DILLARD'S, INC. - Quarter Report: 2019 November (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 | 71-0388071 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) | |
1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive offices)
(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 | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock | DDS | New York Stock Exchange |
Indicate by check mark 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.
ý Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
ý Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | |||
Smaller reporting company | ☐ | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
CLASS A COMMON STOCK as of November 30, 2019 20,690,507
CLASS B COMMON STOCK as of November 30, 2019 4,010,401
Index
DILLARD’S, INC.
Page | ||
Number | ||
Condensed Consolidated Balance Sheets as of November 2, 2019, February 2, 2019 and November 3, 2018 | ||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
DILLARD’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
November 2, 2019 | February 2, 2019 | November 3, 2018 | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 79,065 | $ | 123,509 | $ | 78,156 | ||||||
Restricted cash | 8,467 | — | — | |||||||||
Accounts receivable | 48,241 | 49,853 | 66,532 | |||||||||
Merchandise inventories | 1,969,980 | 1,528,417 | 2,043,669 | |||||||||
Federal and state income taxes | — | — | 23,757 | |||||||||
Other current assets | 74,231 | 68,753 | 75,870 | |||||||||
Total current assets | 2,179,984 | 1,770,532 | 2,287,984 | |||||||||
Property and equipment (net of accumulated depreciation and amortization of $2,358,469, $2,227,860 and $2,693,924, respectively) | 1,494,454 | 1,586,733 | 1,621,332 | |||||||||
Operating lease assets | 48,600 | — | — | |||||||||
Other assets | 77,025 | 74,104 | 77,285 | |||||||||
Total assets | $ | 3,800,063 | $ | 3,431,369 | $ | 3,986,601 | ||||||
Liabilities and stockholders’ equity | ||||||||||||
Current liabilities: | ||||||||||||
Trade accounts payable and accrued expenses | $ | 1,211,446 | $ | 921,205 | $ | 1,340,767 | ||||||
Current portion of finance lease liabilities | 1,148 | 1,214 | 1,187 | |||||||||
Current portion of operating lease liabilities | 15,250 | — | ||||||||||
Other short-term borrowings | 98,600 | — | 191,100 | |||||||||
Federal and state income taxes | 4,505 | 11,116 | — | |||||||||
Total current liabilities | 1,330,949 | 933,535 | 1,533,054 | |||||||||
Long-term debt | 365,674 | 365,569 | 365,534 | |||||||||
Finance lease liabilities | 1,029 | 1,666 | 1,980 | |||||||||
Operating lease liabilities | 32,958 | — | ||||||||||
Other liabilities | 243,258 | 238,731 | 241,694 | |||||||||
Deferred income taxes | 13,812 | 13,487 | 19,063 | |||||||||
Subordinated debentures | 200,000 | 200,000 | 200,000 | |||||||||
Commitments and contingencies | ||||||||||||
Stockholders’ equity: | ||||||||||||
Common stock | 1,239 | 1,239 | 1,239 | |||||||||
Additional paid-in capital | 949,846 | 948,835 | 947,125 | |||||||||
Accumulated other comprehensive loss | (12,809 | ) | (12,809 | ) | (17,685 | ) | ||||||
Retained earnings | 4,492,511 | 4,458,006 | 4,375,479 | |||||||||
Less treasury stock, at cost | (3,818,404 | ) | (3,716,890 | ) | (3,680,882 | ) | ||||||
Total stockholders’ equity | 1,612,383 | 1,678,381 | 1,625,276 | |||||||||
Total liabilities and stockholders’ equity | $ | 3,800,063 | $ | 3,431,369 | $ | 3,986,601 | ||||||
See notes to condensed consolidated financial statements.
