# Dillard'S, Inc.: Form 10-Q for the period ended Oct 27, 2012

- Company: [Dillard'S, Inc.](/companies/dds.md) (CIK 28917)
- Form: 10-Q
- Filed: 2012-11-28
- Accepted by EDGAR: Nov 28, 2012, 17:13 ET
- Period: 2012-10-27
- Accession: 0001104659-12-080554
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/28917/000110465912080554/a12-24553_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/28917/000110465912080554/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-10-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-29 to 2012-10-27 | $1.49bn | us-gaap:Revenues |
| Revenue | 9 months, 2012-01-29 to 2012-10-27 | $4.60bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-07-29 to 2012-10-27 | $919.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2012-01-29 to 2012-10-27 | $2.86bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2012-07-29 to 2012-10-27 | $530.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-01-29 to 2012-10-27 | $1.62bn | us-gaap:GrossProfit |
| Income tax | 3 months, 2012-07-29 to 2012-10-27 | $24.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-29 to 2012-10-27 | $94.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 9 months, 2012-01-29 to 2012-10-27 | $174.5m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2012-07-29 to 2012-10-27 | $1.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-29 to 2012-10-27 | $3.55 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-29 to 2012-10-27 | $1.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-29 to 2012-10-27 | $3.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-29 to 2012-10-27 | 48,105,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-29 to 2012-10-27 | 49,216,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-29 to 2012-10-27 | $219.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2012-01-29 to 2012-10-27 | $111.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2012-01-29 to 2012-10-27 | $7.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2012-01-29 to 2012-10-27 | $162.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2012-10-27 | $124.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-10-27 | $1.94bn | us-gaap:AssetsCurrent |
| Total assets | at 2012-10-27 | $4.56bn | us-gaap:Assets |
| Current liabilities | at 2012-10-27 | $1.14bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2012-10-27 | $614.8m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-10-27 | $260.0k | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2012-10-27 | $27.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2012-10-27 | $2.07bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,155 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 28, 2012.

### EXECUTIVE OVERVIEW

Increased sales continued to headline our quarterly operating performance as comparable store sales were up for our ninth consecutive quarter. Gross margin from retail operations also showed improvement while operating spending was down. Net income for the quarter was $48.5 million, or $1.01 per share, and operating cash flow for the first nine months of the year improved 62.2% over the same prior year period.

Included in net income for the quarter ended October 27, 2012 are:

- a $1.1 million pretax gain ($0.7 million after tax or $0.01 per share) related to the sale of two former retail store locations and
- a $1.7 million tax benefit ($0.04 per share) due to a reversal of a valuation allowance related to a deferred tax asset consisting of a capital loss carryforward.

Included in net income of $228.2 million ($4.31 per share) 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.

Highlights of the quarter ended October 27, 2012 included:

- a 5% increase in comparable store sales,
- gross margin from retail operations improvement of 40 basis points of sales,
- advertising, selling, administrative and general expenses improvement of 140 basis points of sales,
- net income of $48.5 million, or $1.01 per share, and
- cash flow from operations improvement of $84.3 million for the nine months ended October 27, 2012, a 62.2% increase over the comparable prior year period.

As of October 27, 2012, we had working capital of $807.1 million, cash and cash equivalents of $124.8 million and $842.0 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $219.9 million for the nine months ended October 27, 2012. We operated 302 total stores, including 18 clearance centers, and one internet store as of October 27, 2012, a decrease of two stores from the comparable 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 27, 2012 | October 29, 2011 |
| --- | ---: | ---: |
| Net sales (in millions) | $1,449.6 | $1,382.6 |
| Net sales trend | 5% | 3% |
| Gross profit (in millions) | $530.0 | $501.5 |
| Gross profit as a percentage of net sales | 36.6% | 36.3% |
| Cash flow from operations (in millions) | $219.9 | $135.6 |
| Total retail store count at end of period | 302 | 304 |
| Retail sales per square foot | $27 | $26 |
| Retail store sales trend | 4% | 4% |
| Comparable retail store sales trend | 5% | 5% |
| Comparable retail store inventory trend | (1)% | 4% |
| Retail merchandise inventory turnover | 2.5 | 2.4 |

\*Cash flow from operations data is for the nine months ended October 27, 2012 and October 29, 2011.

**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. Comparable store sales exclude the change in the allowance for sales returns. 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; sales in clearance centers; and changes in the allowance for sales returns.

