2 0 0 3 A n n u a l R e p o r t
Dillard’s
Corporate Profile
Dillard’s, Inc. ranks among the nations largest fashion apparel and home furnishings
retailers with annual revenues exceeding $7.8 billion. The Company focuses on delivering
maximum value to its shoppers, with fairly priced merchandise complemented by exceptional
customer service. Dillard’s stores offer a broad selection of merchandise, including products
sourced and marketed under Dillard’s exclusive brand names. The Company comprises 328
stores, spanning 29 states, all operating with one name – Dillard’s.
Financial Highlights
(in thousands of dollars, except per share amounts)
Income Statement Data:
Net sales
Income before cumulative effect
of accounting change
Cumulative effect of accounting
change, net of taxes
Net income (loss)
Diluted earnings per common share:
Income before cumulative effect
of accounting change
Cumulative effect of
accounting change
Net income (loss)
Balance Sheet Data:
Current assets
Current liabilities
Long-term debt
Guaranteed Preferred Beneficial
Interests in the Company’s
Subordinated Debentures
Stockholders’ equity
Operational Data:
2003
2002
2001
2000*
1999
$ 7,598,934
$ 7,910,996
$ 8,154,911
$ 8,566,560
$ 8,676,711
9,344
—
9,344
0.11
—
0.11
131,926
71,798
124,141
163,729
(530,331)(1)
(398,405)
—
71,798
(129,991)(2)
(5,850)
—
163,729
1.55
(6.22)
(4.67)
0.85
—
.85
1.36
(1.42)
(.06)
1.55
—
1.55
$ 3,023,691
$ 1,336,087
1,855,065
3,130,251
886,441
2,193,006
2,814,510
928,071
2,124,577
2,842,948
876,697
2,374,124
3,423,725
810,594
2,894,616
200,000
2,237,097
531,579
2,264,196
531,579
2,668,397
531,579
2,629,820
531,579
2,832,834
Number of employees - average
Gross square footage (in thousands)
Number of stores
53,598
56,000
328
55,208
56,700
333
57,257
56,800
338
58,796
56,500
337
61,824
57,000
342
*53 Weeks
(1) During fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2) During fiscal 2000, the Company changed its method of accounting for inventories under the retail method.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations.
To Our Shareholders
We were disappointed with our results for 2003. We reduced
our operating expenses by $66 million, our depreciation and
rental expense by almost $15 million and our interest expense
by $8.7 million. However, we also experienced a 4% sales
decline and a 160 basis point reduction in gross margin. This
resulted in a large profit decline in 2003.
To improve our sales and margins, we have introduced sev-
eral new brands that we believe will broaden Dillard’s appeal
to the customer seeking better and more upscale merchandise.
We plan to continue the review of our merchandise offering to
add other appropriate brands and to reduce or eliminate
brands that are not performing with satisfactory sales and
gross margins.
We remain committed to differentiating Dillard’s from our
competition. In 2003, we increased the storewide penetration
of our exclusive brands from 18.2% of sales to 20.9%. We
intend to continue to expand the exclusive brand merchandise
offering where appropriate.
Furthermore, we will fine-tune our merchandise mix by
store location to meet the differing needs of the local demo-
graphic in our ongoing effort to set ourselves apart as the
favorite hometown store with a national appeal.
We plan to continue our review of expenses and, where
possible, eliminate or reduce those that do not negatively
impact our customer service. We have continued to invest in
the development of our associates to better service the cus-
tomer and we believe this is another way to distinguish
Dillard’s from the competition.
We were pleased with the improvement in our balance
sheet. We strengthened our financial position in 2003 by com-
mitting available cash resources to paying $261 million in debt,
capping a five-year debt reduction of approximately $1.4 bil-
lion. We reinforced our liquidity by amending and extending
our revolving line of credit to $1 billion with a maturity of
December 2008. We remain financially flexible and firmly com-
mitted to further strengthening our overall financial position.
During the year, we further improved our base of store
locations. We entered the quad-city area of Iowa for the first
time with the opening of our Davenport store in July. We
opened new Dillard’s stores in the established markets of
Cleveland, Ohio, Richmond, Virginia (2) and Houston,
Texas. In Richmond and Houston, we repositioned the
Dillard’s franchise by opening new locations and closing less-
promising ones. During 2003, we closed nine under-perform-
ing locations in our continuing effort to prune our store base.
Our store ownership percentage is 78% - one of the highest
ownership percentages in our market sector.
This is an exciting time to be in fashion apparel and home
retailing and we continue to position ourselves to capitalize on
the needs of confident customers who are focused on fashion,
service and value. We will build on the strength of the
Dillard’s franchise and proudly continue our 65-year legacy of
distinctive merchandising and service. Our team remains com-
mitted to this plan and we thank you, our shareholders, for
your continued support.
William Dillard, II
Chairman of the Board and Chief
Executive Officer
Alex Dillard
President
Alex Dillard
William Dillard, II
1
ExclusivelyYours
When America goes shopping, brand names are one of the most important factors that affect buying prefer-
ences. And when it comes to nationally known brands, Dillard’s customers are beginning to realize that
Exclusively Yours really means Exclusively Ours. Dillard’s shoppers across the country are, more and more,
looking for the names that mean fashion, quality and superior value and associating those names with the
understanding that they are available only at Dillard’s. It’s a benefit to our customers and ultimitaly, a benefit
to our shareholders.
Footwear
Thanks to the trend in prime-time
television everybody seems to be talking
about shoe fashions and fashionable
shoes: Continuing our commitment to
the female shoe shopper, we launched
our Nurture comfort line in the Fall of
2003. Dillard’s customers are stepping
out front with exclusive styles from
Antonio Melani, Gianni Bini, Nurture
and Michelle D.
Nurture
Women’s Apparel
& Accessories
Pick a category, Career Wear, Casual, Sportswear,
Hosiery or Accessories, women shop at our stores
because they already know what to expect. And their
expectations are rising. New fashions, new styles, and a
whole vocabulary of new, and exclusive, brand names
have become associated with Dillard’s…names such as
Preston & York, Antonio Melani, Q.U.E, Westbound,
Katherine Kelly, Allison Daley and Cabernet.
Preston & York Handbags
2
Antonio Melani Sportswear – Footwear – Handbags
For The Home
Starting out or starting over, furnishing the home is an
exciting undertaking and Dillard’s shoppers depend on us
to provide the latest fashions and top quality merchandise.
Kitchen, den, bedrooms, throughout the house, our exclu-
sive brands like Nobility, Main Ingredients, Signature
Home and Status Quo are becoming decorating standards.
Main Ingredients
Nobility
Menswear
Clothes really do make the
man and most men trust
the brands they know.
From business classic to
contemporary sportswear,
the American male (and the
women who shop for them)
return to the trusted
exclusive brands in Dillard’s
men’s department: including
Roundtree & Yorke, Daniel
Cremieux, Murano and
Turnbury.
Roundtree & Yorke
r
a
e
W
s
’
n
e
r
d
l
i
h
C
Copper Key
Class Club
Juniors
Moms all across the
country apply a common
criteria to the business of
clothing their children
and that criteria is based
on dependable quality,
fashion and value. They
depend on Class Club for
boys and Copper Key for
girls and juniors to deliver
time after time.
3
Corporate Organization
William Dillard, II
Chief Executive Officer
Alex Dillard
President
Mike Dillard
Executive Vice President
Drue Corbusier
Executive Vice President
James I. Freeman
Chief Financial Officer
Paul J. Schroeder, Jr.
General Counsel
Vice Presidents
W.R. Appleby, II
H. Gene Baker
Donald A. Bogart
Tom Bolin
Michael Bowen
Joseph P. Brennan
Kent Burnett
Larry Cailteux
Les Chandler
James W. Cherry, Jr.
Neil Christensen
William T. Dillard, III
Gianni Duarte
Karl G. Ederer
Christine A. Ferrari
Ann Franzke
John Grahek, Jr.
Walter C. Grammer
Marva Harrell
Gene D. Heil
William H. Hite
William L. Holder, Jr.
Dan W. Jensen
Mark Killingsworth
Colleen Kirk
Gaston Lemoine
Denise Mahaffy
Paul E. McLynch
Michael S. McNiff
Jeff Menn
Anthony Menzie
Richard Moore
Cindy Myers-Ray
Steven K. Nelson
Tom C. Patterson
Michael E. Price
Grizelda Reeder
Robin Sanderford
Sidney A. Sanders
Linda Sholtis-Tucker
Terry Smith
Burt Squires
Alan Steinberg
Sandra Steinberg
James D. Stockman
Ralph Stuart
Tom Sullivan
Julie A. Taylor
David Terry
Lloyd KeithTidmore
Phillip R. Watts
Kay White
Keith White
Ronald Wiggins
Kent Wiley
Richard B. Willey
Sherrill E. Wise
Merchandising Division Management
Ft. Worth Division
Little Rock Division
Phoenix Division
St. Louis Division
Tampa Division
Drue Corbusier
President
Jeff Menn
Vice President,
Merchandising
Anthony Menzie
Vice President,
Merchandising
Lloyd Tidmore
Director of
Sales Promotion
Mike Dillard
President
David Terry
Vice President,
Merchandising
Keith White
Vice President,
Merchandising
Ken Eaton
Director of
Sales Promotion
Kent Burnett
President
Tom Sullivan
Vice President,
Merchandising
Julie A. Taylor
Vice President,
Merchandising
James Benson
Director of
Sales Promotion
Joseph P. Brennan
President
Robin Sanderford
President
Mark Killingsworth
Vice President,
Merchandising
Sandra Steinberg
Vice President,
Merchandising
Ronald Wiggins
Vice President,
Merchandising
Mark Gastman
Director of
Sales Promotion
James D. Stockman
Vice President,
Merchandising
Louise Platt
Director of
Sales Promotion
Board of Directors
Robert C. Connor
Investments
Drue Corbusier
Executive Vice President of
Dillard’s, Inc.
Will D. Davis
Partner with Heath, Davis,
& McCalla, Attorneys
Austin, Texas
Alex Dillard
President
Dillard’s, Inc.
4
Mike Dillard
Executive Vice President of
Dillard’s, Inc.
John Paul Hammerschmidt
Retired Member of Congress
Harrison, Arkansas
William Dillard, II
Chairman of the Board and
Chief Executive Officer of
Dillard’s, Inc.
James I. Freeman
Senior Vice President and
Chief Financial Officer of
Dillard’s, Inc.
Bob L. Martin
Independent Business
Executive
Former President and
Chief Executive Officer Wal-
Mart International
Rogers, Arkansas
Warren A. Stephens
President and Chief Executive
Officer of Stephens Group
and Stephens, Inc.
Little Rock, Arkansas
William H. Sutton
Managing Partner of Friday,
Eldredge and Clark,
Attorneys
Little Rock, Arkansas
J.C. Watts, Jr.
Former Member of Congress
and Chairman of
J.C. Watts Companies
Arlington, Virginia
CA
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2004
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 1-6140
DILLARD’S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
71-0388071
(IRS Employer
Identification Number)
1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive office)
(Zip Code)
(501) 376-5200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Class A Common Stock
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No_
Indicated by checkmark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-
2). Yes X No _
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form
10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28,
2004: $1,357,737,216.
Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of February
28, 2004:
CLASS A COMMON STOCK, $.01 par value 79,480,069
CLASS B COMMON STOCK, $.01 par value 4,010,929
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 15, 2004 (the "Proxy
Statement") are incorporated by reference into Part III.
2
Item No.
1.
1A.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
10.
11.
12.
13.
14.
15.
Table of Contents
PART I
Page No.
Business.
Executive Officers of the Registrant.
Properties.
Legal Proceedings.
Submission of Matters to a Vote of Security Holders.
PART II
Market for Registrant’s Common Equity and Related Stockholder Matters.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures about Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements with Accounts on Accounting and Financial Disclosure.
Controls and Procedures.
PART III
Directors and Executive Officers of the Registrant.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Certain Relationships and Related Transactions.
Principal Accountant Fees and Services.
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Certifications.
4
4
5
6
6
6
7
9
21
22
22
22
22
23
23
23
23
23
25
3
PART I
ITEM 1. BUSINESS.
General
Dillard's, Inc. (the "Company" or "Registrant") is an outgrowth of a department store originally founded in 1938 by
William Dillard. The Company was incorporated in Delaware in 1964. The Company operates retail department stores
located primarily in the Southwest, Southeast and Midwest.
We conduct our retail merchandise business under highly competitive conditions. Although we are a large regional
department store, we have numerous competitors at the national and local level that compete with our individual stores,
including specialty, off-price, discount, internet, and mail-order retailers. Competition is characterized by many factors
including location, reputation, assortment, advertising, price, quality, service and credit availability. We believe that our
stores are in a strong competitive position with regard to each of these factors. The Company's earnings depend to a
significant extent on the results of operations for the last quarter of its fiscal year. Due to holiday buying patterns, sales
for that period average approximately one-third of annual sales.
For additional information with respect to the Registrant's business, reference is made to information contained under the
headings “Net sales,” “Net income,” “Total assets” and “Number of employees-average,” under item 6 hereof.
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are
available free of charge on the Dillard’s, Inc. Web site:
www.dillards.com
The information contained on the Company’s web site is not incorporated by reference into this Form 10-K and should
not be considered to be a part of this Form 10-K. These reports are available as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and Exchange Commission.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table lists the names and ages of all Executive Officers of the registrant, the nature of any family
relationship between them and all positions and offices with the Registrant presently held by each person named. All of
the Executive Officers listed below have been in managerial positions with the registrant for more than five years.
4
The following is a listing of executive officers of the Company, their age, position and office, and family relationship, if
any.
Name
Age
Position & Office
Family Relationship
William Dillard, II
59
Director; Chief Executive Officer
None
Alex Dillard
54
Director; President
Brother of William Dillard, II
Mike Dillard
52
Director; Executive Vice President
Brother of William Dillard, II
H. Gene Baker
65
Vice President
Joseph P. Brennan
59
Vice President
G. Kent Burnett
59
Vice President
None
None
None
Drue Corbusier
57
Director; Executive Vice President
Sister of William Dillard, II
James I. Freeman
54
Director; Senior Vice President; Chief
Financial Officer
None
Randal L. Hankins
53
President of Dillard National Bank
Gaston Lemoine
60
Vice President
Steven K. Nelson
46
Vice President
Robin Sanderford
57
Vice President
Paul J. Schroeder
55
Vice President
Burt Squires
54
Vice President
Charles Unfried
57
Chief Executive Officer of Dillard
National Bank
None
None
None
None
None
None
None
ITEM 2. PROPERTIES.
All of the Registrant's stores are owned or leased from wholly owned subsidiaries or from third parties. The Registrant's
third-party store leases typically provide for rental payments based on a percentage of net sales with a guaranteed
minimum annual rent. Lease terms between the Registrant and its wholly owned subsidiaries vary. In general, the
Company pays the cost of insurance, maintenance and any increase in real estate taxes related to the leases. At January
31, 2004 there were 328 stores in operation with gross square footage approximating 56.0 million feet. The Company
owned or leased, from wholly owned subsidiaries, a total of 257 stores with 43.9 million square feet. The Company
leased 71 stores from third parties, which totaled 12.1 million square feet. Additional information is contained in Notes
1, 2, 12 and 13 of “Notes to Consolidated Financial Statements,” in Item 8 hereof and reference is made to information
contained under the heading “Number of stores,” under item 6 hereof.