4
DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Net sales | $ | 1,388,310 | $ | 1,419,213 | $ | 4,280,614 | $ | 4,345,498 | ||||||||
Service charges and other income | 35,349 | 35,752 | 99,825 | 101,594 | ||||||||||||
1,423,659 | 1,454,965 | 4,380,439 | 4,447,092 | |||||||||||||
Cost of sales | 926,782 | 954,937 | 2,886,563 | 2,875,855 | ||||||||||||
Selling, general and administrative expenses | 418,149 | 418,896 | 1,232,434 | 1,233,128 | ||||||||||||
Depreciation and amortization | 56,143 | 55,762 | 162,890 | 167,986 | ||||||||||||
Rentals | 5,927 | 6,578 | 18,254 | 19,683 | ||||||||||||
Interest and debt expense, net | 11,536 | 12,104 | 35,021 | 40,447 | ||||||||||||
Other expense | 1,916 | 1,915 | 5,750 | 5,745 | ||||||||||||
Loss (gain) on disposal of assets | 304 | (2 | ) | (11,996 | ) | 63 | ||||||||||
Income before income taxes | 2,902 | 4,775 | 51,523 | 104,185 | ||||||||||||
Income taxes (benefit) | (2,560 | ) | (2,650 | ) | 8,130 | 19,080 | ||||||||||
Net income | $ | 5,462 | $ | 7,425 | $ | 43,393 | $ | 85,105 | ||||||||
Earnings per share: | ||||||||||||||||
Basic and diluted | $ | 0.22 | $ | 0.27 | $ | 1.69 | $ | 3.08 | ||||||||
See notes to condensed consolidated financial statements.
5
DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Net income | $ | 5,462 | $ | 7,425 | $ | 43,393 | $ | 85,105 | ||||||||
Other comprehensive income: | ||||||||||||||||
Amortization of retirement plan and other retiree benefit adjustments (net of tax of $0, $32, $0, and $95, respectively) | — | 100 | — | 301 | ||||||||||||
Comprehensive income | $ | 5,462 | $ | 7,525 | $ | 43,393 | $ | 85,406 | ||||||||
See notes to condensed consolidated financial statements.
6
DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Three Months Ended November 2, 2019 | |||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||
Total | |||||||||||||||||||||||
Balance, August 3, 2019 | $ | 1,239 | $ | 949,846 | $ | (12,809 | ) | $ | 4,490,759 | $ | (3,783,191 | ) | $ | 1,645,844 | |||||||||
Net income | — | — | — | 5,462 | — | 5,462 | |||||||||||||||||
Purchase of 600,479 shares of treasury stock | — | — | — | — | (35,213 | ) | (35,213 | ) | |||||||||||||||
Cash dividends declared: | |||||||||||||||||||||||
Common stock, $0.15 per share | — | — | — | (3,710 | ) | — | (3,710 | ) | |||||||||||||||
Balance, November 2, 2019 | $ | 1,239 | $ | 949,846 | $ | (12,809 | ) | $ | 4,492,511 | $ | (3,818,404 | ) | $ | 1,612,383 | |||||||||
Three Months Ended November 3, 2018 | |||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||
Total | |||||||||||||||||||||||
Balance, August 4, 2018 | $ | 1,239 | $ | 947,125 | $ | (17,785 | ) | $ | 4,370,780 | $ | (3,626,885 | ) | $ | 1,674,474 | |||||||||
Net income | — | — | — | 7,425 | — | 7,425 | |||||||||||||||||
Other comprehensive income | — | — | 100 | — | — | 100 | |||||||||||||||||
Purchase of 721,807 shares of treasury stock | — | — | — | — | (53,997 | ) | (53,997 | ) | |||||||||||||||
Cash dividends declared: | |||||||||||||||||||||||
Common stock, $0.10 per share | — | — | — | (2,726 | ) | — | (2,726 | ) | |||||||||||||||
Balance, November 3, 2018 | $ | 1,239 | $ | 947,125 | $ | (17,685 | ) | $ | 4,375,479 | $ | (3,680,882 | ) | $ | 1,625,276 | |||||||||
Nine Months Ended November 2, 2019 | |||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||
Total | |||||||||||||||||||||||
Balance, February 2, 2019 | $ | 1,239 | $ | 948,835 | $ | (12,809 | ) | $ | 4,458,006 | $ | (3,716,890 | ) | $ | 1,678,381 | |||||||||
Net income | — | — | — | 43,393 | — | 43,393 | |||||||||||||||||
Issuance of 17,600 shares under equity plans | — | 1,011 | — | — | — | 1,011 | |||||||||||||||||