**Service charges and other income.** Service charges and other income 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, gift card breakage and lease income on leased departments.

**Cost of sales.** Cost of sales includes the cost of merchandise sold (net of purchase discounts), 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 expense includes depreciation and amortization on property and equipment.

**Rentals.** Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.

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

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

**Asset impairment and store closing charges.** Asset impairment and store closing charges consist of write-downs to fair value of under-performing or held 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, our business could be affected by such in the future.

### RESULTS OF OPERATIONS

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

|  | Three Months Ended October 27, 2012 | October 29, 2011 | Nine Months Ended October 27, 2012 | October 29, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Service charges and other income | 2.5 | 2.6 | 2.5 | 2.3 |
|  | 102.5 | 102.6 | 102.5 | 102.3 |
| Cost of sales | 63.4 | 63.7 | 63.8 | 63.9 |
| Advertising, selling, administrative and general expenses | 27.9 | 29.3 | 26.7 | 27.7 |
| Depreciation and amortization | 4.5 | 4.7 | 4.3 | 4.5 |
| Rentals | 0.5 | 0.8 | 0.5 | 0.8 |
| Interest and debt expense, net | 1.2 | 1.3 | 1.2 | 1.3 |
| Gain on disposal of assets | 0.0 | (0.1) | 0.0 | (0.1) |
| Asset impairment and store closing charges | 0.0 | 0.0 | 0.0 | 0.0 |
| Income before income taxes and income on and equity in losses of joint ventures | 5.0 | 2.9 | 6.0 | 4.2 |
| Income taxes (benefit) | 1.7 | (13.6) | 2.1 | (3.2) |
| Income on and equity in losses of joint ventures | 0.0 | 0.0 | 0.0 | 0.1 |
| Net income | 3.3% | 16.5% | 3.9% | 7.5% |

17

### Net Sales — Three Month Comparison

*(in thousands of dollars)*

| Net sales: | Three Months Ended October 27, 2012 | October 29, 2011 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,424,722 | $1,366,362 | $58,360 |
| Construction segment | 24,901 | 16,250 | 8,651 |
| Total net sales | $1,449,623 | $1,382,612 | $67,011 |

The percent change by category in the Company’s retail operations segment sales for the three months ended October 27, 2012 compared to the three months ended October 29, 2011 as well as the percentage by segment and category to total net sales for the three months ended October 27, 2012 is as follows:

| Retail operations segment | Three Months % Change 2012-2011 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | 2.7% | 15% |
| Ladies’ apparel | 2.1 | 22 |
| Ladies’ accessories and lingerie | 7.3 | 13 |
| Juniors’ and children’s apparel | 5.3 | 9 |
| Men’s apparel and accessories | 8.1 | 17 |
| Shoes | 5.4 | 17 |
| Home and furniture | (6.1) | 5 |
|  |  | 98 |
| Construction segment | 53.2 | 2 |
| Total |  | 100% |

Net sales from the retail operations segment increased 4% during the three months ended October 27, 2012 compared to the three months ended October 29, 2011 while sales in comparable stores increased 5% between the same periods. Sales of men’s apparel and accessories, ladies’ accessories and lingerie, shoes and juniors’ and children’s apparel increased significantly over the prior year period while sales of ladies’ apparel and cosmetics increased moderately. Home and furniture sales decreased significantly between the periods.

The number of sales transactions increased 1% for the three months ended October 27, 2012 over the comparable prior year period while the average dollars per sales transaction increased 4%. We recorded an allowance for sales returns of $7.0 million and $7.7 million as of October 27, 2012 and October 29, 2011, respectively.

We believe that we may continue to see some sales growth in the retail operations segment during fiscal 2012; however, there is no guarantee of improved sales performance.

Net sales from the construction segment increased $8.7 million or 53% during the three months ended October 27, 2012 compared to the three months ended October 29, 2011 due to an increase in new construction projects. We believe that we will continue to see some sales growth in the construction segment during fiscal 2012; however, there is no guarantee of improved sales performance. The backlog of awarded construction contracts at October 27, 2012 totaled $184.7 million.