5
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of
business. Such issues may relate to litigation with customers, employment related lawsuits, class action lawsuits,
purported class action lawsuits and actions brought by governmental authorities. As of April 3, 2004, we are not a party
to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect
on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse
effect on our business, results of operations, financial condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of the year ended January 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company’s common stock trades on the New York Stock Exchange under the Ticker Symbol “DDS”.
Stock Prices and Dividends by Quarter
2003
2002
First
Second
Third
Fourth
High
Low
$15.10 $12.49
12.77
15.08
13.98
16.92
14.46
17.86
High
Low
$25.87 $12.94
21.70
15.59
15.00
30.47
27.98
19.32
Dividends
per Share
2003
$0.04
0.04
0.04
0.04
2002
$0.04
0.04
0.04
0.04
Equity Compensation Plan Information
Number of securities to be
issued upon exercise of
outstanding options
(a)
Equity compensation plans
approved by shareholders
Total
7,870,739
7,870,739
Weighted average
exercise prices of
outstanding options
(b)
$22.45
$22.45
Number of securities
available for future
issuance under equity
compensation
plans(excluding securities
reflected in column (a))
(c)
9,773,141
9,773,141
As of February 28, 2004, there were 4,827 record holders of the Company's Class A Common Stock and 8 record holders
of the Company's Class B Common Stock.
6
ITEM 6. SELECTED FINANCIAL DATA.
Table of Selected Financial Data
(In thousands of dollars, except per share data)
Net sales
Percent change
Cost of sales
Percent of sales
Interest and debt expense
Income before taxes
Income taxes
Income before cumulative effect of
accounting change
Cumulative effect of accounting change
Net income (loss)
Pro forma inventory change
Pro forma net income (loss)
Per Diluted Common Share
Income before cumulative effect of
accounting change
Cumulative effect of accounting change
Net income (loss)
Pro forma inventory change
Pro forma net income (loss)
Dividends
Book value
Average number of shares
outstanding
Accounts receivable (4)
Merchandise inventories
Property and equipment
Total assets
Long-term debt (4)
Capitalized lease obligations
Deferred income taxes
Guaranteed Preferred Beneficial Interests
in the Company's Subordinated Debentures
Stockholders' equity
Number of employees - average
Gross square footage (in thousands)
Number of stores
Opened
Acquired
Closed
Total - end of year
2003
$7,598,934
-4%
5,170,173
68.0%
181,065
15,994
6,650
2002
$7,910,996
-3%
5,254,134
66.4%
189,779
204,261
72,335
2001
$8,154,911
-5%
5,507,702
67.5%
192,344
120,963
49,165
2000*
$8,566,560
-1%
5,802,147
67.8%
169,609
183,531
59,390
1999
$8,676,711
12%
5,762,431
66.4%
249,514
283,949
120,220
131,926
(530,331) (1)
(398,405)
-
(398,405)
1.55
(6.22)
(4.67)
-
(4.67)
0.16
26.71
85,316,200
1,387,835
1,594,308
3,370,502
6,675,932
2,193,006
18,600
645,020
531,579
2,264,196
55,208
56,700
4
0
9
333
71,798
-
71,798
-
71,798
0.85
-
0.85
-
0.85
0.16
31.81
84,486,747
1,112,325
1,561,863
3,455,715
7,074,559
2,124,577
20,459
643,965
531,579
2,668,397
57,257
56,800
6
4
9
338
124,141
(129,991) (2)
(5,850)
-
(5,850)
163,729
-
163,729
(8,963) (3)
154,766
1.36
(1.42)
(0.06)
-
(0.06)
0.16
30.94
91,199,184
1,011,481
1,616,186
3,508,331
7,199,309
2,374,124
22,453
638,648
531,579
2,629,820
58,796
56,500
4
0
9
337
1.55
-
1.55
(0.08)
1.47
0.16
28.68
105,617,503
1,137,458
2,047,830
3,619,191
7,918,204
2,894,616
24,659
702,467
531,579
2,832,834
61,824
57,000
8
0
1
342
9,344
-
9,344
-
9,344
0.11
-
0.11
-
0.11
0.16
26.79
83,899,974
1,232,456
1,632,377
3,197,469
6,411,097
1,855,065
17,711
617,236
200,000
2,237,097
53,598
56,000
5
0
10
328
7
* 53 Weeks
(1) During fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets”. See Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2) During fiscal 2000, the Company changed its method of accounting for inventories under the retail method
(3) Pro forma effect of applying the cumulative effect of accounting change for inventories in fiscal 2000.
(4) The Company had $300 million in off-balance-sheet debt and accounts receivable for the fiscal years ending
2001, 2000 and 1999, respectively. See Note 15 to the Consolidated Financial Statements.
The items below are included in the Selected Financial Data.
2003
The items below amount to a net $18.6 million pretax charge ($12.8 million after tax or $0.15 per diluted share).
a $43.7 million pretax charge ($28.9 million after tax or $0.34 per diluted share) for asset impairment and store
closing charges related to certain stores (see Note 13 of the Notes to Consolidated Financial Statements).
a call premium resulting in additional interest expense of $15.6 million ($10.0 million after tax or $0.12 per
diluted share) associated with a $125.9 million call of debt.
a pretax gain of $15.6 million ($10.0 million after tax or $0.12 per diluted share) pertaining to the Company’s
sale of its interest in Sunrise Mall and its associated center in Brownsville, Texas (see Note 1 of the Notes to
Consolidated Financial Statements).
a pretax gain of $12.3 million ($7.9 million after tax or $0.09 per diluted share) recorded due to the resolution of
certain liabilities originally recorded in conjunction with the purchase of Mercantile Stores Company, Inc.
an $8.7 million pretax gain ($5.6 million after tax or $0.07 per diluted share) related to the sale of certain store
properties.
$4.1 million ($2.6 million after tax or $0.03 per diluted share) received from the Internal Revenue Service as a
result of the Company’s filing of an interest-netting claim related to previously settled tax years.
•
•
•
•
•
•
2002
The items below amount to a net $3.0 million pretax gain ($1.8 million after tax or $0.02 per diluted share).
•
•
•
•
•
a pretax gain of $64.3 million ($41.1 million after tax or $0.48 per diluted share) pertaining to the Company’s
sale of its interest in FlatIron Crossing, a Broomfield, Colorado shopping center (see Note 1 of the Notes to
Consolidated Financial Statements).
a pretax asset impairment and store closing charge of $52.2 million ($33.4 million after tax or $0.39 per diluted
share) related to certain stores (see Note 13 of the Notes to Consolidated Financial Statements).
a call premium resulting in additional interest expense of $11.6 million ($7.4 million after tax or $0.09 per
diluted share) associated with a $143.0 million call of debt.
a pretax charge of $5.4 million ($3.5 million after tax or $0.04 per diluted share) on the amortization of off-
balance-sheet accounts receivable securitization (see Note 15 of the Notes to Consolidated Financial
Statements).
a pretax gain of $4.8 million ($3.0 million after tax or $0.04 per diluted share) on the early extinguishment of
debt.
8
•
a pretax gain of $3.1 million ($2.0 million after tax or $0.02 per diluted share) from an investee partnership of
the Company who received an unusual distribution in the settlement of a receivable.
2001
The items below amount to a net $5.6 million pretax charge ($3.6 million after tax or $0.04 per diluted share).
a pretax asset impairment and store closing charge of $3.8 million ($2.4 million after tax or $0.03 per diluted
share) related to certain stores (see Note 13 of the Notes to Consolidated Financial Statements).
a pretax gain of $9.4 million ($6.0 million after tax or $0.07 per diluted share) on the early extinguishment of
debt.
•
•
2000
The items below amount to a net $38.2 million pretax charge ($21.3 million after tax or $0.23 per diluted share).
a pretax asset impairment and store closing charge of $51.4 million ($36.0 million after tax or $0.40 per diluted
share) related to certain stores.
a pretax gain of $42.7 million ($27.3 million after tax or $0.30 per diluted share) on the early extinguishment of
debt.
a pretax gain of $46.9 million ($30.0 million after tax or $0.33 per diluted share) on the Company’s change in
its method of accounting for inventories under the retail inventory method.
•
•
•
1999
The items below amount to a net $83.5 million pretax charge ($64.3 million after tax or $0.63 per diluted share).
•
•
a pretax asset impairment and store closing charge of $69.7 million ($55.5 million after tax or $0.55 per diluted
share) related to certain stores.
a pretax loss of $13.8 million ($8.8 million after tax or $0.08 per diluted share) on the Company’s change in its
method of accounting for inventories under the retail inventory method.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
EXECUTIVE OVERVIEW
Dillard’s, Inc. (“the Company” or “we”) operates 328 retail department stores in 29 states. Our stores are located in
suburban shopping malls and offer a broad selection of fashion apparel and home furnishings. We offer an appealing and
attractive assortment of merchandise to our customers at a fair price. We seek to enhance our income by maximizing the
sale of this merchandise to our customers. We do this by promoting and advertising our merchandise and by making our
stores an attractive and convenient place for our customers to shop.
Fundamentally, the Company’s business model is to offer the customer a compelling price/value relationship through the
combination of high quality products and services at a competitive price. The Company seeks to deliver a high level of
profitability and cash flow by:
• maximizing the effectiveness of our pricing and brand awareness;
• minimizing costs through leveraging our centralized overhead expense structure;
• Sourcing;
• Credit operations;
9
•
reinvesting operating cash flows into store growth, distribution initiatives, improving product quality in our
proprietary brands; and
•
returning profits to shareholders through dividends, share repurchases and increased share price.
The consumer retail sector is extremely competitive. Many different retail establishments compete for our customers’
business. These include other department stores, specialty retailers, discounters, internet and mail order retailers. We
also attempt to enhance our income by managing our operating costs without sacrificing service to our customers.
Trends and uncertainties
The following key uncertainties have been identified by the Company whose fluctuations can have a material effect on
the operating results.
• Cash flow from operating activities are a primary source of liquidity that is adversely affected when the industry
faces market driven challenges and new and existing competitors seek areas of growth to expand their
businesses. If our customers do not purchase our merchandise offerings in sufficient quantities, we respond by
taking markdowns. If we have to reduce our prices, the cost of goods sold on our income statement will
correspondingly rise, thus reducing our income.
• Success of brand – The success of our exclusive brand merchandise is dependent upon customer fashion
preferences.
• Store growth – Our growth is dependent on a number of factors which could prevent the opening of new stores,
such as identifying suitable markets and locations.
2004 Guidance
A summary of guidance on key financial measures for 2004, on a GAAP basis, is shown below. There have been no
changes in the guidance for 2004 since the Company released its fourth quarter earnings on March 10, 2004.
(In millions of dollars)
2004
Estimated
2003
Actual
Depreciation and amortization
Rental expense
Interest and debt expense
Capital expenditures
$ 291
$ 290
64
64
155
181
240 227
General
Net Sales. Net sales include sales of comparable stores, non-comparable stores and lease income on leased departments.
Comparable store sales include sales for those stores which were in operation for a full period in both the current month
and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from
stores opened during the previous fiscal year before they are considered comparable stores, sales from new stores opened
in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.
Service Charges, Interest and Other Income. Service Charges, Interest and Other Income include interest and service
charges, net of service charge write-offs, related to the Company’s proprietary credit card sales. Other income relates to
joint ventures accounted for by the equity method, rental income, shipping and handling fees and gains (losses) on the
sale of property and equipment and joint ventures.
Cost of Sales. Cost of sales includes the cost of merchandise sold, bankcard fees, freight to the distribution centers,
employee and promotional discounts and direct payroll for salon personnel.
Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses
include buying and occupancy, selling, distribution, warehousing, store management and corporate expenses, including
payroll and employee benefits, insurance, employment taxes, advertising, management information systems, legal, bad
debt costs and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for
design, buying and merchandising personnel.
10
Depreciation and amortization. Depreciation and amortization expenses include depreciation on property and
equipment and amortization of goodwill prior to February 3, 2002.
Rentals. Rentals include expenses for store leases and data processing equipment rentals.
Interest and debt expense. Interest and debt expense includes interest relating to the Company’s unsecured notes,
mortgage notes, credit card receivables financing, the Guaranteed Beneficial Interests in the Company’s subordinated
debentures, gains and losses on note repurchases, amortization of financing intangibles and interest on capital lease
obligations.
Asset impairment and store closing charges. Asset impairment and store closing charges consist of write-downs to
fair value of under-performing properties and exit costs associated with the closure of certain stores. Exit costs include
future rent, taxes and common area maintenance expenses from the time the stores are closed.
Cumulative effect of accounting change. Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an “impairment only” approach. Under SFAS No. 142,
goodwill is no longer amortized but reviewed for impairment annually or more frequently if certain indicators arise. The
Company tested goodwill for impairment as of the adoption date using the two-step process prescribed in SFAS No. 142.
The Company identified its reporting units under SFAS No. 142 at the store unit level. The fair value of these reporting
units was estimated using the expected discounted future cash flows and market values of related businesses, where
appropriate. The cumulative effect of the accounting change as of February 3, 2002 was to decrease net income for fiscal
year 2002 by $530 million or $6.22 per diluted share.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1of Notes to Consolidated Financial Statements.
As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions about future events that affect the amounts reported in the consolidated
financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute
certainty, actual results will differ from those estimates. The Company evaluates its estimates and judgments on an
ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Actual results will differ from these under different assumptions or
conditions.
Management of the Company believes the following critical accounting policies, among others, affect its more
significant judgments and estimates used in preparation of the Consolidated Financial Statements.
Merchandise inventory. Approximately 97% of the inventories are valued at lower of cost or market using the retail
last-in, first-out (“LIFO”) inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at
cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of
inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality.
Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if
markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are
certain significant management judgments including, among others, merchandise markon, markups, and markdowns,
which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management
believes that the Company’s RIM provides an inventory valuation which results in a carrying value at the lower of cost
or market. The remaining 3% of the inventories are valued at lower of cost or market using the specific identified cost
method.
Allowance for doubtful accounts. The accounts receivable from the Company’s proprietary credit card sales are
subject to credit losses. The Company maintains allowances for uncollectible accounts for estimated losses resulting
from the inability of its customers to make required payments. The adequacy of the allowance is based on historical
experience with similar customers including write-off trends, current aging information and year-end balances.
Bankruptcies and recoveries used in the allowance calculation are projected based on qualitative factors such as current
and expected consumer and economic trends. Management believes that the allowance for uncollectible accounts is
adequate to cover anticipated losses in the reported credit card receivable portfolio under current conditions; however,
significant deterioration in any of the above-noted factors or in the overall health of the economy could materially change
these expectations.
11
Vendor allowances. The Company receives concessions from its vendors through a variety of programs and
arrangements, including co-operative advertising, payroll reimbursements and markdown reimbursement programs. Co-
operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising
occurred. Payroll reimbursements are reported as a reduction of payroll expense in the period in which the
reimbursement occurred. All other vendor allowances are recognized as a reduction of cost purchases. Accordingly, a
reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative
expenses.
Insurance accruals. The Company’s consolidated balance sheets include liabilities with respect to self-insured workers’
compensation and general liability claims. The Company estimates the required liability of such claims, utilizing an
actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience,
projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and
changes in the ultimate cost per incident (severity).
Finite-lived assets. The Company evaluates the fair value and future benefits of finite-lived assets whenever events and
changes in circumstances suggest. The Company performs an analysis of the anticipated undiscounted future net cash
flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the
carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included
in this analysis. To the extent these future projections or the Company’s strategies change, the conclusion regarding
impairment may differ from the current estimates.