Purchase of 1,665,222 shares of treasury stock | — | — | — | — | (101,514 | ) | (101,514 | ) | |||||||||||||||
Cash dividends declared: | |||||||||||||||||||||||
Common stock, $0.35 per share | — | — | — | (8,888 | ) | — | (8,888 | ) | |||||||||||||||
Balance, November 2, 2019 | $ | 1,239 | $ | 949,846 | $ | (12,809 | ) | $ | 4,492,511 | $ | (3,818,404 | ) | $ | 1,612,383 | |||||||||
7
Nine Months Ended November 3, 2018 | |||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||
Total | |||||||||||||||||||||||
Balance, February 3, 2018 | $ | 1,239 | $ | 946,147 | $ | (15,444 | ) | $ | 4,365,219 | $ | (3,589,006 | ) | $ | 1,708,155 | |||||||||
Net income | — | — | — | 85,105 | — | 85,105 | |||||||||||||||||
Cumulative effect adjustment related to ASU 2016-16 and 2018-02 | — | — | (2,542 | ) | (66,574 | ) | — | (69,116 | ) | ||||||||||||||
Other comprehensive income | — | — | 301 | — | — | 301 | |||||||||||||||||
Issuance of 12,800 shares under equity plans | — | 978 | — | — | — | 978 | |||||||||||||||||
Purchase of 1,239,610 shares of treasury stock | — | — | — | — | (91,876 | ) | (91,876 | ) | |||||||||||||||
Cash dividends declared: | |||||||||||||||||||||||
Common stock, $0.30 per share | — | — | — | (8,271 | ) | — | (8,271 | ) | |||||||||||||||
Balance, November 3, 2018 | $ | 1,239 | $ | 947,125 | $ | (17,685 | ) | $ | 4,375,479 | $ | (3,680,882 | ) | $ | 1,625,276 | |||||||||
See notes to condensed consolidated financial statements.
8
DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended | ||||||||
November 2, 2019 | November 3, 2018 | |||||||
Operating activities: | ||||||||
Net income | $ | 43,393 | $ | 85,105 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization of property and other deferred cost | 164,373 | 169,412 | ||||||
(Gain) loss on disposal of assets | (11,996 | ) | 63 | |||||
Proceeds from insurance | 397 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable | 1,612 | (28,095 | ) | |||||
Increase in merchandise inventories | (441,563 | ) | (580,108 | ) | ||||
Increase in other current assets | (2,015 | ) | (24,533 | ) | ||||
Increase in other assets | (8,404 | ) | (8,666 | ) | ||||
Increase in trade accounts payable and accrued expenses and other liabilities | 286,322 | 512,459 | ||||||
Decrease in income taxes | (9,135 | ) | (55,978 | ) | ||||
Net cash provided by operating activities | 22,984 | 69,659 | ||||||
Investing activities: | ||||||||
Purchases of property and equipment | (70,915 | ) | (114,202 | ) | ||||
Proceeds from disposal of assets | 22,031 | 1,958 | ||||||
Proceeds from insurance | — | 1,961 | ||||||
Distribution from joint venture | 1,350 | 2,690 | ||||||
Net cash used in investing activities | (47,534 | ) | (107,593 | ) | ||||
Financing activities: | ||||||||
Principal payments on long-term debt and finance lease liabilities | (703 | ) | (161,779 | ) | ||||
Increase in short-term borrowings | 98,600 | 191,100 | ||||||
Cash dividends paid | (7,810 | ) | (8,383 | ) | ||||
Purchase of treasury stock | (101,514 | ) | (91,876 | ) | ||||
Net cash used in financing activities | (11,427 | ) | (70,938 | ) | ||||
Decrease in cash, cash equivalents and restricted cash | (35,977 | ) | (108,872 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period | 123,509 | 187,028 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 87,532 | $ | 78,156 | ||||
Non-cash transactions: | ||||||||
Accrued capital expenditures | $ | 9,573 | $ | 5,189 | ||||
Accrued purchases of treasury stock | — | 2,000 | ||||||
Stock awards | 1,011 | 978 | ||||||
Lease assets obtained in exchange for new operating lease liabilities | 4,601 | — | ||||||
See notes to condensed consolidated financial statements.