### Net Sales — Nine Month Comparison

*(in thousands of dollars)*

| Net sales: | Nine Months Ended October 27, 2012 | October 29, 2011 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $4,402,721 | $4,247,462 | $155,259 |
| Construction segment | 84,146 | 46,095 | 38,051 |
| Total net sales | $4,486,867 | $4,293,557 | $193,310 |

The percent change by category in the Company’s retail operations segment sales for the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 as well as the percentage by segment and category to total net sales for the nine months ended October 27, 2012 is as follows:

| Retail operations segment | Nine Months % Change 2012-2011 | % of Net Sales |
| --- | ---: | ---: |
| Cosmetics | 3.8% | 15% |
| Ladies’ apparel | 2.0 | 23 |
| Ladies’ accessories and lingerie | 7.3 | 14 |
| Juniors’ and children’s apparel | 2.0 | 9 |
| Men’s apparel and accessories | 4.4 | 17 |
| Shoes | 5.0 | 15 |
| Home and furniture | (2.8) | 5 |
|  |  | 98 |
| Construction segment | 82.5 | 2 |
| Total |  | 100% |

Net sales from the retail operations segment increased 4% in both total and comparable stores during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011. Sales of shoes and ladies’ accessories and lingerie increased significantly over the prior year period while sales of cosmetics, men’s apparel and accessories, juniors’ and children’s apparel and ladies’ apparel increased moderately. Home and furniture sales decreased moderately between the periods.

The number of sales transactions decreased 2% for the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 while the average dollars per sales transaction increased 5%.

Net sales from the construction segment increased $38.1 million or 83% during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 due to an increase in new construction contracts.

### Service Charges and Other Income

*(in thousands of dollars)*

| Service charges and other income: Retail operations segment | Three Months Ended October 27, 2012 | October 29, 2011 | Nine Months Ended October 27, 2012 | October 29, 2011 | Three Months $ Change 2012-2011 | Nine Months $ Change 2012-2011 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Leased department income | $2,358 | $2,372 | $7,216 | $7,106 | $(14) | $110 |
| Income from GE marketing and servicing alliance | 27,301 | 25,297 | 78,731 | 70,515 | 2,004 | 8,216 |
| Shipping and handling income | 3,965 | 4,012 | 12,671 | 12,538 | (47) | 133 |
| Other | 3,094 | 3,197 | 11,996 | 9,820 | (103) | 2,176 |
|  | 36,718 | 34,878 | 110,614 | 99,979 | 1,840 | 10,635 |
| Construction segment | 4 | 130 | 58 | 156 | (126) | (98) |
| Total | $36,722 | $35,008 | $110,672 | $100,135 | $1,714 | $10,537 |

Service charges and other income is composed primarily of income from the Alliance with GE. Income from the Alliance increased during the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011 primarily due to increases in finance charge and late charge fee income and decreased credit losses.

### Gross Profit

*(in thousands of dollars)*

| Gross profit: Three months ended | October 27, 2012 | October 29, 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $528,971 | $501,058 | $27,913 | 5.6% |
| Construction segment | 1,029 | 475 | 554 | 116.6 |
| Total gross profit | $530,000 | $501,533 | $28,467 | 5.7% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,618,751 | $1,548,591 | $70,160 | 4.5% |
| Construction segment | 3,778 | 339 | 3,439 | 1,014.5 |
| Total gross profit | $1,622,529 | $1,548,930 | $73,599 | 4.8% |

| Gross profit as a percentage of segment net sales: | Three Months Ended October 27, 2012 | October 29, 2011 | Nine Months Ended October 27, 2012 | October 29, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 37.1% | 36.7% | 36.8% | 36.5% |
| Construction segment | 4.1 | 2.9 | 4.5 | 0.7 |
| **Total gross profit as a percentage of net sales** | 36.6 | 36.3 | 36.2 | 36.1 |

Gross profit improved 30 basis points of sales and 10 basis points of sales during the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011, respectively.

During the three months ended October 27, 2012 compared to the three months ended October 29, 2011, gross profit from retail operations improved 40 basis points of sales primarily as a result of decreased markdowns. Gross margin improved moderately in men’s apparel and accessories and ladies’ accessories and lingerie. Gross margin was essentially flat in most other product categories with the exception of home and furniture which experienced a significant decline.

During the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011, gross profit from retail operations improved 30 basis points of sales as a result of increased markups. Gross margin increased slightly in ladies’ accessories and lingerie. Gross margin was essentially flat in most other product categories with the exception of home and furniture which experienced a moderate decline.

Inventory decreased 1% in comparable stores as of October 27, 2012 compared to October 29, 2011. 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 27, 2012, respectively.

We believe that gross margin from retail operations will improve slightly during fiscal 2012; however, there is no guarantee of improved gross margin performance.