Goodwill. The Company evaluates goodwill annually and whenever events and changes in circumstances suggest that
the carrying amount may not be recoverable from its estimated future cash flows. To the extent these future projections
or our strategies change, the conclusion regarding impairment may differ from the current estimates.
Accounts receivable securitizations. As part of the credit card securitizations, the Company transfers credit card
receivable balances to the Trust in exchange for certificates representing undivided interests in such receivables. The
Trust securitizes balances by issuing certificates representing undivided interests in the Trust’s receivables to outside
investors. In each securitization the Company retains certain subordinated interests that serve as a credit enhancement to
outside investors and expose the Trust assets to possible credit losses on receivables sold to outside investors. The
investors and the Trust have no recourse against the Company beyond Trust assets. In order to maintain the committed
level of securitized assets, the Trust reinvests cash collections on securitized accounts in additional balances. Interest
paid to outside investors is recorded as interest expense.
Currently all borrowings under our receivable financing conduit are recorded on balance sheet and included in “Long-
term Debt” on the consolidated balance sheet. As of January 31, 2004 and February 1, 2003 we had $400 million of
debt, respectively, outstanding under this agreement. Prior to May 2002, we accounted for securitizations of credit card
receivables as sales of receivables, thus off balance sheet.
Income taxes. Temporary differences arising from differing treatment of income and expense items for tax and
financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These
balances, as well as income tax expense, are determined through management’s estimations, interpretation of tax law for
multiple jurisdictions and tax planning. If the Company’s actual results differ from estimated results due to changes in
tax laws, new store locations or tax planning, the Company’s effective tax rate and tax balances could be affected. As
such these estimates may require adjustment in the future as additional facts become known or as circumstances change.
Discount rate. The discount rate that the Company utilizes for determining future pension obligations is based on the
Moody’s AA corporate bond index. The indices selected reflect the weighted average remaining period of benefit
payments. The discount rate determined on this basis had decreased to 6.0% as of January 31, 2004 from 6.75% as of
February 1, 2003.
12
Results of Operations
The following table sets forth the results of operations, expressed as a percentage of net sales, for the periods indicated:
(in millions of dollars)
For the years ended
Net sales
Cost of sales
Gross profit
Advertising, selling, administrative
and general expenses
Depreciation and amortization
Rentals
Interest and debt expense
Asset impairment and store closing
charges
Total operating expenses
Service charges, interest and other
income
Income before income taxes
Income taxes
Income before cumulative effect
of accounting change
Cumulative effect of accounting change
Net income (loss)
January 31, 2004
% of
Amount Net Sales
February 1, 2003
% of
February 2, 2002
% of
Amount Net Sales
Amount Net Sales
$7,598.9
5,170.2
2,428.7
2,097.9
290.7
64.1
181.1
43.7
2,677.5
264.8
16.0
6.7
9.3
-
100.0 %
68.0
$7,911.0
5,254.1
100.0 %
66.4
32.0
27.6
3.8
0.8
2.4
0.6
35.2
3.4
0.2
0.1
0.1
-
2,656.9
33.6
2164.0
301.4
68.1
189.8
52.2
2,775.5
322.9
204.3
72.4
27.3
3.8
0.9
2.4
0.7
35.1
4.1
2.6
0.9
131.9
(530.3)
1.7
(6.7)
$8,154.9
5,507.7
2,647.2
100.0 %
67.5
32.5
2,191.4
310.7
72.8
192.3
3.8
2,771.0
244.8
121.0
49.2
71.8
-
26.9
3.8
0.9
2.4
-
34.0
3.0
1.5
0.6
0.9
-
$ 9.3
0.1 %
$(398.4)
(5.0) %
$ 71.8
0.9 %
Sales
The percent change by category in the Company’s sales for the past two years is as follows:
Cosmetics
Women’s and Juniors’ Clothing
Children’s Clothing
Men’s Clothing and Accessories
Shoes, Accessories and Lingerie
Home
% Change
03-02
02-01
-1.1
-4.8
-8.9
-5.8
-0.8
-4.3
-2.5
-2.8
-1.9
-5.9
-0.8
-3.6
Sales decreased 4% for the 52-week period ended January 31, 2004 compared to the 52-week period ended February 1,
2003 on both a total and comparable store basis. Sales declined in all merchandising categories with the largest declines
in children’s, men’s clothing and accessories and women’s and juniors’ clothing. Sales in the home categories were in
line with the average sales performance while sales in accessories, shoes, lingerie and cosmetics were strongest and
exceeded the Company’s average sales performance for the period. Dillard’s management reiterates their strong belief
that merchandise differentiation by the Company is crucial to its future success in the marketplace. The Company
continues to work diligently to build penetration and recognition of its exclusive brand merchandise as a means to
provide superior price and value choices to its customers. During the fiscal years 2003, 2002 and 2001, sales of private
brand merchandise as a percent of total sales were 20.9%, 18.2% and 15.4%, respectively.
Sales decreased 3% for the 52-week period ended February 1, 2003 compared to the 52-week period ended February 2,
2002 on both a total and comparable store basis. The sales decrease for 2002 is due to lower levels of comparable store
sales particularly in the latter half of fiscal 2002 due to a notably weak retail environment. Sales declined in all
merchandising categories with the largest declines in men’s clothing and accessories and home, which decreased 6% and
4%, respectively.
13
Cost of Sales
Cost of sales as a percentage of sales increased to 68.0% during 2003 compared with 66.4% for 2002. The decline of
160 basis points in gross margin during fiscal 2003 was due to competitive pressures in the Company’s retail sector and
the resulting effort to maintain a competitive position with increased markdown activity. The higher level of markdown
activity increased cost of sales by 3.7% of sales. Improved levels of markups partially offset this promotional activity
during fiscal 2003. The increased markup percentage was responsible for a decrease in cost of sales of 2.1% of sales. All
product categories had decreased gross margins during 2003 except cosmetics, which increased 10 basis points from
2002. The Company has continued to build penetration and recognition of its private brand merchandise as a means for
increased control over merchandise mix and better gross margin performance with the goal of replacing under-
performing branded vendors with Dillard’s private brands.
Inventory in comparable stores at January 31, 2004 increased 140 basis points comparing to inventory in comparable
stores at February 1, 2003. This increase was due to lower than expected sales in the fourth quarter of fiscal 2003.
Cost of sales as a percentage of sales decreased to 66.4% during 2002 compared with 67.5% for 2001. The Company
experienced lower than expected consumer demand in its fourth quarter of 2002 necessitating increased promotional
efforts to clear slower moving merchandise. This higher level of markdown activity increased the cost of sales by 1.5%
of sales in response to a heavily promotional retail environment and comparatively weak sales trends in the holiday
merchandise category compared to the prior year. Significantly improved levels of markups offset this promotional
activity during 2002 compared with 2001. The increased markup percentage was responsible for a decrease in cost of
sales of 2.6% of sales. All product categories had improved gross margins during 2002 except cosmetics, which was
unchanged from 2001.
Expenses
2003 Compared to 2002
Advertising, selling, administrative and general (“SG&A“) expenses increased to 27.6% of sales for fiscal 2003
compared to 27.3% for fiscal 2002. The percentage increase is primarily due to a lack of sales leverage as SG&A
expenses decreased $66.1 million in 2003 compared to 2002. On a dollar basis significant decreases were noted in
payroll, advertising and bad debt expense. Payroll, advertising and bad debt expense declined $37.0 million, $8.6
million and $9.5 million, respectively. The decrease in payroll was caused primarily by a reduction in incentive based
sales payroll which is directly tied to the decrease in sales during 2003. The decline in advertising expense resulted
primarily from a reduction in newspaper advertising as the Company considers which media more appropriately matches
its customers’ lifestyles. Improvement in the quality of accounts receivable through lower delinquencies as well as a
reduction in outstanding accounts receivable contributed to the lower bad debt expense. SG&A expenses in fiscal 2003
include a $12.3 million pretax credit recorded due to the resolution of certain liabilities originally recorded in conjunction
with the purchase of Mercantile Stores Company, Inc. that were deemed not necessary based upon current information.
Depreciation and amortization as a percentage of sales remained flat during fiscal 2003 principally due to lower capital
expenditures in fiscal 2003 combined with a lack of sales leverage from the 4% decline in comparable store sales during
the year.
Interest and debt expense as a percentage of sales was unchanged from fiscal 2002 as a result of the Company’s lack of
sales leverage. Interest expense declined $9.0 million due to the Company’s continuing focus on reducing its out-
standing debt levels. Average debt outstanding declined approximately $226 million in fiscal 2003. Interest expense for
fiscal 2003 includes a credit of $4.1 million received from the Internal Revenue Service as a result of the Company’s
filing of an interest netting claim related to previously settled tax years. A call premium of $15.6 million related to the
early retirement of debt is included in interest expense for fiscal 2003 compared to a call premium of $11.6 million
related to the early retirement of debt for fiscal 2002. The Company has retired all the remaining debt associated with
the call premiums in fiscal 2003 and 2002 and does not anticipate any similar call premiums in fiscal 2004. Also
included in interest expense for the fiscal 2002 is a pretax gain of $4.8 million related to the early extinguishment of
debt. The Company retired $272 million in long-term debt and issued $50 million in new short-term borrowings during
2003.
During fiscal 2003, the Company recorded a pre tax charge of $44 million for asset impairment and store closing costs.
The charge includes a write down to fair value for certain under-performing properties. The charge consists of a write
down for a joint venture in the amount of $5.5 million, a write down of goodwill on two stores to be closed of $2.5
million and a write down of property and equipment in the amount of $35.7 million. The Company does not expect to
incur significant additional exit costs upon the closing of these properties during fiscal 2004. A breakdown of the asset
impairment and store closing charges for fiscal 2003 is as follows:
14
(in thousands of dollars)
Stores closed during fiscal 2003
Stores to close during fiscal 2004
Store impaired based on cash flows
Non-operating facilities
Joint Venture
Total
2002 Compared to 2001
Number of
Locations
Impairment
Amount
3
4
1
7
1
16
$ 3,809
17,115
1,293
16,030
5,480
$43,727
Advertising, selling, administrative and general (“SG&A“) expenses increased to 27.3% of sales for fiscal 2002
compared to 26.9% for fiscal 2001. The percentage increase is primarily due to a lack of sales leverage as SG&A
expenses decreased $27.4 million in 2002 compared to 2001. On a dollar basis significant decreases were noted in
payroll, utilities and supplies partially offset by a $23.8 million increase in bad debt expenses, which includes an increase
in the allowance for doubtful accounts of $12.4 million during 2002 compared to 2001.
Depreciation and amortization as a percentage of sales remained flat during fiscal 2002 principally due to lower
amortization expenses during 2002 compared to 2001 as a result of the non-amortization provisions of SFAS No. 142
combined with a lack of sales leverage from the 3% decline in comparable store sales during the year.
Interest and debt expense as a percentage of sales remained flat during fiscal 2002 as a result of the Company’s
continuing focus on reducing its outstanding debt levels and the reduction in variable short-term interest rates combined
with a lack of sales leverage. The Company retired $340 million in long-term debt and issued $40 million in new
mortgage loans and $100 million in additional receivable financing during 2002.
The Company adopted the provisions of SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”) as of February 1, 2003. For the year ended
February 1, 2003, as a result of adopting SFAS No. 145, the Company has reclassified $6.8 million to interest and debt
expense from extraordinary loss. This amount is comprised of a gain of $4.8 million on debt repurchased, offset by a call
premium of $11.6 million. For the year ended February 2, 2002, the Company has reclassified $9.4 million to interest
and debt expense from extraordinary gain.
The Company has reclassified $11.3 million in interest expense related to its receivable financing from other revenue to
interest expense on its consolidated statements of operations for fiscal 2001.
During fiscal 2002, the Company recorded a pretax charge of $52.2 million for asset impairment and store closing costs.
The charge includes a write down to fair value for certain under-performing properties in the amount of $55.8 million
and exit costs to close four such properties in the amount of $4.4 million, all of which were closed during fiscal 2003,
partially offset by forgiveness of a lease obligation of $8.0 million in connection with the sale of a closed owned store in
Memphis, Tennessee in satisfaction of that obligation. During fiscal 2001, the Company recorded a pretax charge of
$3.8 million for asset impairment and store closing costs. The charge includes a write down to fair value for one under-
performing store in the amount of $1.8 million and lease commitments of $2 million.
15
Service Charges, Interest and Other Income
(in millions of dollars)
$ Change
% Change
2003
$ 8.1
2002
$ 19.5
2001
$ 11.6
03-02
$(11.4)
02-01
$ 7.9
02-01
03-02
-58.5% 68.1%
24.3
207.9
24.4
65.4
225.7
12.3
$ 264.7 $ 322.9
$1,231.4 $1,330.9
2.1
210.4
20.7
$ 244.8
$1,260.8
(41.1)
(17.8)
12.1
$(58.2)
$(99.5)
63.3
15.3
(8.4)
$ 78.1
$ 70.1
-62.8
-7.9
98.4
*
7.3
-40.6
-18.0% 31.9%
-7.5% 5.6%
Joint venture income
Gain on sale of joint venture and
property and equipment
Service charge income
Other
Total
Average accounts receivable
* percent change greater than 100%
2003 Compared to 2002
Included in other income in fiscal 2003 is a gain of $15.6 million relating the sale of the Company’s interest in Sunrise
Mall and its associated center in Brownsville, Texas. Included in other income in fiscal 2002 is a $64.3 million gain
pertaining to the Company’s sale of its interest in the FlatIron Crossing joint venture located in Broomfield, Colorado.
Service charge income decreased due to a $99 million decrease in the average amount of outstanding accounts receivable
during 2003 compared to 2002. The decrease in accounts receivable was due to a 140 basis point decline in sales
penetration on the Company’s proprietary credit card coupled with a 4% decline in overall retail sales during fiscal 2003
compared to the prior year. Sales on the Company’s proprietary credit cards as a percent of total sales were 26.8%,
28.2% and 28.8% for fiscal 2003, 2002 and 2001, respectively. Also included in other income are realized gains on the
sale of property and equipment of $8.7 million and $1.1 million for fiscal 2003 and fiscal 2002, respectively. Earnings
from joint ventures declined due to the Company’s sale of FlatIron Crossing in fiscal 2002 and the sale of Sunrise Mall
in the first quarter of fiscal 2003.
2002 Compared to 2001
Service charge income was $226 million in 2002 compared to $210 million in 2001. This increase is due to a $70
million increase in the average amount of outstanding accounts receivable during 2002 compared to 2001. Earnings
from FlatIron Crossing for fiscal 2002 were $13.6 million.
Income Taxes
The Company’s actual federal and state income tax rate (exclusive of the effect of nondeductible goodwill amortization)
was 36% in fiscal 2003, 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position Summary
(in thousands of dollars)
2003
2002
$ Change % Change
Cash and cash equivalents
Short-term debt
Current portion of long-term debt
Current portion of Guaranteed Beneficial Interests
Long-term debt
Guaranteed Beneficial Interests
Stockholders’ equity
$ 160,873
50,000
166,041
331,579
1,855,065
200,000
2,237,097
$ 142,356
-
138,814
-
2,193,006
531,579
2,264,196
18,517
50,000
27,227
331,579
(337,941)
(331,579)
(27,099)
13.0
-
19.6
-
-15.4
-62.4
-1.2
Current ratio
Debt to capitalization
2.26%
53.8%
3.53%
55.8%
The Company's current priorities for its use of cash are:
•
Investment in high-return capital projects, in particular investments in technology to improve merchandising
and distribution, reduce costs, improve efficiencies or help the Company better serve its customers;
• Strategic investments to enhance the value of existing properties;
16
• Construction of new stores;
• Dividend payments to shareholders;
• Debt reduction; and
• Stock repurchase plan.