9
DILLARD’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended November 2, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2020 due to, among other factors, the seasonal nature of the business.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019 filed with the SEC on March 29, 2019.
Restricted Cash - Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows.
(in thousands) | November 2, 2019 | November 3, 2018 | ||||||
Cash and cash equivalents | $ | 79,065 | $ | 78,156 | ||||
Restricted cash | 8,467 | — | ||||||
Total cash, cash equivalents and restricted cash | $ | 87,532 | $ | 78,156 | ||||
Reclassifications—Certain items have been reclassified from their prior year classifications to conform to the current year presentation. These reclassifications had no effect on net income or stockholders' equity as previously reported.
Note 2. Accounting Standards
Recently Adopted Accounting Pronouncements
Leases: Amendments to the FASB Accounting Standards Codification
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification, to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under these amendments, lessees are required to recognize lease assets and lease liabilities for leases classified as operating leases under Accounting Standards Codification 840, Leases ("ASC 840"). Subsequent to the issuance of ASU No. 2016-02, the FASB issued additional amendments related to ASU No. 2016-02: (1) ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842; (2) ASU No. 2018-10: Codification Improvements to Topic 842, Leases; and (3) ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. We refer to this ASU and related amendments as the "new standard" or "ASU No. 2016-02." We adopted the requirements of the new standard as of February 3, 2019. See Note 13, Leases.
10
Recently Issued Accounting Pronouncements
Defined Benefit Plans: Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, to improve the effectiveness of disclosures in the notes to financial statements for employers that sponsor defined benefit pension plans. ASU No. 2018-14 is effective for financial statements issued for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company plans to adopt ASU No. 2018-14 during the fourth quarter of 2019. The impact of this update on its notes to financial statements is not expected to be material.
Note 3. Significant Accounting Policies Updates
Operating Leases—The Company leases retail stores, office space and equipment under operating leases. The Company records right-of-use assets and operating lease liabilities for operating leases with lease terms exceeding twelve months. The right-of-use assets are adjusted for lease incentives, including construction allowances, and prepaid rent. The Company recognizes minimum rent expense on a straight-line basis over the lease term. Many leases contain contingent rent provisions. Contingent rent is expensed as incurred.
The lease term used for lease evaluation includes renewal option periods only in instances in which the exercise of the option period is reasonably certain.
Revenue Recognition—The Company's retail operations segment recognizes merchandise revenue at the point of sale. Allowance for sales returns and a return asset are recorded as components of net sales in the period in which the related sales are recorded. Sales taxes collected from customers are excluded from revenue and are recorded in trade accounts payable and accrued expenses until remitted to the taxing authorities.
Wells Fargo Bank, N.A. ("Wells Fargo") owns and manages Dillard's private label cards under a 10-year agreement ("Wells Fargo Alliance"). Pursuant to the Wells Fargo Alliance, we receive on-going cash compensation from Wells Fargo based upon the portfolio's earnings. The compensation received from the portfolio is determined monthly and has no recourse provisions. The amount the Company receives is dependent on the level of sales on Wells Fargo accounts, the level of balances carried on Wells Fargo accounts by Wells Fargo customers, payment rates on Wells Fargo accounts, finance charge rates and other fees on Wells Fargo accounts, the level of credit losses for the Wells Fargo accounts as well as Wells Fargo's ability to extend credit to our customers. The Company's share of income under the Wells Fargo Alliance is included as a component of service charges and other income. We participate in the marketing of the private label cards, which includes the cost of customer reward programs. Through the reward programs, customers earn points that are redeemable for discounts on future purchases. The Company defers a portion of its net sales upon the sale of merchandise to its customer reward program members that is recognized in net sales when the reward is redeemed or expired at a future date.
Revenue from CDI Contractors, LLC ("CDI"), the Company's general contracting construction company, construction contracts is generally measured based on the ratio of costs incurred to total estimated contract costs (the "cost-to-cost method"). The length of each contract varies but is typically nine to eighteen months. The progress towards completion is determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. When the estimate on a contract indicates a loss, the entire loss is recorded in the current period.
Note 4. Business Segments
The Company operates in two reportable segments: the operation of retail department stores (“retail operations”) and a general contracting construction company (“construction”).