Gross profit from the construction segment improved by $0.6 million (120 basis points of sales) and $3.4 million (380 basis points of sales) during the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011, respectively. The improvement in both periods was due to increased revenue and improved fee percentages on new contracts. The nine-month improvement was also attributable to a $1.2 million loss that was recorded during the first quarter of fiscal 2011 on an electrical contract that was completed in 2011.

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

*(in thousands of dollars)*

| SG&A: Three months ended | October 27, 2012 | October 29, 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $403,605 | $403,658 | $(53) | 0.0% |
| Construction segment | 1,032 | 1,108 | (76) | (6.9) |
| Total SG&A | $404,637 | $404,766 | $(129) | 0.0% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $1,193,205 | $1,186,492 | $6,713 | 0.6% |
| Construction segment | 3,458 | 3,578 | (120) | (3.4) |
| Total SG&A | $1,196,663 | $1,190,070 | $6,593 | 0.6% |

| SG&A as a percentage of segment net sales: | Three Months Ended October 27, 2012 | October 29, 2011 | Nine Months Ended October 27, 2012 | October 29, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | 28.3% | 29.5% | 27.1% | 27.9% |
| Construction segment | 4.1 | 6.8 | 4.1 | 7.8 |
| **Total SG&A as a percentage of net sales** | 27.9 | 29.3 | 26.7 | 27.7 |

SG&A improved 140 basis points of sales during the three months ended October 27, 2012 compared to the three months ended October 29, 2011. The improvement was most noted in advertising ($6.1 million) and utilities ($1.5 million) mostly offset by increases in payroll and payroll related taxes ($4.6 million) and services purchased ($2.2 million).

SG&A improved 100 basis points of sales during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 while total SG&A dollars increased $6.6 million. The dollar increase was most noted in payroll and payroll related taxes ($10.3 million), services purchased ($8.4 million) and insurance ($5.3 million) partially offset by savings in advertising ($15.4 million) and utilities ($6.2 million).

We believe that SG&A for fiscal 2012 will improve slightly as a percentage of sales compared to fiscal 2011; however, there is no guarantee of improved SG&A performance.

### Rentals

*(in thousands of dollars)*

| Rentals: Three months ended | October 27, 2012 | October 29, 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $7,611 | $11,213 | $(3,602) | (32.1)% |
| Construction segment | 13 | 16 | (3) | (18.8) |
| Total rentals | $7,624 | $11,229 | $(3,605) | (32.1)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $24,492 | $34,763 | $(10,271) | (29.5)% |
| Construction segment | 38 | 35 | 3 | 8.6 |
| Total rentals | $24,530 | $34,798 | $(10,268) | (29.5)% |

The decrease in rental expense for the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011 was primarily due to a reduction in the amount of equipment leased by the Company.

We believe that rental expense for fiscal 2012 will be significantly less than fiscal 2011, with a current projected reduction of $14 million from fiscal 2011, primarily as a result of the expiration of certain equipment leases.

### Interest and Debt Expense, Net

*(in thousands of dollars)*

| Interest and debt expense (income), net: Three months ended | October 27, 2012 | October 29, 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Retail operations segment | $17,042 | $17,791 | $(749) | (4.2)% |
| Construction segment | (31) | (41) | 10 | 24.4 |
| Total interest and debt expense, net | $17,011 | $17,750 | $(739) | (4.2)% |
| Nine months ended |  |  |  |  |
| Retail operations segment | $52,241 | $54,567 | $(2,326) | (4.3)% |
| Construction segment | (102) | (120) | 18 | 15.0 |
| Total interest and debt expense, net | $52,139 | $54,447 | $(2,308) | (4.2)% |

The decrease in net interest and debt expense for the three months ended October 27, 2012 is primarily attributable to lower average debt levels. Total weighted average debt decreased approximately $122.1 million during the three months ended October 27, 2012 compared to the three months ended October 29, 2011.

The decrease in net interest and debt expense for the nine months ended October 27, 2012 is primarily attributable to lower average debt levels partially offset by increased credit facility fees and lower investment income. Total weighted average debt decreased approximately $94.5 million during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011.

