscal 2011. We believe collateralizing these obligations with cash is cost-effective, since the fees that would have been paid for the standby letters of credit exceed the amount of interest which could have been earned if the cash had been invested. Prior to this change, all claims were secured by standby letters of credit. The cash in the trust was recorded as restricted cash.

During the nine months ended October 29, 2011, the Company received a distribution of excess cash from a mall joint venture of $6.7 million and recorded a related gain of $4.2 million in income on and equity in (losses) of joint ventures.

The Company had cash on hand, including restricted cash, of $131.3 million as of October 29, 2011. 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 29, 2011. Borrowings of $142.0 million were outstanding and letters of credit totaling $55.8 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $802 million at October 29, 2011. Borrowings, net of invested cash, were $117.7 million at October 29, 2011.

During the nine months ended October 29, 2011, the Company repurchased 9.3 million shares of Class A Common Stock for $392.4 million at an average price of $42.09 per share under its 2010, February 2011 and May 2011 Stock Plans. 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 under its 2007 and 2010 Stock Plans. At October 29, 2011, no authorization remained under the 2007, 2010 and February 2011 Stock Plans, and $126.3 million of authorization remained under the May 2011 Stock Plan.

During the nine months ended October 29, 2011, the Company made principal payments on long-term debt and capital lease obligations of $55.8 million, including the repurchase of $5.7 million face amount of 6.625% notes with an original maturity on January 15, 2018. This repurchase resulted in a pretax gain of approximately $0.2 million which was recorded in net interest and debt expense.

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 and the repurchase of $1.2 million face amount of 7.13% notes with an original maturity on August 1, 2018. The repurchase resulted in a pretax gain of approximately $21 thousand which was recorded in net interest and debt expense.

During fiscal 2011, 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 2011, net of invested cash, to be approximately $200 million. 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 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 29, 2011.

### OFF-BALANCE-SHEET ARRANGEMENTS

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

### NEW ACCOUNTING STANDARDS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, *Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.* The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This update is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The Company does not expect the adoption of ASU No. 2011-04 to have a material impact on the Company’s financial statements.

In June 2011, the FASB issued ASU No. 2011-05, *Comprehensive Income (Topic 220)—Presentation of Comprehensive Income*, to make the presentation of items within other comprehensive income (“OCI”) more prominent. The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders’ equity. This new update is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The adoption of this new standard may change the order in which certain financial statements are presented and will provide additional detail in those financial statements when applicable, but will not have any other impact on the Company’s financial statements.

### FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as “may,” “will,” “could,” “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 2011 and fiscal 2012. 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 29, 2011, 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 29, 2011.

## 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 29, 2011 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 29, 2011.

Filed Dec 6, 2011.
Source: SEC EDGAR, the filing index for accession 0001104659-11-067903. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.