Cash flows for the three fiscal years ended were as follows:
(in thousands of dollars)
Operating Activities
Investing Activities
Financing Activities
Total Cash Provided (Used)
Operating Activities
2003
$ 432,106
(161,076)
(252,513)
$ 18,517
2002
$ 356,942
(164,973)
(202,573)
$ (10,604)
2001
$ 616,981
(270,595)
(387,406)
$ (41,020)
% Change
03-02
21.1
2.4
(24.7)
02-01
(42.1)
39.0
47.7
The primary source of the Company’s liquidity is cash flows from operations. Retail sales are the key operating cash
component providing 96.6% and 96.1% of total revenues over the past two years. Operating cash inflows also include
finance charges paid on Company receivables and cash distributions from joint ventures. Operating cash outflows
include payments to vendors for inventory, services and supplies, payments to employees, and payments of interest and
taxes.
Net cash flows from operations were $432 million for 2003 and were adequate to fund the Company’s operations for the
year. Cash flows from operations increased from 2002 levels due primarily to a $111 million decrease in accounts
receivable in the current year. The decrease in accounts receivable was due to a 140 basis point decline in sales
penetration on the Company’s proprietary credit card coupled with a 4% decline in overall retail sales during fiscal 2003
compared to the prior year. Accounts payable and accrued expenses increased $5 million in fiscal 2003 compared to a
$104 million decrease in accounts payable and accrued expenses in the prior year. Net cash flow from operations was
negatively impacted by lower income before accounting change during fiscal 2003.
Investing Activities
Cash inflows from investing activities generally include proceeds from sales of property and equipment and joint
ventures. Investment cash outflows generally include payments for capital expenditures such as property and equipment.
Capital expenditures were $227 million for 2003. These expenditures consist primarily of the construction of new stores,
remodeling of existing stores and investments in technology. During 2003, the Company opened four new stores, Great
Northern Mall in Olmstead, Ohio; NorthPark Mall in Davenport, Iowa; Stoney Point Fashion Park and Short Pump Town
Center in Richmond, Virginia and one replacement store, Memorial City Mall in Houston, Texas. These five stores
totaled approximately 996,000 square feet of retail space. In addition, the Company completed major expansions on two
stores totaling 56,000 square feet of retail space. The Company closed ten store locations, including the one replacement
store, during the year totaling approximately 1.6 million square feet of retail space. Capital expenditures for 2004 are
expected to be approximately $240 million. The Company plans to open eight new stores in fiscal 2004 totaling 821,000
square feet, net of replaced square footage. Historically, the Company has financed such capital expenditures with cash
flow from operations. The Company believes that it will continue to finance capital expenditures in this manner during
fiscal 2004.
During 2003, the Company recorded a gain of $15.6 million and received proceeds of $34.6 million from the sale of its
interest in Sunrise Mall and its associated center in Brownsville, Texas. During 2003, the company recorded a gain on
the sale of property and equipment of $8.7 million and received proceeds of $31.8 million. During 2002, the Company
recorded a gain of $64.3 million and received proceeds of $68.3 million from the sale of its interest in FlatIron Crossing,
a regional mall in Broomfield, Colorado.
Financing Activities
Cash inflows from financing activities generally include borrowing under the Company’s accounts receivable conduit
facilities, the issuance of new mortgage notes or long-term debt and funds from stock option exercises. Financing cash
outflows generally include the repayment of borrowings under the Company’s accounts receivable conduit facilities, the
repayment of mortgage notes or long-term debt, the payment of dividends and the purchase of treasury stock.
17
At January 31, 2004, the Company has $50 million of variable rate (currently 1.08%) short-term borrowings under its
accounts receivable conduit facilities. The Company repurchased $6.0 million of its outstanding unsecured notes prior to
their related maturity dates. The Company also retired the remaining $125.9 million of its 6.39% Reset Put Securities
(“REPS”) due August 1, 2013 prior to their maturity dates. Interest rates on the repurchased securities ranged from
6.39% to 6.88%. Maturity dates ranged from 2004 to 2013.
During 2003, the Company reduced its net level of outstanding debt and capital leases by $221 million through
scheduled debt maturities and repurchases of notes prior to their related maturity dates. Maturities of long-term debt
over the next five years are $166 million, $292 million, $298 million, $201 million and $201 million, respectively.
Third-Party Financing
The Company has the following financing sources available to supplement cash flows from operations:
• Accounts receivable conduit,
• Revolving credit agreement, and
• Shelf registration statement.
Accounts Receivable Conduit
The Company utilizes credit card securitizations as part of its overall funding strategy. The Company had $400 million
of long-term debt outstanding under this agreement on the consolidated balance sheet as of January 31, 2004 and
February 1, 2003.
At January 31, 2004 and February 1, 2003, the Company had $50.0 million and $0 outstanding, respectively, in short-
term borrowings under its accounts receivable conduit facilities related to seasonal financing needs. Remaining available
short-term borrowings under these conduit facilities at January 31, 2004 were $450.0 million. These facilities were
subsequently reduced to an availability of $400 million and extended to a maturity date of September 30, 2004.
Revolving Credit Agreement
During fiscal 2003, the Company amended and extended its revolving credit agreement (“credit agreement”) to increase
the amount available under this facility from $400 million to $1 billion ($835 million of the facility was available upon
closing on December 12, 2003, with an additional $165 million becoming available immediately upon the Preferred
Security redemption discussed below). Borrowings under the credit agreement accrue interest at JPMorgan’s Base Rate
or LIBOR plus 1.50% (currently 2.60%) subject to certain availability thresholds as defined in the credit agreement.
Availability for borrowings and letter of credit obligations under the credit agreement is limited to 75% of the inventory
of certain Company subsidiaries (approximately $1.2 billion at January 31, 2004). There are no financial covenant
requirements under the credit agreement provided availability exceeds $100 million. The credit agreement expires on
December 12, 2008. At January 31, 2004, letters of credit totaling $75.5 million were issued under this facility. There
was no funded debt outstanding under the revolving credit agreement at January 31, 2004.
Shelf Registration Statement
At the end of fiscal 2003, the Company had an outstanding shelf registration statement for securities in the amount of
$750 million.
Long-term Debt
At January 31, 2004, the Company had $1.6 billion of unsecured notes and mortgage notes outstanding. The unsecured
notes bear interest at rates ranging from 6.30% to 9.50% with due dates from 2003 through 2028. The mortgage notes
bear interest at rates ranging from 7.25% to 13.25% with due dates through 2013.
Stock Repurchase
In May 2000, the Company announced that the Board of Directors authorized the repurchase of up to $200 million of its
Class A Common Stock. During fiscal 2003, the Company repurchased approximately $18.9 million of Class A
Common Stock, representing 1.5 million shares at an average price of $12.99 per share. Approximately $56 million in
share repurchase authorization remained under this open-ended plan at January 31, 2004.
Guaranteed Beneficial Interests In the Company’s Subordinated Debentures
The Company entered into an agreement to redeem the $331.6 million liquidation amount of Preferred Securities of
Horatio Finance V.O.F., a wholly owned subsidiary of the Company, effective February 2, 2004. The Company
redeemed the $331.6 million Preferred Securities on February 2, 2004 as planned, with $100 million borrowed under its
amended revolving credit agreement and the balance borrowed under the Company’s accounts receivable securtization
conduit facilities. Short-term borrowings under both the credit facility and accounts receivable securitization conduit
18
facilities were $376.5 million at February 2, 2004. Subsequently, the Company has paid down substantially all of these
borrowings from cash from operations during the first quarter of fiscal 2004.
Fiscal 2004
During fiscal 2004, the Company expects to finance its capital expenditures and its working capital requirements
including required debt repayments and stock repurchases, if any, from cash flows generated from operations. As part of
its overall funding strategy and for peak working capital requirements, the Company expects to obtain funds through its
credit card receivable financing facilities and its revolving credit agreement. The Company’s available receivable
financing facilities provide for borrowings of up to $400 million and mature on September 30, 2004. The Company
intends to renew maturing receivable financing facilities as they become due. The peak borrowings incurred under the
facilities were $381.5 million during 2003. The Company expects peak funding requirements of approximately $600
million during fiscal 2004. This peak demand will be met through a combination of accounts receivable financing and
the $1 billion credit agreement. At January 31, 2004, letters of credit totaling $75.5 million were issued under this line of
credit facility. Other than peak working capital requirements, management believes that cash generated from operations
will be sufficient to cover its reasonably foreseeable working capital, capital expenditure, debt service requirements and
stock repurchase. Depending on conditions in the capital markets and other factors, the Company will from time to time
consider the issuance of debt or other securities, or other possible capital market transactions, the proceeds of which
could be used to refinance current indebtedness or other corporate purposes.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of the Company’s contractual obligations and commercial commitments, the following
data is provided:
(in thousands of dollars)
Contractual obligations
Long-term debt
Guaranteed beneficial interests in
the Company’s subordinated
debentures
Receivable financing facility
Short-term receivable financing
facility
Capital lease obligations
Operating leases
Total contractual cash
obligations
(in thousands of dollars)
Other commercial commitments
$760 million line of credit, none
outstanding (1)
$450 million receivables
financing facility, none
outstanding
Standby letters of credit
Import letters of credit
Total commercial commitments
PAYMENTS DUE BY PERIOD
Total
Within 1 year
2-3 years
4-5 years
After 5 years
$1,621,106
$166,041
$190,116
$401,341
$863,608
531,579
400,000
50,000
19,837
266,073
331,579
-
-
400,000
50,000
2,126
51,309
-
3,849
80,535
-
-
-
2,370
53,339
200,000
-
-
11,492
80,890
$2,888,595
$601,055
$674,500
$457,050
$1,155,990
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
Total
Amounts
Committed Within 1 year
2-3 years
4-5 years
After 5 years
$-
$-
-
59,325
16,153
$75,478
-
59,325
16,153
$75,478
$-
-
-
-
$-
$-
-
-
-
$-
$-
-
-
-
$-
(1) Available amount of $835 million has been reduced by outstanding letters of credit of $75 million.
Other long-term commitments consist of liabilities incurred relating to the Company’s defined benefit plans. The
Company expects pension expense to be approximately $8.5 million in fiscal 2004 with a liability of $83 million. The
Company expects to make a contribution to the pension plan of approximately $3.4 million in fiscal 2004.
19
New Accounting Pronouncements
In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections” (“SFAS No. 145”) was issued. SFAS No. 145 rescinds SFAS No. 4 and 64, which
required gains and losses from extinguishments of debt to be classified as extraordinary items. SFAS No. 145 also
amends SFAS No. 13, eliminating inconsistencies in certain sale-leaseback transactions. The Company adopted the
provisions of SFAS No. 145 as of February 2, 2003. For the year ended February 1, 2003, as a result of adopting SFAS
No. 145, the Company has reclassified $6.8 million ($4.4 million after tax) to interest and debt expense from
extraordinary loss and for the year ended February 2, 2002, the Company has reclassified $9.4 million ($6.0 million
after-tax), respectively, to interest and debt expense from extraordinary gain.
In December 2003, the FASB issued SFAS No. 132 (Revised) (“SFAS No. 132-R”), Employer’s Disclosure about
Pensions and Other Postretirement Benefits. SFAS No. 132-R retains disclosure requirements of the original SFAS No.
132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS
No. 132-R is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for
fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after
December 15, 2003. The adoption of the disclosure provisions of SFAS No. 132-R did not have a material effect on the
Company’s financial position or results of operations.
In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) issued
final transition guidance regarding accounting for vendor allowances in its Issue No. 02-16, “Accounting by a Customer
(Including a Reseller) for Cash Consideration Received from a Vendor”. EITF Issue No. 02-16 addresses the accounting
treatment for vendor allowances and stipulates that cash consideration received from a vendor should be presumed to be
a reduction of the prices of the vendors’ product and should therefore be shown as a reduction in the purchase price of
the merchandise. Further, these allowances should be recognized as a reduction in cost of sales when the related product
is sold. To the extent that the cash consideration represents a reimbursement of a specific, incremental and identifiable
cost, then those vendor allowances should offset such costs. The Company receives concessions from its vendors through
a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs.
Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the
advertising occurred. All other vendor allowances are recognized as a reduction of cost purchases. Accordingly, a
reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative
expenses. Payroll reimbursements are reported as a reduction of payroll expense in the period in which the
reimbursement occurred.
The adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on the Company’s financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity” (“SFAS No. 150”). This statement establishes standards for how a company classifies and
measures certain financial instruments with characteristics of both liabilities and equity. The FASB Staff Position defers
the effective date of SFAS No. 150 for certain mandatorily redeemable noncontrolling interests. We do not expect SFAS
No. 150 to have a material impact on the Company’s financial position or results of operations.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50” (“FIN 46”),
was issued in January 2003, as amended by FIN 46-R. FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company
does not currently participate in any variable interest entities.
Forward-Looking Information
The foregoing contains certain “forward-looking statements” within the definition of federal securities laws. Statements
in the Management’s Discussion and Analysis of Financial Condition and Results of Operations include certain
“forward-looking statements,” including (without limitation) statements with respect to anticipated future operating and
financial performance, growth and acquisition opportunities, financing requirements and other similar forecasts and
statements of expectation. Words such as “expects,” “anticipates,” “plans” and “believes,” and variations of these words
and similar expressions, are intended to identify these forward-looking statements. Statements made regarding the
Company’s merchandise strategies, funding of cyclical working capital needs, store opening schedule and estimates of
depreciation and amortization, rental expense, interest and debt expense and capital expenditures for fiscal year 2004 are
20
forward-looking statements. The Company cautions that forward-looking statements, as such term is defined in the
Private Securities Litigation Reform Act of 1995, contained in this report are based on estimates, projections, beliefs and
assumptions of management at the time of such statements and are not guarantees of future performance. The Company
disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the
receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties
and are subject to change based on various important factors. Actual future performance, outcomes and results may differ
materially from those expressed in forward-looking statements made by the Company and its management as a result of a
number of risks, uncertainties and assumptions. Representative examples of those factors (without limitation) include
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; the
impact of competitive pressures in the department store industry and other retail channels including specialty, off-price,
discount, internet, and mail-order retailers; trends in personal bankruptcies and charge-off trends in the credit card
receivables portfolio; changes in consumer spending patterns and debt levels; adequate and stable availability of
materials and production facilities from which the Company sources its merchandise; changes in operating expenses,
including employee wages, commission structures and related benefits; possible future acquisitions of store properties
from other department store operators and 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; 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The table below provides information about the Company’s obligations that are sensitive to changes in interest rates. The
table presents maturities of the Company’s long-term debt and Guaranteed Beneficial Interests in the Company’s
Subordinated Debentures along with the related weighted-average interest rates by expected maturity dates.