### Gain on Disposal of Assets

*(in thousands of dollars)*

| Gain (loss) on disposal of assets: Three months ended | October 27, 2012 | October 29, 2011 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $1,071 | $1,456 | $(385) |
| Construction segment | 1 | — | 1 |
| Total gain on disposal of assets | $1,072 | $1,456 | $(384) |
| Nine months ended |  |  |  |
| Retail operations segment | $2,210 | $3,911 | $(1,701) |
| Construction segment | 1 | (64) | 65 |
| Total gain on disposal of assets | $2,211 | $3,847 | $(1,636) |

During the three months ended October 27, 2012, the Company received proceeds of $4.1 million from the sales of two former retail stores: one location was in Charlotte, North Carolina and was held for sale and the other location was in Colonial Heights, Virginia, which was closed during the period. The sales resulted in a net gain of $1.1 million that was recorded in gain on disposal of assets.

Additionally, during the nine months ended October 27, 2012, the Company received proceeds of $7.8 million from the sales of two former retail stores located in Cincinnati, Ohio and Antioch, Tennessee that were held for sale and one building that was formerly a portion of a currently operating retail location, resulting in a net gain of $0.9 million that was recorded in gain on disposal of assets.

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 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 on disposal of assets.

### Asset Impairment and Store Closing Charges

*(in thousands of dollars)*

| Asset impairment and store closing charges: Nine months ended | October 27, 2012 | October 29, 2011 | $ Change |
| --- | ---: | ---: | ---: |
| Retail operations segment | $— | $1,200 | $(1,200) |
| Construction segment | — | — | — |
| Total asset impairment and store closing charges | $— | $1,200 | $(1,200) |

There were no asset impairment and store closing costs recorded during the three and nine months ended October 27, 2012 and the three months ended October 29, 2011.

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 held for sale.

### Income Taxes

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 33.3% and (473.1)% for the three months ended October 27, 2012 and October 29, 2011, respectively. During the three months ended October 27, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes offset by a tax benefit recognized for an amended return filed where capital gain income was offset by a previously unrecognized capital loss carryforward available in the amended return year. Certain federal tax credits were not extended into fiscal 2012 which negatively impacted the effective tax rate. During the three months ended October 29, 2011, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes offset by tax benefits recognized for: (i) the reversal of a valuation allowance of approximately $201.6 million related to a capital loss carryforward, (ii) federal tax credits, and (iii) net decreases in unrecognized tax benefits, interest and penalties.

The Company’s estimated federal and state income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.1% and (75.4)% for the nine months ended October 27, 2012 and October 29, 2011, respectively. During the nine months ended October 27, 2012, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for: (i) an amended return filed where capital gain income was offset by a previously unrecognized capital loss carryforward available in the amended return year and (ii) net decreases in unrecognized tax benefits primarily related to statute lapses. Certain federal tax credits were not extended into fiscal 2012 which negatively impacted the effective tax rate. During the nine months ended October 29, 2011, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes offset by tax benefits recognized for: (i) the reversal of a valuation allowance of approximately $201.6 million related to a capital loss carryforward, (ii) federal tax credits, (iii) net decreases in unrecognized tax benefits, interest and penalties, and (iv) decreases in net deferred tax liabilities resulting from legislatively-enacted state tax rate reductions.

The Company’s effective tax rate for fiscal 2012 is expected to approximate 36%. This rate may change if results of operations for fiscal 2012 differ from management’s current expectations. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

### Income on Joint Venture

During the nine months ended October 29, 2011, the Company’s retail operations segment 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.

### FINANCIAL CONDITION

A summary of net cash flows for the nine months ended October 27, 2012 and October 29, 2011 follows:

*(in thousands of dollars)*

|  | Nine Months Ended October 27, 2012 | October 29, 2011 | $ Change |
| --- | ---: | ---: | ---: |
| Operating Activities | $219,873 | $135,553 | $84,320 |
| Investing Activities | (99,932) | (79,758) | (20,174) |
| Financing Activities | (219,419) | (292,703) | 73,284 |
| Total Cash Provided (Used) | $(99,478) | $(236,908) | $137,430 |

Net cash flows from operations increased $84.3 million during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011. This improvement was primarily attributable to higher net income, as adjusted for non-cash items, of $70.4 million for the nine months ended October 27, 2012 as compared to the nine months ended October 29, 2011. This improvement was also attributable to an increase of $13.9 million related to changes in working capital items, primarily of slower seasonal buildup of inventory and increases in trade accounts payable and accrued expenses and other liabilities partially offset by decreases in income taxes payable.