(in thousands of dollars)
Expected Maturity Date
(fiscal year)
Long-term debt (including
receivables financing
facilities)
Average interest rate
Guaranteed Beneficial
Interests in the Company’s
Subordinated Debentures
Average interest rate
2004
2005
2006
2007
2008 Thereafter
Total
Fair Value
$166,041 $291,633 $298,483 $200,640 $200,701
6.5%
5.0%
6.9%
3.1%
6.5%
$863,608
7.5%
$2,021,106
6.3%
$2,059,118
$331,579
2.7%
$-
-%
$-
-%
$-
-%
$-
-%
$200,000
7.5%
$ 531,579
4.5%
$ 525,579
During the year ended January 31, 2004, the Company repurchased $6.0 million of its outstanding unsecured notes prior
to their related maturity dates. During the year ended January 31, 2004, the Company also retired $125.9 million of its
6.39% Reset Put Securities (“REPS”) due August 1, 2013 prior to their maturity dates. Interest rates on the repurchased
securities ranged from 6.39% to 6.88%. Maturity dates ranged from 2004 to 2013.
The Company is exposed to market risk from changes in the interest rates on certain receivable financing facilities and
$331.6 million of the Guaranteed Beneficial Interests in the Company’s Subordinated Debentures. Outstanding balances
under these facilities bear interest at a variable rate based on a spread over LIBOR. Based on the amount outstanding as
of January 31, 2004, a 100 basis point change in interest rates would result in an approximate $5.8 million annual change
to interest expense.
In fiscal 2003, the Company announced its intention to redeem its $331.6 million Preferred Securities included in
Guaranteed Preferred Beneficial Interests in the Company’s Subordinated Debentures anticipating that such redemption
would occur on February 2, 2004. Accordingly, $331.6 million of Guaranteed Preferred Beneficial Interests in
Company’s Subordinated Debentures is included in current liabilities on the Company’s consolidated balance sheet at
January 31, 2004. The Company redeemed the $331.6 million Preferred Securities on February 2, 2004 as planned.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and notes thereto are included in this report beginning on page F-
1.
ITEM 9. CHANGES IN AND DISGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains “disclosure controls and procedures,” as such term is defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information
required to be disclosed in the Company’s reports, pursuant to the Exchange Act, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well-designed and
operated, can provide only reasonable assurances of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
The Company’s management, including William Dillard, II, Chairman of the Board of Directors and Chief Executive
Officer (principal executive officer), and James I. Freeman, Senior Vice-President and Chief Financial Officer (principal
financial officer), have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as of January
31, 2004. Based on their evaluation, the principal executive officer and principal financial officer concluded that the
Company’s disclosure controls and procedures are effective to ensure that the material information required to be
disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported with the time periods specified in the rules and forms of the SEC. There were no
changes in the Company’s internal controls over financial reporting during the period covered by this report that have
materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
A.
Directors of the Registrant
Information regarding directors of the Registrant is incorporated herein by reference under the heading
“Nominees for Election as Directors” and under the heading “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement.
B.
Executive Officers of the Registrant
Information regarding executive officers of the Registrant is incorporated herein by reference to Item 1 of this
report under the heading “Executive Officers of the Registrant.” Reference additionally is made to the
information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement, which information is incorporated herein by reference.
The Company’s Board of Directors has adopted a Company Code of Conduct that applies to all Company employees
including the Company’s Directors, CEO and senior financial officers. The current version of such Code of Conduct is
available free of charge on Dillard’s, Inc. Web site, www.dillards.com , and are available in print to any shareholder who
requests copies by contacting Julie J. Bull, Director of Investor Relations, at the Company's principal executive offices
set forth above.
22
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation and compensation of directors is incorporated herein by reference to the
information beginning under the heading “Compensation of Directors and Executive Officers” and concluding under the
heading “Compensation of Directors” in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information regarding security ownership of certain beneficial owners and management is incorporated herein by
reference to the information under the heading “Principal Holders of Voting Securities” and under the heading
“Nominees for Election as Directors” and continuing through footnote 12 in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is incorporated herein by reference to the information
under the heading “Certain Relationships and Transactions” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information regarding principal accountant fees and services is incorporated herein by reference to the information on
under the heading “Independent Accountant Fees” in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) and (2) Financial Statements and Financial Statement Schedules
An “Index to Financial Statements” and “Financial Statement Schedules” has been filed as a part of this Report
beginning on page F-1 hereof.
(a)(3) Exhibits and Management Compensatory Plans
An “Exhibit Index” has been filed as a part of this Report beginning on page E-1 hereof and is herein incorporated by
reference.
(b)
Reports on Form 8-K filed during the fourth quarter
A current report on Form 8-K dated November 20, 2003 was filed with the Securities and Exchange Commission on
November 21, 2003 to report, under Item 5, that the registrant issued its third quarter earnings release (attached as
Exhibit 99 thereto).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 8, 2004
Dillard’s, Inc.
Registrant
/s/ James I. Freeman
James I. Freeman, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
23
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacity and on the date indicated.
/s/ Robert C. Connor
Robert C. Connor
Director
/s/ Will D. Davis
Will D. Davis
Director
/s/ Alex Dillard
Alex Dillard
President and Director
/s/ James I. Freeman
James I. Freeman
Senior Vice President and Chief
Financial Officer and Director
/s/ Bob L. Martin
Bob L. Martin
Director
/s/ William H. Sutton
William H. Sutton
Director
Date: April 8, 2004
/s/ Drue Corbusier
Drue Corbusier
Executive Vice President and Director
/s/ William Dillard, II
William Dillard, II
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Mike Dillard
Mike Dillard
Executive Vice President
and Director
/s/ John Paul Hammerschmidt
John Paul Hammerschmidt
Director
/s/ Warren A. Stephens
Warren A. Stephens
Director
/s/ J.C. Watts, Jr.
J.C. Watts, Jr.
Director
24
CERTIFICATIONS
I, William Dillard, II, certify that:
1. I have reviewed this annual report on Form 10-K of Dillard’s, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this annual report based on such evaluation; and
(c) disclosed in this annual report any changes in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: April 8, 2004
/s/ William Dillard, II
William Dillard, II
Chairman of the Board and Chief Executive Officer
25
I, James I. Freeman, certify that:
1. I have reviewed this annual report on Form 10-K of Dillard’s, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this annual report based on such evaluation; and
(c) disclosed in this annual report any changes in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: April 8, 2004
/s/ James I. Freeman
James I. Freeman
Senior Vice-President and Chief Financial Officer
26
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
DILLARD'S, INC. AND SUBSIDIARIES
Year Ended January 31, 2004
Independent Auditors' Report
Consolidated Balance Sheets – January 31, 2004 and February 1, 2003.
Consolidated Statements of Operations - Fiscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss - Fiscal
years ended January 31, 2004, February 1, 2003 and February 2, 2002.
Consolidated Statements of Cash Flows - Fiscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002.
Notes to Consolidated Financial Statements - Fiscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002.
Schedule II - Valuation and Qualifying Accounts
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-22
F-1
Independent Auditors' Report
Independent Auditors’ Report
To the Stockholders and Board of Directors of Dillard’s, Inc.
Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of Dillard’s, Inc. and subsidiaries as of January 31, 2004 and February
1, 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows for each of
the three fiscal years in the period ended January 31, 2004. Our audits also included the financial statement schedule of Dillard's, Inc.
and subsidiaries, listed in item 15. These financial statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of
Dillard’s, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended January 31, 2004 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill
and other intangible assets in 2002 to conform to Statement of Financial Standards No. 142.
Deloitte & Touche LLP
Dallas, Texas
April 8, 2004
F-2
Consolidated Balance Sheets
Dollars in Thousands
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable (net of allowance for
doubtful accounts of $40,967 and $49,755)
Merchandise inventories
Other current assets
Total current assets
Property and Equipment:
Land and land improvements
Buildings and leasehold improvements
Furniture, fixtures and equipment
Buildings under construction
Buildings under capital leases
Less accumulated depreciation and amortization
Goodwill
Other Assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable and accrued expenses
Other short-term borrowings
Current portion of long-term debt
Current portion of Guaranteed Beneficial Interest
In the Company’s Subordinated Debentures
Current portion of capital lease obligations
Federal and state income taxes
Total current liabilities
Long-term Debt
Capital Lease Obligations
Other Liabilities
Deferred Income Taxes
Operating Leases and Commitments
Guaranteed Preferred Beneficial Interests in the
Company’s Subordinated Debentures
Stockholders’ Equity:
Common stock, Class A – 112,866,918 and 112,677,505 shares issued;
79,480,069 and 80,746,732 shares outstanding
Common stock, Class B (convertible) — 4,010,929 shares issued
and outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Less treasury stock, at cost, Class A —33,386,849 and 31,930,773 shares
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
F-3
January 31, 2004
February 1, 2003
$160,873
$142,356
1,191,489
1,632,377
38,952
3,023,691
100,726
2,685,628
2,192,029
40,636
51,493
(1,873,043)
3,197,469
36,731
153,206
$6,411,097
$679,854
50,000
166,041
331,579
2,126
106,487
1,336,087
1,855,065
17,711
147,901
617,236
1,338,080
1,594,308
55,507
3,130,251
104,848
2,748,225
2,202,811
28,602
50,123
(1,764,107)
3,370,502
39,214
135,965
$6,675,932
$675,962
-
138,814
-
1,856
69,829
886,461
2,193,006
18,600
137,070
645,020
200,000
531,579
1,129
1,127
40
713,974
(11,281)
2,201,623
(668,388)
2,237,097
$6,411,097
40
711,324
(4,496)
2,205,674
(649,473)
2,264,196
$6,675,932
Consolidated Statements of Operations
Dollars in Thousands, Except Per Share Data
Net Sales
Service Charges, Interest and Other Income
Costs and Expenses:
Cost of sales
Advertising, selling, administrative and general expenses
Depreciation and amortization
Rentals
Interest and debt expense
Asset impairment and store closing charges
Total costs and expenses
Income Before Income Taxes
Income Taxes
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax benefit
of $0
Net Income (Loss)
Basic Earnings Per Common Share:
Income before cumulative effect of accounting change
Cumulative effect of accounting change
Net Income (Loss)
Diluted Earnings Per Common Share:
Income before cumulative effect of accounting change
Cumulative effect of accounting change
Net Income (Loss)
See notes to consolidated financial statements.
January 31, 2004
Years Ended
February 1, 2003
February 2, 2002
$7,598,934
264,734
7,863,668
5,170,173
2,097,947
290,661
64,101
181,065
43,727
7,847,674
15,994
6,650
9,344
—
$9,344
$0.11
—
$0.11
$0.11
—
$0.11
$7,910,996
322,943
8,233,939
5,254,134
2,164,033
301,407
68,101
189,779
52,224
8,029,678
204,261
72,335
131,926
(530,331)
$(398,405)
$ 1.56
(6.27)
$(4.71)
$ 1.55
(6.22)
$(4.67)
$8,154,911
244,776
8,399,687
5,507,702
2,191,389
310,754
72,783
192,344
3,752
8,278,724
120,963
49,165
71,798
—
$71,798
$0.85
—
$0.85
$0.85
—
$0.85
F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
Dollars in Thousands, Except Per Share Data
Additional
Accumulated
Other
Common Stock
Class A Class B
$40
$ 1,116
__
__
Paid-in Comprehen- Retained
Earnings
sive Loss
Capital
$2,558,933
$ —
$696,879
71,798
__
__
Treasury
Stock
$(627,148)
__
Total
$2,629,820
71,798
Balance, February 3, 2001
Net income
Issuance of 221,635 shares
under stock option,
employee savings and
stock bonus plans
Purchase of 1,333,959 shares of
treasury stock
Cash dividends declared:
Common stock, $.16 per share
Balance, February 2, 2002
Net loss
Minimum pension liability adjustment, net
Total comprehensive loss
Issuance of 869,985 shares
under stock option,
employee savings and
stock bonus plans
Cash dividends declared:
Common stock, $.16 per share
Balance, February 1, 2003
Net income
Minimum pension liability adjustment, net
Total comprehensive income
Issuance of 189,413 shares
under stock option,
employee savings and
stock bonus plans
Purchase of 1,456,076 shares of
treasury stock
Cash dividends declared:
Common stock, $.16 per share
Balance, January 31, 2004
See notes to consolidated financial statements.
2
__
—
1,118
__
__
9
—
1,127
__
__
2
__
—
$1,129
__
__
—
40
__
__
__
—
40
__
__
__
__
2,225
__
__
__
__
__
__
2,227
(22,325)
(22,325)
—
699,104
__
__
—
—
__
(4,496)
(13,123)
2,617,608
(398,405)
__
—
(649,473)
__
__
(13,123)
2,668,397
(398,405)
(4,496)
(402,901)
12,220
__
__
__
12,229
—
—
711,324 (4,496)
__
__
(6,785)
(13,529)
2,205,674
9,344
__
—
(649,473)
__
__
(13,529)
2,264,196
9,344
(6,785)
2,559
2,650
__
__
__
__
__
__
2,652
(18,915)
(18,915)
—
$40
—
—
$713,974 $(11,281)
(13,395)
$2,201,623
—
$(668,388)
(13,395)
$2,237,097
F-5
Consolidated Statements of Cash Flows
Dollars in Thousands
Operating Activities:
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Loss (gain) on early extinguishments of debt
Impairment charges
Gain on sale of joint venture
Gain on sale of property and equipment
Provision for loan losses
Cumulative effect of accounting change, net of taxes
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
(Increase) decrease in merchandise inventories
Decrease (increase) in other current assets
(Increase) decrease in other assets
(Decrease) increase in trade accounts payable
and accrued expenses, other liabilities and income taxes
Net cash provided by operating activities
Investing Activities:
Purchase of property and equipment
Proceeds from sale of property and equipment
Proceeds from sale of joint venture
Net cash used in investing activities
Financing Activities:
Principal payments on long-term debt and capital lease obligations
Increase in short-term borrowings and capital lease obligations
Cash dividends paid
Proceeds from issuance of common stock
Purchase of treasury stock
Proceeds from receivable financing, net
Proceeds from long-term borrowings
Net cash used in financing activities
Increase (decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
See notes to consolidated financial statements.
January 31, 2004
Years Ended
February 1, 2003
February 2, 2002
$9,344
$(398,405)
$71,798
297,201
13,623
-
43,727
(15,624)
(8,699)
35,244
__
110,936
(38,069)
16,121
(37,048)
5,350
432,106
(227,421)
31,766
34,579
(161,076)
(272,702)
51,369
(13,395)
1,130
(18,915)
—
—
(252,513)
18,517
142,356
$160,873
305,545
24,878
6,834
52,224
(64,295)
(1,103)
36,574
530,331
286
(32,445)
(30,760)
31,559
(104,281)
356,942
(233,268)
—
68,295
(164,973)
(340,081)
—
(13,529)
11,037
—
100,000
40,000
(202,573)
(10,604)
152,960
$142,356
313,711
2,043
(9,394)
3,752
__
(2,060)
21,286
__
(116,985)
54,323
28,794
53,504
196,209
616,981
(270,595)
—
—
(270,595)
(402,941)
—
(13,123)
983
(22,325)
—
50,000
(387,406)
(41,020)
193,980
$152,960
F-6
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business – Dillard’s, Inc. (the “Company”) operates retail department stores located primarily in the Southeastern,
Southwestern and Midwestern areas of the United States. The Company’s fiscal year ends on the Saturday nearest January 31 of each
year. Fiscal years 2003, 2002 and 2001 ended on January 31, 2004, February 1, 2003 and February 2, 2002, respectively. Fiscal years
2003, 2002 and 2001 included 52 weeks.
Consolidation – The accompanying consolidated financial statements include the accounts of Dillard’s, Inc. and its wholly owned
subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. Investments in and advances to joint ventures in
which the Company has a 50% ownership interest are accounted for by the equity method.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include inventories, sales return, allowance for doubtful accounts, self-
insured accruals and lives of long-lived assets. Actual results could differ from those estimates.
Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.
Accounts Receivable – Customer accounts receivable are classified as current assets and include some which are due after one year,
consistent with industry practice. Credit card receivables are shown net of an allowance for uncollectible accounts. The Company
calculates the allowance for uncollectible accounts using a model that analyzes factors such as bankruptcy filings, delinquency rates,
historical charge-off patterns, recovery rates and other portfolio data. The calculation is then reviewed by management to assess
whether, based on recent economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.
The Company's current credit processing system charges off an account automatically when a customer has failed to make a required
payment in each of the six billing cycles following a missed payment. The Company also provides for the estimated uncollectible
portion of the finance charge revenue based upon our historical collection experience as part of the allowance for doubtful accounts.
This allowance represents amounts of credit card receivable balances (including billed but uncollected finance charges) which
management estimates will ultimately not be collected. Finance charge revenue is recorded until an account is charged off, at which
time uncollected finance charge revenue is recorded as a reduction of credit revenues.
The Company utilizes credit card securitizations as part of its overall funding strategy. The transfers were subject to the
grandfathering provisions of Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfer and Servicing
of Financial Assets and Liabilities” until May 2002 and thus continued to be accounted for under the previous accounting standards
that existed under FAS 125. In May 2002, the Company amended its conduit financing agreement in a manner that prevented future
transfers of accounts receivable to its master trust from qualifying as a sale and thus receiving off-balance-sheet treatment. As a result
of this decision, the Company does not have any off-balance-sheet financing as it relates to new transfers to the Trust. All financing
through this facility is recorded on the balance sheet. (see Note 15).
Significant Group Concentrations of Credit Risk –The Company grants credit to customers throughout North America. There were
no Metropolitan Statistical Areas that comprised 10% of the Company’s managed credit card receivables at January 31, 2004 and
February 1, 2003.
Merchandise Inventories – The retail last-in, first-out (“LIFO”) inventory method is used to value merchandise inventories. At
January 31, 2004 and February 1, 2003, the LIFO cost of merchandise was approximately equal to the first-in, first-out (“FIFO”) cost
of merchandise.
Property and Equipment – Property and equipment owned by the Company is stated at cost, which includes related interest costs
incurred during periods of construction, less accumulated depreciation and amortization. Capitalized interest was $2.6 million, $2.5
million and $5.4 million in fiscal 2003, 2002 and 2001, respectively. For tax reporting purposes, accelerated depreciation or cost
recovery methods are used and the related deferred income taxes are included in noncurrent deferred income taxes in the Consolidated
Balance Sheets. For financial reporting purposes, depreciation is computed by the straight-line method over estimated useful lives:
F-7
Buildings and leasehold improvements
Furniture, fixtures and equipment
20 - 40 years
3 - 10 years
Properties leased by the Company under lease agreements which are determined to be capital leases are stated at an amount equal to
the present value of the minimum lease payments during the lease term, less accumulated amortization. The properties under capital
leases and leasehold improvements under operating leases are amortized on the straight-line method over the shorter of their useful
lives or the related lease terms. The provision for amortization of leased properties is included in depreciation and amortization
expense.
Included in property and equipment as of January 31, 2004 are assets held for sale in the amount of $31.9 million. During fiscal 2003,
2002 and 2001, the Company realized gains on the sale of property and equipment of $8.7 million, $1.1 million and $2.1 million,
respectively.
Depreciation expense on property and equipment was $291 million, $301 million and $295 million for fiscal 2003, 2002 and 2001,
respectively.
Long-Lived Assets Excluding Goodwill – The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which requires impairment losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying
amount. In the evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived assets. This analysis is performed at the store unit level. If
the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various
factors including future sales growth and profit margins are included in this analysis. Management believes at this time that the
carrying value and useful lives continue to be appropriate, after recognizing the impairment charge recorded in 2003 and 2002, as
disclosed in Note 13.
Goodwill – The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective February 3, 2002. It changes
the accounting for goodwill from an amortization method to an “impairment only” approach. Under SFAS No. 142, goodwill is no
longer amortized but reviewed for impairment annually or more frequently if certain indicators arise. The Company tested goodwill
for impairment as of the adoption date using the two-step process prescribed in SFAS No. 142. The Company identified its reporting
units under SFAS No. 142 at the store unit level. The fair value of these reporting units was estimated using the expected discounted
future cash flows and market values of related businesses, where appropriate. Prior to the adoption of SFAS No. 142, goodwill, which
represents the cost in excess of fair value of net assets acquired, was amortized on the straight-line basis over 40 years. Accumulated
goodwill amortization was $55.6 million at February 2, 2002. Management believes at this time that the carrying value continues to
be appropriate, recognizing the impairment charge recorded in fiscal 2003 and 2002, as disclosed in Note 2.
Other Assets – Other assets include investments in joint ventures accounted for by the equity method. These joint ventures, which
consist of malls and a general contracting company that constructs Dillard’s stores and other commercial buildings, had carrying
values of $97 million and $97 million at January 31, 2004 and February 1, 2003, respectively. The malls are located in Crestview
Hills, Kentucky; Toledo, Ohio; Denver, Colorado and two currently under construction in Bonita Springs, Florida and Yuma, Arizona.
Earnings from joint ventures were $8.1 million, $19.5 million and $11.6 million for fiscal 2003, 2002 and 2001, respectively. The
Company also recorded a $15.6 million pretax gain for the year ended January 31, 2004 from the sale of its interest in Sunrise Mall
and its associated center in Brownsville, Texas for $80.7 million including the assumption of the $40.0 million mortgage note. The
Company recorded a pretax gain of $64.3 million pertaining to the Company’s sale of its interest in FlatIron Crossing, a Broomfield,
Colorado shopping center, for the year ended February 1, 2003. The gains on the sale were recorded in Service Charges, Interest and
Other Income.
Vendor Allowances – The Company receives concessions from its vendors through a variety of programs and arrangements,
including co-operative advertising and markdown reimbursement programs. Co-operative advertising allowances are reported as a
reduction of advertising expense in the period in which the advertising occurred. Payroll reimbursements are reported as a reduction
of payroll expense in the period in which the reimbursement occurred. All other vendor allowances are recognized as a reduction of
cost purchases. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and
administrative expenses.
F-8
Insurance accruals. The Company’s consolidated balance sheets include liabilities with respect to self-insured workers’
compensation and general liability claims. The Company estimates the required liability of such claims on a discounted basis, utilizing
an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected
loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the
changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Revenue Recognition – The Company recognizes revenue at the “point of sale.” Finance charge revenue earned on customer
accounts, serviced by the Company under its proprietary credit card program, is recognized in the period in which it is earned.
Allowance for sales returns are recorded as a component of net sales in the period in which the related sales are recorded.
Advertising – Advertising and promotional costs, which include newspaper, television, radio and other media advertising, are
expensed as incurred and were $245 million, $253 million and $245 million for fiscal years 2003, 2002 and 2001, respectively.
Income Taxes – In accordance with SFAS No. 109, “Accounting for Income Taxes,” deferred income taxes reflect the future tax
consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end.
Shipping and Handling – In accordance with Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling
Fees and Costs,” the Company records shipping and handling reimbursements in Other Income. The Company records shipping and
handling costs in Advertising, Selling, Administrative and General Expenses.
Comprehensive Income – Comprehensive income is equivalent to the Company’s net income for fiscal year 2001.
Stock-Based Compensation – The Company periodically grants stock options to employees. Pursuant to Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees,” the Company accounts for stock-based employee compensation
arrangements using the intrinsic value method. No compensation expense has been recorded in the Consolidated Financial Statements
with respect to option grants. The Company has adopted the disclosure only provisions of Financial Accounting Standards Board
Statement No. 123, “Accounting for Stock Based Compensation,” as amended by Financial Accounting Standards Board Statement
No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123”. See
Note 11 to the Company’s Consolidated Financial Statements. If compensation cost for the Company’s stock option plans had been
determined in accordance with the fair value method prescribed by SFAS No. 123, the Company’s income before extraordinary item
and accounting change would have been:
(in thousands of dollars, except per share data)
Income before cumulative effect of accounting change
As reported
Deduct: Total stock based employee compensation expense
determined under fair value based method, net of taxes
Pro forma
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
Fiscal 2003
Fiscal 2002
Fiscal 2001
$9,344
$131,926
$71,798
(2,732)
$6,612
$0.11
0.08
$0.11
0.08
(9,261)
$122,665
(5,667)
$66,131
$1.56
1.45
$1.55
1.44
$0.85
0.78
$0.85
0.79
Segment Reporting – The Company operates in a single operating segment — the operation of retail department stores. Revenues
from external customers are derived from merchandise sales and service charges and interest on the Company’s proprietary credit
card.
The Company does not rely on any major customers as a source of revenue.
F-9
New Accounting Pronouncements
In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections” (“SFAS No. 145”) was issued. SFAS No. 145 rescinds SFAS No. 4 and 64, which required gains and losses
from extinguishments of debt to be classified as extraordinary items. SFAS No. 145 also amends SFAS No. 13, eliminating
inconsistencies in certain sale-leaseback transactions. The Company adopted the provisions of SFAS No. 145 as of February 2, 2003.
For the year ended February 1, 2003, as a result of adopting SFAS No. 145, the Company has reclassified $6.8 million ($4.4 million
after tax) to interest and debt expense from extraordinary loss and for the year ended February 2, 2002, the Company has reclassified
$9.4 million ($6.0 million after-tax), respectively, to interest and debt expense from extraordinary gain.
In December 2003, the FASB issued SFAS No. 132 (Revised) (“SFAS No. 132-R”), “Employer’s Disclosure about Pensions and
Other Postretirement Benefits.” SFAS No. 132-R retains disclosure requirements of the original SFAS No. 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS No. 132-R is effective for fiscal
years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004.
Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of the disclosure
provisions of SFAS No. 132-R did not have a material effect on the Company’s financial position or results of operations.
In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) issued final transition
guidance regarding accounting for vendor allowances in its Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for
Cash Consideration Received from a Vendor”. EITF Issue No. 02-16 addresses the accounting treatment for vendor allowances and
stipulates that cash consideration received from a vendor should be presumed to be a reduction of the prices of the vendors’ product
and should therefore be shown as a reduction in the purchase price of the merchandise. Further, these allowances should be
recognized as a reduction in cost of sales when the related product is sold. To the extent that the cash consideration represents a
reimbursement of a specific, incremental and identifiable cost, then those vendor allowances should offset such costs. The Company
receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising and
markdown reimbursement programs. Co-operative advertising allowances are reported as a reduction of advertising expense in the
period in which the advertising occurred. All other vendor allowances are recognized as a reduction of cost purchases.
Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative
expenses. Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred.
The adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on the Company’s financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity” (“SFAS No. 150”). This statement establishes standards for how a company classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The FASB Staff Position defers the effective date of Statement No. 150
for certain mandatorily redeemable noncontrolling interests. We do not expect SFAS 150 to have a material impact on the Company’s
financial position or results of operations.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50” (“FIN 46”), was issued in
January 2003, as amended by FIN 46-R. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN
46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June
15, 2003. The Company does not currently participate in any variable interest entities.
Reclassifications – Certain reclassifications have been made to prior year financial statements to conform with fiscal 2003
presentations.
2. Goodwill
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective February 3, 2002. It changes the accounting
for goodwill from an amortization method to an “impairment only” approach. Under SFAS No. 142, goodwill is no longer amortized
but reviewed for impairment annually or more frequently if certain indicators arise. The Company tested goodwill for impairment as
of the adoption date using the two-step process prescribed in SFAS No. 142. The Company identified its reporting units under SFAS
F-10
No. 142 at the store unit level. The fair value of these reporting units was estimated using the expected discounted future cash flows
and market values of related businesses, where appropriate.
Related to the 1998 acquisition of Mercantile Stores Company Inc., the Company had $570 million in goodwill recorded in its
consolidated balance sheet at the beginning of 2002. The Company completed the required impairment tests of goodwill in the second
quarter of 2002 and determined that $530 million of goodwill was impaired under the fair value test. This impairment was the result
of sequential periods of declining profits in certain of these reporting units. In accordance with SFAS No. 142, the impairment loss for
goodwill was reflected as a cumulative effect of a change in accounting principle in the first quarter of 2002.
The changes in the carrying amount of goodwill for the years ended January 31, 2004 and February 1, 2003 are as follows (in
thousands):
Goodwill balance at February 2, 2002
Cumulative effect of adopting SFAS No. 142
Goodwill balance at February 1, 2003
Goodwill written off in fiscal 2003
Goodwill balance at January 31, 2004
$569,545
(530,331)
39,214
( 2,483)
$ 36,731
The following pro forma financial information is presented as if the statement was adopted at January 30, 2000 (in thousands, except
per share amounts):
Reported net income (loss)
Cumulative effect of accounting change
Net income before the cumulative
effect of accounting change
Add back:
Goodwill amortization
Pro forma
Net income (loss) per share reported – basic
Cumulative effect of accounting change
Goodwill amortization
Pro forma net income per share – basic
Net income (loss) per share reported – diluted
Cumulative effect of accounting change
Goodwill amortization
Pro forma net income per share – diluted
Fiscal 2003
Fiscal 2002
Fiscal 2001
$ 9,344
-
$(398,405)
530,331
$71,798
-
9,344
131,926
71,798
-
$ 9,344
-
$ 131,926
15,604
$87,402
$0 .11
-
-
$0.11
$0.11
-
-
$0.11
$(4.71)
6.27
-
$ 1.56
$(4.67)
6.22
-
$ 1.55
$0.85
-
0.19
$1.04
$0.85
-
0.18
$1.03
3. Revolving Credit Agreement
At January 31, 2004, the Company maintained an $835 million revolving credit facility with JPMorgan Chase Bank (“JPMorgan”)
with an additional $165 million becoming available immediately upon the Preferred Security redemption discussed in Note 7.
Borrowings under the credit agreement accrue interest at JPMorgan’s Base Rate or LIBOR plus 1.50% (currently 2.60%) subject to
certain availability thresholds as defined in the credit agreement. Availability for borrowings and letter of credit obligations under the
credit agreement is limited to 75% of the inventory of certain Company subsidiaries (approximately $1.2 billion at January 31, 2004).
There are no financial covenant requirements under the credit agreement provided availability exceeds $100 million. The credit
agreement expires on December 12, 2008. The Company pays an annual commitment fee of 0.375% of the committed amount to the
banks. There were no funds borrowed under the revolving credit facility during fiscal 2003.
F-11
4. Long-term Debt
Long-term debt consists of the following:
(in thousands of dollars)
Unsecured notes
at rates ranging from
6.30% to 9.50%,
due 2003 through 2028
Receivable financing facilities
at rates ranging from 1.4% to
3.8% due 2005 through 2006
Mortgage notes, payable
monthly or quarterly
(some with balloon payments)
through 2013 and bearing
interest at rates ranging from
7.25% to 13.25%
Current portion
January 31, 2004
February 1, 2003
$1,561,353
$1,823,429
400,000
400,000
59,753
2,021,106
(166,041)
$1,855,065
108,391
2,331,820
(138,814)
$2,193,006
Building, land, and land improvements with a carrying value of $39.6 million at January 31, 2004 were pledged as collateral on the
mortgage notes. Maturities of long-term debt over the next five years are $166 million, $292 million, $298 million, $201 million and
$201 million. Outstanding letters of credit aggregated $75.5 million at January 31, 2004.