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 $78.7 million and $70.5 million from GE during the nine months ended October 27, 2012 and October 29, 2011, respectively. While future cash flows under this Alliance are difficult to predict and are not guaranteed, the Company expects income from the Alliance to improve moderately during fiscal 2012 compared to fiscal 2011. 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 27, 2012, the Company received proceeds of $11.9 million from the sales of four former retail stores and one building that was formerly a portion of a currently operating retail location. Three of the stores were held for sale and were located in Cincinnati, Ohio; Antioch, Tennessee and Charlotte, North Carolina. The remaining store was located in Colonial Heights, Virginia and was closed during the period. The sales resulted in a net gain of $2.0 million that was recorded in gain on disposal of assets.

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 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 on disposal of assets.

Capital expenditures were $111.9 million and $80.3 million for the nine months ended October 27, 2012 and October 29, 2011, respectively. The current year expenditures were primarily for the remodeling of existing stores, purchase of equipment, including the buyout of certain leased equipment, and completion of the Company’s new internet fulfillment center located in Maumelle, Arkansas, which began processing merchandise during the first quarter of fiscal 2012. This new 850,000 square foot internet fulfillment center has replaced the Company’s Nashville, Tennessee internet fulfillment center (285,000 square feet), which closed in July 2012. During the nine months ended October 27, 2012, we also closed our Hutchinson Mall location in Hutchinson, Kansas (70,000 square feet) and our Southpark Mall location in Colonial Heights, Virginia (85,000 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.

Capital expenditures for fiscal 2012 are expected to be approximately $145 million compared to actual expenditures of $116 million during fiscal 2011. There are no planned new store openings for fiscal 2012.

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) was to collateralize a third party insurer for workers’ compensation and general liability obligations under casualty insurance programs for policy years through fiscal 2011. 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.

During the nine months ended October 27, 2012, the Company repurchased 2.5 million shares of its Class A Common Stock for $162.1 million at an average price of $64.21 per share under its 2012 and May 2011 Stock Plans. 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. At October 27, 2012, no authorization remained under the 2010, February 2011 and May 2011 Stock Plans, and $115.4 million of authorization remained under the 2012 Stock Plan. The ultimate disposition of the repurchased stock has not been determined.

During the nine months ended October 27, 2012, the Company made principal payments on long-term debt and capital lease obligations of $78.2 million at their normal maturities. 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.

The Company had cash on hand of $124.8 million as of October 27, 2012. As part of our overall liquidity management strategy and for peak working capital requirements, the Company has a $1.0 billion credit facility. During the nine months ended October 27, 2012, the Company amended and extended this credit facility, which now has higher availability for the same amount of pledged inventory as the previous agreement and expires April 11, 2017.

Limited to 90% 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 27, 2012. Borrowings of $27.0 million and $142.0 million were outstanding as of October 27, 2012 and October 29, 2011, respectively. Letters of credit totaling $61.9 million were issued under this credit agreement as of October 27, 2012 leaving unutilized availability under the facility of approximately $911 million at October 27, 2012.

During fiscal 2012, the Company expects to finance its capital expenditures and its working capital requirements, including required debt repayments and stock repurchases, from cash on hand, cash flows generated from operations and utilization of the credit facility. During fiscal 2012, the Company expects peak borrowings to not exceed $125 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.

On November 26, 2012, the Company announced that its Board of Directors declared a special, one-time cash dividend of $5.00 per share. The dividend is payable on the Class A and Class B Common Stock of the Company on December 21, 2012 to shareholders of record as of December 7, 2012. The Company expects to fund the dividend from cash flows from normal operations.

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 28, 2012.

### 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

#### Fair Value Measurements and Disclosure

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 was effective for interim and annual periods beginning after December 15, 2011 and was to be applied prospectively. The adoption of this standard did not have a significant impact on the Company’s financial statements.

#### Presentation of Comprehensive Income

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 requires 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 was effective for interim and annual periods beginning after December 15, 2011 and was applied retrospectively. The adoption of this standard changed the order and placement where certain financial statement items were presented but did not have any other impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12, *Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-5* which deferred the requirement from the June 2011 guidance that related to the presentation of reclassification adjustments. The amendment will allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.

### 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 2012 and fiscal 2013. 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 28, 2012, 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 28, 2012.

## 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 27, 2012 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 28, 2012.

Filed Nov 28, 2012.
Source: SEC EDGAR, the filing index for accession 0001104659-12-080554. Last ingested by Listed: Oct 27, 2026, 18:21 ET. No prices; not investment advice.