Interest and debt expense consists of the following:
(in thousands of dollars)
Long-term debt:
Interest
(Gain) loss on early retirement
of long-term debt
Amortization of
debt expense
Interest on capital
lease obligations
Interest on receivable financing
Fiscal
2003
Fiscal
2002
Fiscal
2001
$159,844
$166,093
$180,918
-
6,985
166,829
2,202
12,034
$181,065
6,839
4,088
177,020
2,354
10,405
$189,779
(9,392)
4,204
175,730
2,560
14,054
$192,344
Interest paid during fiscal 2003, 2002 and 2001 was approximately $186.9 million, $158.6 million and $208.9 million, respectively.
The interest paid during fiscal 2002 does not include a $28.4 million interest payment made on February 3, 2003 that would have been
due on the last day of the Company’s fiscal year had the date fallen on a business day.
The Company has reclassified $11.3 million in interest expense related to its receivable financing from other revenue to interest
expense on its consolidated statements of operations for the fiscal year ended February 2, 2002.
The Company has reclassified $6.8 million to interest and debt expense from extraordinary loss for the year ended February 1, 2003,
and the Company has reclassified $9.4 million to interest and debt expense from extraordinary gain for the year ended February 2,
2002.
F-12
5. Trade Accounts Payable and Accrued Expenses
Trade accounts payable and accrued expenses consist of the following:
January 31, 2004
$457,485
February 1, 2003
$431,752
(in thousands of dollars)
Trade accounts payable
Accrued expenses:
Taxes, other than income
Salaries, wages,
and employee benefits
Liability to customers
Interest
Rent
Other
76,263
44,661
47,340
39,789
9,949
4,367
$679,854
6. Income Taxes
The provision for federal and state income taxes is summarized as follows:
(in thousands of dollars)
Current:
Federal
State
Deferred:
Federal
State
Fiscal
2003
$(5,293)
(1,680)
(6,973)
12,046
1,577
13,623
$6,650
Fiscal
2002
$45,428
2,029
47,457
23,570
1,308
24,878
$72,335
66,894
53,560
46,900
46,138
11,704
19,014
$675,962
Fiscal
2001
$45,107
2,015
47,122
1,692
351
2,043
$49,165
A reconciliation between the Company’s income tax provision and income taxes using the federal statutory income tax rate is
presented below:
(in thousands of dollars)
Income tax at the
statutory federal rate
State income taxes,
net of federal benefit
Nondeductible
goodwill amortization and write off
Impact of reduced effective income
tax rate on deferred taxes
Other
Fiscal
2003
Fiscal
2002
Fiscal
2001
$5,598
$71,493
$42,338
122
869
-
61
$6,650
2,008
-
-
(1,166)
$72,335
1,320
5,461
-
46
$49,165
At January 31, 2004, the Company incurred a net operating loss of approximately $18.9 million. For federal income tax purposes, the
loss will be carried back to the year ended February 1, 2003 to reduce the income tax liability for that year. For state income tax
purposes, the loss will be carried back to the extent allowed by each states’ law, otherwise the loss will be carried forward to reduce
future years’ state income tax liability. The Company also has a charitable contribution carryforward of approximately $1.3 million
that will expire on January 31, 2009. Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s
actual federal and state income tax rate (exclusive of the effect of non-deductible goodwill amortization) was 36% in fiscal 2003, 2002
and 2001. Significant components of the Company’s deferred tax assets and liabilities as of January 31, 2004 and February 1, 2003
are as follows:
F-13
(in thousands of dollars)
Property and equipment
bases and depreciation
differences
State income taxes
Joint venture basis differences
Differences between
book and tax bases of inventory
Other
Total deferred tax liabilities
Accruals not currently deductible
State income taxes
Total deferred tax assets
Net deferred tax liabilities
January 31, 2004
February 1, 2003
$505,581
25,787
24,849
49,095
112,550
717,862
(45,813)
(2,045)
(47,858)
$670,004
$524,090
25,612
14,119
36,872
121,303
721,996
(59,156)
(2,641)
(61,797)
$660,199
Deferred tax assets and liabilities are presented as follows in the accompanying consolidated balance sheets:
(in thousands of dollars)
Net deferred tax liabilities-noncurrent
Net deferred tax liabilities-current
Net deferred tax liabilities
January 31, 2004
$617,236
52,768
$670,004
February 1, 2003
$645,020
15,179
$660,199
Income taxes paid during fiscal 2003, 2002 and 2001 were approximately $0, $0 and $22.9 million, respectively.
7. Guaranteed Preferred Beneficial Interests in the Company’s Subordinated Debentures
Guaranteed Preferred Beneficial Interests in the Company’s Subordinated Debentures are comprised of $200 million liquidation
amount of 7.5% Capital Securities, due August 1, 2038 (the “Capital Securities”) representing beneficial ownership interest in the
assets of Dillard’s Capital Trust I, a wholly owned subsidiary of the Company, and $331.6 million liquidation amount of LIBOR plus
1.56% Preferred Securities, due January 29, 2009 (the “Preferred Securities”) by Horatio Finance V.O.F., a wholly owned subsidiary
of the Company.
Holders of the Capital Securities are entitled to receive cumulative cash distributions, payable quarterly, at the annual rate of 7.5% of
the liquidation amount of $25 per Capital Security. The subordinated debentures are the sole assets of the Trust, and the Capital
Securities are subject to mandatory redemption upon repayment of the subordinated debentures. Holders of the Preferred Securities are
entitled to receive quarterly dividends at LIBOR plus 1.56%. The Company’s obligations under the debentures and related
agreements, taken together, provide a full and unconditional guarantee of payments due on the Capital and Preferred Securities. The
Company has entered into an agreement to redeem the $331.6 million liquidation amount of Preferred Securities of Horatio Finance
V.O.F., effective February 2, 2004. The Company redeemed the $331.6 million Preferred Securities on February 2, 2004 as planned.
8. Benefit Plans
The Company has a retirement plan with a 401(k)-salary deferral feature for eligible employees. Under the terms of the plan, eligible
employees may contribute up to 20% of eligible pay. Eligible employees with one year of service may elect to make a Basic
Contribution of up to 5% of eligible pay which will be matched 100% only if invested in the Company’s common stock. The
Company contributions are used to purchase Class A Common Stock of the Company for the account of the employee. The terms of
the plan provide a six-year graduated-vesting schedule for the Company contribution portion of the plan. The Company incurred
expense of $18 million, $18 million and $19 million for fiscal 2003, 2002 and 2001, respectively, for the plan.
The Company has a nonqualified defined benefit plan for certain officers. The plan is noncontributory and provides benefits based on
years of service and compensation during employment. Pension expense is determined using various actuarial cost methods to
estimate the total benefits ultimately payable to officers and allocates this cost to service periods. The pension plan is unfunded. The
actuarial assumptions used to calculate pension costs are reviewed annually. The Company expects to make a contribution to the
pension plan of approximately $3.4 million in fiscal 2004.
F-14
The accumulated benefit obligations (“ABO”), change in projected benefit obligation (“PBO”), change in plan assets, funded status,
and reconciliation to amounts recognized in the consolidated balance sheets are as follows:
(in thousands of dollars)
Change in projected benefit obligation:
PBO at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial loss (gain)
Benefits paid
PBO at end of year
ABO at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status (PBO less plan assets)
Unamortized prior service costs
Unrecognized net actuarial loss
Intangible asset
Unrecognized net loss
Accrued benefit cost
ABO in excess of plan assets
Amounts recognized in the balance sheets:
Accrued benefit liability
Intangible asset
Accumulated other comprehensive loss
Net amount recognized
January 31, 2004
February 1, 2003
$64,360
993
4,235
-
14,244
(3,279)
$80,553
$77,856
$45,163
1,416
3,592
6,360
10,988
(3,159)
$64,360
$64,126
January 31, 2004
February 1, 2003
$ -
3,279
(3,279)
$ -
$80,553
(5,734)
(19,829)
5,734
17,627
$78,351
$77,856
$54,990
5,734
17,627
$78,351
$ -
3,159
(3,159)
$ -
$64,360
(6,360)
(5,715)
6,360
7,025
$65,670
$64,126
$52,285
6,360
7,025
$65,670
Accrued benefit liability is included in other liabilities. Intangible asset is included in other assets. Accumulated other comprehensive
loss, net of tax benefit, is included in stockholders’ equity.
The discount rate that the Company utilizes for determining future pension obligations is based on the Moody’s AA corporate bond
index. The indices selected reflect the weighted average remaining period of benefit payments. The discount rate determined on this
basis had decreased to 6.0% as of January 31, 2004 from 6.75% as of February 1, 2003. Weighted average assumptions are as
follows:
Discount rate-net periodic pension cost
Discount rate-benefit obligations
Rate of compensation increases
Fiscal 2003
6.75%
6.00%
2.50%
Fiscal 2002
7.25%
6.75%
2.50%
Fiscal 2001
7.25%
7.25%
2.50%
F-15
The components of net periodic benefit costs are as follows:
(in thousands of dollars)
Components of net periodic benefit costs:
Service cost
Interest cost
Net actuarial gain (loss)
Amortization of prior service cost
Amortization of transition obligation
Net periodic benefit costs
9. Stockholders’ Equity
Capital stock is comprised of the following:
Fiscal 2003
Fiscal 2002
Fiscal 2001
$ 993
4,235
130
627
-
$5,985
$1,416
3,592
(156)
-
-
$4,852
$1,255
3,287
(103)
-
2,688
$7,127
Type
Preferred (5% cumulative)
Additional preferred
Class A, common
Class B, common
Par
Value
$100
$ .01
$ .01
$ .01
Shares
Authorized
5,000
10,000,000
289,000,000
11,000,000
Holders of Class A are empowered as a class to elect one-third of the members of the Board of Directors and the holders of Class B
are empowered as a class to elect two-thirds of the members of the Board of Directors. Shares of Class B are convertible at the option
of any holder thereof into shares of Class A at the rate of one share of Class B for one share of Class A.
On March 2, 2002, the Company adopted a shareholder rights plan under which the Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of the Company’s Common Stock, which includes both the Company’s Class
A and Class B Common Stock, payable on March 18, 2002 to the shareholders of record on that date. Each right, which is not
presently exercisable, entitles the holder to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock for
$70 per one one-thousandth of a share of Preferred Stock, subject to adjustment. In the event that any person acquires 15% or more of
the outstanding shares of common stock, each holder of a right (other than the acquiring person or group) will be entitled to receive,
upon payment of the exercise price, shares of Class A common stock having a market value of two times the exercise price. The
rights will expire, unless extended, redeemed or exchanged by the Company, on March 2, 2012.
In May 2000, the Company announced that the Board of Directors authorized the repurchase of up to $200 million of its Class A
Common Stock. During fiscal 2003, the Company repurchased approximately $18.9 million of Class A Common Stock, representing
1.5 million shares at an average price of $12.99 per share. Approximately $56 million in share repurchase authorization remained
under this open-ended plan at January 31, 2004.
10. Earnings per Share
In accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share has been computed based upon the weighted
average of Class A and Class B common shares outstanding. Diluted earnings per share gives effect to outstanding stock options.
Earnings per common share has been computed as follows:
(in thousands of dollars, except per share data)
Earnings before cumulative effect of
accounting change
Cumulative effect of accounting change
Net earnings (loss) available for
per-share calculation
Average shares of common
stock outstanding
Stock options
Total average equivalent shares
Fiscal 2003
Fiscal 2002
Fiscal 2001
Basic
Diluted
Basic
Diluted
Basic
Diluted
$9,344
-
$9,344
-
$ 131,926
(530,331)
$ 131,926
(530,331)
$71,798
-
$71,798
-
$9,344
$9,344
$(398,405)
$(398,405)
$71,798
$71,798
83,643
-
83,643
83,643
257
83,900
84,513
-
84,513
84,513
803
85,316
84,020
-
84,020
84,020
467
84,487
F-16
Per Share of Common Stock:
Earnings before cumulative effect of
accounting change
Cumulative effect of accounting change
Net income (loss)
$0.11
-
$0.11
$0.11
-
$0.11
$ 1.56
(6.27)
$(4.71)
$ 1.55
(6.22)
$(4.67)
$0.85
-
$0.85
$0.85
-
$0.85
Total stock options outstanding were 7,870,739, 9,669,755 and 10,708,646 at January 31, 2004, February 1, 2003 and February 2,
2002, respectively. Of these, options to purchase 7,343,073, 8,974,174 and 9,298,695 shares of Class A Common Stock at prices
ranging from $18.13 to $40.22, $18.13 to $40.22, $15.74 to $40.22 per share were outstanding in fiscal 2003, 2002 and 2001,
respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options exceeds
the average market price and would have been antidilutive.
11. Stock Options
The Company has various stock option plans that provide for the granting of options to purchase shares of Class A Common Stock to
certain key employees of the Company. Exercise and vesting terms for options granted under the plans are determined at each grant
date. All options were granted at not less than fair market value at dates of grant. At the end of fiscal 2003, 9,773,141 shares were
available for grant under the plans and 17,643,880 shares of Class A Common Stock were reserved for issuance under the stock option
plans. Stock option transactions are summarized as follows:
Fiscal 2003
Fiscal 2002
Fiscal 2001
Fixed Options
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Options exercisable at year-end
Weighted-average fair value of
options granted during the year
Shares
9,669,755
-
(122,375)
(1,676,641)
7,870,739
5,823,459
$-
Weighted
Average
Exercise Price
$24.72
-
10.44
35.27
$22.45
$23.56
Shares
10,708,646
2,312,375
(2,150,111)
(1,201,155)
9,669,755
6,793,960
$6.91
Weighted
Average
Exercise Price
$ 24.58
24.02
20.62
31.53
$ 24.72
$ 26.63
Shares
11,270,261
654,000
(345,675)
(869,940)
10,708,646
7,834,601
$3.91
Weighted
Average
Exercise Price
$ 25.30
15.74
12.93
31.98
$ 24.58
$ 26.73
The following table summarizes information about stock options outstanding at January 31, 2004:
Range of
Exercise Prices
$10.44 - $15.74
$18.13 - $25.13
$28.19 - $40.22
Options Outstanding
Weighted-Average
Remaining
Contractual Life (Yrs.)
3.68
2.67
0.85
2.58
Options
Outstanding
1,742,141
4,767,598
1,361,000
7,870,739
Weighted-Average
Exercise Price
$11.80
22.31
36.62
$22.45
Options Exercisable
Options Weighted-Average
Exercise Price
$12.42
22.18
36.62
$23.56
Exercisable
1,188,866
3,273,593
1,361,000
5,823,459
SFAS No. 123, “Accounting for Stock Based Compensation,” permits compensation expense to be measured based on the fair value
of the equity instrument awarded. In accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” the Company uses the intrinsic value method of accounting for stock options. No compensation cost has been
recognized in the consolidated statements of operations for the Company’s stock option plans.
F-17
The fair value of each option grant is estimated on the date of each grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Risk-free interest rate
Expected option life (years)
Expected volatility
Expected dividend yield
Fiscal 2003
-
-
-
-
Fiscal 2002
1.96%
3.1
41.6%
0.67%
Fiscal 2001
2.27%
2.0
44.0%
1.02%
The fair values generated by the Black-Scholes model may not be indicative of the future benefit, if any, that may be received by the
option holder.
12. Leases and Commitments
Rental expense consists of the following:
(in thousands of dollars)
Operating leases:
Buildings:
Minimum rentals
Contingent rentals
Equipment
Contingent rentals
on capital leases
Fiscal
2003
Fiscal
2002
Fiscal
2001
$38,087
8,732
17,282
64,101
-
$64,101
$40,862
10,433
16,806
68,101
-
$68,101
$45,066
10,310
16,757
72,133
650
$72,783
Contingent rentals on certain leases are based on a percentage of annual sales in excess of specified amounts. Other contingent rentals
are based entirely on a percentage of sales.
The future minimum rental commitments as of January 31, 2004 for all noncancelable leases for buildings and equipment are as
follows:
(in thousands of dollars)
Fiscal Year
2004
2005
2006
2007
2008
After 2008
Total minimum lease payments
Less amount representing interest
Present value of net minimum
lease payments (of which
$2,126 is currently payable)
Operating
Leases
$51,309
41,948
38,587
29,904
23,435
80,890
$266,073
Capital
Leases
$4,095
3,813
3,429
2,578
2,342
19,251
35,508
(15,671)
$19,837
Renewal options from three to 25 years exist on the majority of leased properties. At January 31, 2004, the Company is committed to
incur costs of approximately $167 million to acquire, complete and furnish certain stores and equipment.
Various legal proceedings, in the form of lawsuits and claims, which occur in the normal course of business are pending against the
Company and its subsidiaries. In the opinion of management, disposition of these matters is not expected to materially affect the
Company's financial position, cash flows or results of operations.
F-18
13. Asset Impairment and Store Closing Charges
In the evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted
cash flows, the Company reduces the carrying value to its fair value, which is generally calculated using discounted cash flows.
During fiscal 2003, the Company recorded a pre-tax charge of $43.7 million for asset impairment and store closing costs. The charge
includes a write-down to fair value for certain under-performing properties. The charge consists of a write down to a joint venture in
the amount of $5.5 million, a write down of goodwill on two stores to be closed of $2.5 million and a write down of property and
equipment in the amount of $35.7 million. The Company does not expect to incur significant additional exit costs upon the closing of
these properties during fiscal 2004. During fiscal 2002, the Company recorded a pre-tax charge of $52.2 million for asset impairment
and store closing costs. The charge includes a write down to fair value for certain under-performing properties in the amount of $55.8
million and exit costs to close four such properties in the amount of $4.4 million, all of which were closed during fiscal 2003, partially
offset by the forgiveness of a lease obligation of $8.0 million in connection with the sale of a closed owned store in Memphis,
Tennessee in satisfaction of that obligation. During fiscal 2001, the Company recorded a pre-tax charge of $3.8 million for asset
impairment and store closing costs. The charge includes a write down to fair value for one under-performing store in the amount of
$1.8 million and lease commitments of $2 million.
14. Fair Value Disclosures
The estimated fair values of financial instruments which are presented herein have been determined by the Company using available
market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data
to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange.
The fair value of trade accounts receivable is determined by discounting the estimated future cash flows at current market rates, after
consideration of credit risks and servicing costs using historical rates. The fair value of the Company’s long-term debt and Guaranteed
Preferred Beneficial Interests in the Company’s Subordinated Debentures is based on market prices or dealer quotes (for publicly
traded unsecured notes) and on discounted future cash flows using current interest rates for financial instruments with similar
characteristics and maturity (for bank notes and mortgage notes).
The fair value of the Company’s cash and cash equivalents and trade accounts receivable approximates their carrying values at
January 31, 2004 and February 1, 2003 due to the short-term maturities of these instruments. The fair value of the Company’s long-
term debt at January 31, 2004 and February 1, 2003 was $2.06 billion and $2.24 billion, respectively. The carrying value of the
Company’s long-term debt at January 31, 2004 and February 1, 2003 was $2.02 billion and $2.33 billion, respectively. The fair value
of the Guaranteed Preferred Beneficial Interests in the Company’s Subordinated Debentures at January 31, 2004 and February 1, 2003
was $526 million and $473 million, respectively. The carrying value of the Guaranteed Preferred Beneficial Interests in the
Company’s Subordinated Debentures at January 31, 2004 and February 1, 2003 was $532 million.
15. Securitizations of Assets
As part of its credit card securitizations, the Company transfers credit card receivable balances to a Trust in exchange for certificates
representing undivided interests in such receivables. The Trust securitizes balances by issuing certificates representing undivided
interests in the Trust’s receivables to outside investors. In each securitization, the Company retains certain subordinated interests that
serve as a credit enhancement to outside investors and expose the Trust assets to possible credit losses on receivables sold to outside
investors. The investors and the Trust have no recourse against the Company beyond Trust assets. In order to maintain the committed
level of securitized assets, the Trust reinvests cash collections on securitized accounts in additional balances. The Company also
receives annual servicing fees as compensation for servicing the outstanding balances.
Currently, all borrowings under the Company’s receivable financing conduit are recorded on balance sheet. The Company had $400
million of long-term debt outstanding under this agreement on the consolidated balance sheet as of January 31, 2004 and February 1,
2003. Prior to May 2002, the Company accounted for securitizations of credit card receivables as sales of receivables, thus off
balance sheet. Since May 2002, future transfers no longer meet sale treatment, and interest paid to outside investors is recorded in
interest expense instead of other revenue. The Company reclassified $11.3 million for the twelve months ended February 2, 2002 to
conform to current period classification. Accordingly, as a result of this decision, the Company recorded an income statement charge
of $5.4 million related to the amortization of the beneficial interests recognized up front on the off-balance-sheet financing for the
twelve months ended February 1, 2003. This charge was included in Service Charges, Interest and Other Income.
F-19
At January 31, 2004 and February 1, 2003, the Company had $50.0 million and $0 outstanding, respectively, in short-term borrowings
under its accounts receivable conduit facilities related to seasonal financing needs. Remaining available short-term borrowings under
these conduit facilities at January 31, 2004 were $450.0 million.
16. Quarterly Results of Operations (unaudited)
During the second quarter of 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill
and Other Intangible Assets.” The cumulative effect of the accounting change as of February 3, 2002 was to decrease net income for
fiscal year 2002 by $530 million or $6.22 per diluted share.
(in thousands of dollars, except per share data)
Net sales
Gross profit
Net income (loss)
Diluted earnings per share:
Net income (loss)
Fiscal 2003, Three Months Ended
May 3
$1,813,911
601,939
24,349
August 2
$1,721,485
535,067
(50,346)
November 1
$1,764,484
564,431
(15,835)
January 31
$2,299,054
727,324
51,176
0.29
(0.60)
(0.19)
0.61
Fiscal 2002, Three Months Ended
(in thousands of dollars, except per share data)
Net sales
Gross profit
Income (loss) before cumulative
effect of accounting change
Net income (loss)
Diluted earnings per share:
Income (loss) before cumulative
effect of accounting change
Net income (loss)
May 4
$1,910,879
684,451
58,112
(472,219)
0.68
(5.56)
August 3
$1,817,976
620,677
November 2
$1,794,250
602,813
February 1
$2,387,891
748,921
6,666
6,666
0.08
0.08
(5,102)
(5,102)
(0.06)
(0.06)
72,250
72,250
0.85
0.85
Total of quarterly earnings per common share may not equal the annual amount because net income per common share is calculated
independently for each quarter.
Quarterly information for fiscal 2003 and fiscal 2002 include the following items:
First Quarter
2003
• a pretax gain of $15.6 million ($10.0 million after tax or $0.12 per diluted share) pertaining to the Company’s sale of its interest
in Sunrise Mall and its associated center in Brownsville, Texas.
• a pretax gain of $12.3 million ($7.9 million after tax or $0.09 per diluted share) recorded due to the resolution of certain liabilities
originally recorded in conjunction with the purchase of Mercantile Stores Company, Inc.
Second Quarter
2003
• a call premium resulting in additional interest expense of $15.6 million ($10.0 million after tax or $0.12 per diluted share)
associated with a $125.9 million call of debt.
• a $17.1 million pretax charge ($10.9 million after tax, or $0.13 per diluted share) for asset impairment and store closing charges
related to certain stores.
F-20
2002
• a call premium resulting in additional interest expense of $11.6 million ($7.4 million after tax $0.09 per diluted share) associated
with a $143.0 million call of debt.
• a charge of $3.2 million ($2.0 million after tax or $0.02 per diluted share) on the amortization of off-balance-sheet accounts
receivable securitization.
• a pretax gain of $3.1 million ($2.0 million after tax or $0.02 per diluted share) from an investee partnership of the Company who
received an unusual distribution in the settlement of a receivable.
• a pretax gain of $2.5 million ($1.6 million after tax or $0.02 per diluted share) on the early extinguishment of debt.
•
$862,000 in pre-tax net income ($552,000 after tax, or $0.01 per diluted share) for asset impairment and store closing charges
related to certain stores.
Third Quarter
2003
• a $1.7 million charge ($1.1 million after tax or $0.01 per diluted share) for asset impairment and store closing charges related to
certain stores.
• $4.1 million ($2.6 million after tax or $0.03 per diluted share) received from the Internal Revenue Service as a result of the
Company’s filing of an interest-netting claim related to previously settled tax years.
2002
• a charge of $2.2 million ($1.4 million after tax or $0.02 per diluted share) on the amortization of off-balance-sheet accounts
receivable securitization.
• a pretax gain of $1.7 million ($1.1 million after tax or $0.01 per diluted share) on the early extinguishment of debt.
Fourth Quarter
2003
• a pretax asset impairment and store closing charge of $25.0 million ($16.8 million after tax or $0.20 per diluted share) related to
certain stores.
• an $8.5 million gain ($5.5 million after tax or $0.07 per diluted share) related to the sale of three store properties.
2002
• a pretax gain of $64.3 million ($41.1 million after tax or $0.48 per diluted share) pertaining to the Company’s sale of its interest
in FlatIron Crossing, a Broomfield, Colorado shopping center (see Note 1 of the Notes to the Consolidated Financial
Statements).
• a pretax asset impairment and store closing charge of $53.1 million ($34.0 million after tax or $0.40 per fully diluted share)
related to certain stores.
F-21
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DILLARD'S, INC. AND SUBSIDIARIES
(DOLLAR AMOUNTS IN THOUSANDS)
Column A
Column B
Column C
Column D
Column E
Column F
Additions
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions (1)
Balance at
End of
Period
Description
Allowance for losses on accounts receivable:
Year Ended January 31, 2004
$49,755
$83,030
$ -
$91,818
$40,967
Year Ended February 1, 2003
37,385
98,787
-
86,417
49,755
Year Ended February 2, 2002
32,240
78,121
-
72,976
37,385
(1) Accounts written off and charged to allowance for losses on accounts receivable (net of recoveries).
F-22
Number
*3(a)
Exhibit Index
Description
Restated Certificate of Incorporation (Exhibit 3 to Form 10-Q for the quarter ended August 1, 1992 in 1-
6140).
*3(b)
By-Laws as currently in effect (Exhibit 3.1 to Form 8-K dated as of March 2, 2002 in 1-6140).
*4(a)
*4(b)
Indenture between the Registrant and Chemical Bank, Trustee, dated as of October 1, 1985 (Exhibit (4)
in 2-85556).
Indenture between the Registrant and Chemical Bank, Trustee, dated as of October 1, 1986 (Exhibit (4)
in 33-8859).
*4(c)
Indenture between Registrant and Chemical bank, dated as of April 15, 1987 (Exhibit 4.3 in 33-13534).
*4(d)
Indenture between Registrant and Chemical bank, Trustee, dated as of May 15, 1988, as supplemented
(Exhibit 4 in 33-21671, Exhibit 4.2 in 33-25114 and Exhibit 4(c) to Current Report on Form 8-K dated
September 26, 1990 in 1-6140).
*4(e)
Rights Agreement between Dillard’s, Inc. and Registrar and Transfer Company, as Rights Agent
(Exhibit 4.1 to Form 8-K dated as of March 2, 2002 in 1-6140).
**10(a)
Retirement Contract of William Dillard dated March 8, 1997 (Exhibit 10(a) to Form 10-K for the fiscal
year ended February 1, 1997 in 1-6140).
**10(b)
1998 Incentive and Nonqualified Stock Option Plan (Exhibit 10 (b) to Form 10-K for the fiscal year
ended January 30, 1999 in 1-6140).
**10(c)
Amended and Restated Corporate Officers Non-Qualified Pension Plan (Exhibit 10 to Form 10-Q for the
quarter ended May 2, 2003 in 1-6140).
**10(d)
Senior Management Cash Bonus Plan (Exhibit 10(d) to Form 10-K for the fiscal year ended January 28,
1995 in 1-6140).
**10(e)
2000 Incentive and Nonqualified Stock Option Plan (Exhibit 10(e) to Form 10-K for the fiscal year
ended February 3, 2001 in 1-6140).
*10(f)
Amended and Restated Credit Agreement among Dillard’s, Inc. and JPMorgan Chase Bank and Fleet
Retail Group, Inc. (Exhibit 10 to Form 10-Q for the quarter ended November 1, 2003 in 1-6140).
12
*18
21
23
Statement re: Computation of Ratio of Earnings to Fixed Charges.
Letter re: Change in Accounting Principles (Exhibit 18 to Form 10-K for the fiscal year ended February
3, 2001 in 1-6140).
Subsidiaries of Registrant.
Consent of Independent Auditors.
E-1
31(a)
31(b)
32(a)
32(b)
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
* Incorporated by reference as indicated.
** A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant
to Item 14(c) of Form 10-K.
E-2
3
Annual Meeting
Saturday, May 15, 2004, at 9:30 a.m.,
Dillard’s Corporate Office
1600 Cantrell Road,
Little Rock, Arkansas 72201
Transfer Agent and Registrar
Registered shareholders should address communications regard-
ing address changes, lost certificates and other administrative
matters to the Company’s
Transfer Agent and Registrar.
Financial and Other Information
Copies of financial documents and other company infor-
mation such as Dillard’s, Inc. reports on Form 10-K and
10-Q and other reports filed with the Securities and
Exchange Commission are available by contacting:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Telephone: 800-368-5948
E-Mail: info@rtco.com
Web page: www.rtco.com
Dillard’s, Inc.
Investor Relations
1600 Cantrell Road,
Little Rock, Arkansas 72201
501-376-5522
E-mail: investor.relations@dillards.com
Financial reports, press releases and other Company
information are available on the Dillard’s, Inc. Web site:
www.dillards.com
Individuals or securities analysts with questions
regarding Dillard’s, Inc. may contact:
Julie J. Bull
Director of Investor Relations
1600 Cantrell Road
Little Rock, Arkansas 72201
Telephone: 501-376-5965
Fax: 501-376-5917
E-mail: julie.bull@dillards.com
Please refer to Dillard’s, Inc. on all correspondence and have
available your name as printed on your stock certificate, your
Social Security number, your address and phone number.
Corporate Headquarters
1600 Cantrell Road
Little Rock, Arkansas 72201
Mailing Address
Post Office Box 486
Little Rock, Arkansas 72203
Telephone: 501-376-5200
Fax: 501-376-5917
Listing
New York Stock Exchange, Ticker Symbol “DDS”
Store Openings - 2003
Store Name
Location
Open Month Sq. Foot
Great Northern Mall
NorthPark Mall
Stony Point Fashion Park
Short Pump Town Center
Memorial City Mall**
Olmstead, Ohio
Davenport, Iowa
Richmond, Virginia
Richmond, Virginia
Houston, Texas
March
July
September
September
October
220,000
126,000
200,000
200,000
250,000
**Replacing 223,000 sf
.
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Dillard’s, Inc.
1600 Cantrell Road
Little Rock, Arkansas 72201
www.dillards.com