For the Company’s retail operations, the Company determined its operating segments on a store by store basis. Each store’s operating performance has been aggregated into one reportable segment. The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics, class of consumer, nature of products and distribution methods. Revenues from external customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue. Across all stores, the Company operates one store format under the Dillard’s name where each store offers the same general mix of merchandise with similar categories and similar customers. The Company believes that disaggregating its operating segments would not provide meaningful additional information.
11
The following table summarizes the percentage of net sales by segment and major product line:
Three Months Ended | Nine Months Ended | |||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||
Retail operations segment | ||||||||||||
Cosmetics | 14 | % | 13 | % | 13 | % | 14 | % | ||||
Ladies’ apparel | 23 | 23 | 24 | 24 | ||||||||
Ladies’ accessories and lingerie | 14 | 13 | 15 | 14 | ||||||||
Juniors’ and children’s apparel | 10 | 10 | 10 | 9 | ||||||||
Men’s apparel and accessories | 17 | 17 | 17 | 17 | ||||||||
Shoes | 15 | 16 | 15 | 15 | ||||||||
Home and furniture | 3 | 3 | 3 | 3 | ||||||||
96 | 95 | 97 | 96 | |||||||||
Construction segment | 4 | 5 | 3 | 4 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
12
The following tables summarize certain segment information, including the reconciliation of those items to the Company’s consolidated operations:
(in thousands of dollars) | Retail Operations | Construction | Consolidated | |||||||||
Three Months Ended November 2, 2019: | ||||||||||||
Net sales from external customers | $ | 1,334,205 | $ | 54,105 | $ | 1,388,310 | ||||||
Gross profit | 460,549 | 979 | 461,528 | |||||||||
Depreciation and amortization | 55,963 | 180 | 56,143 | |||||||||
Interest and debt expense (income), net | 11,562 | (26 | ) | 11,536 | ||||||||
Income before income taxes | 2,223 | 679 | 2,902 | |||||||||
Total assets | 3,753,211 | 46,852 | 3,800,063 | |||||||||
Three Months Ended November 3 2018: | ||||||||||||
Net sales from external customers | $ | 1,341,845 | $ | 77,368 | $ | 1,419,213 | ||||||
Gross profit | 461,476 | 2,800 | 464,276 | |||||||||
Depreciation and amortization | 55,605 | 157 | 55,762 | |||||||||
Interest and debt expense (income), net | 12,117 | (13 | ) | 12,104 | ||||||||
Income before income taxes | 3,463 | 1,312 | 4,775 | |||||||||
Total assets | 3,918,065 | 68,536 | 3,986,601 | |||||||||
Nine Months Ended November 2, 2019: | ||||||||||||
Net sales from external customers | $ | 4,132,890 | $ | 147,724 | $ | 4,280,614 | ||||||
Gross profit | 1,392,057 | 1,994 | 1,394,051 | |||||||||
Depreciation and amortization | 162,364 | 526 | 162,890 | |||||||||
Interest and debt expense (income), net | 35,104 | (83 | ) | 35,021 | ||||||||
Income (loss) before income taxes | 52,023 | (500 | ) | 51,523 | ||||||||
Total assets | 3,753,211 | 46,852 | 3,800,063 | |||||||||
Nine Months Ended November 3, 2018 | ||||||||||||
Net sales from external customers | $ | 4,161,992 | $ | 183,506 | $ | 4,345,498 | ||||||
Gross profit | 1,463,251 | 6,392 | 1,469,643 | |||||||||
Depreciation and amortization | 167,513 | 473 | 167,986 | |||||||||
Interest and debt expense (income), net | 40,480 | (33 | ) | 40,447 | ||||||||
Income before income taxes | 102,385 | 1,800 | 104,185 | |||||||||
Total assets | 3,918,065 | 68,536 | 3,986,601 | |||||||||
Intersegment construction revenues of $8.2 million and $9.3 million for the three months ended November 2, 2019 and November 3, 2018, respectively, and $22.8 million and $21.4 million for the nine months ended November 2, 2019 and November 3, 2018, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.
The retail operations segment gives rise to contract liabilities through the loyalty program and through the issuances of gift cards. The loyalty program liability and a portion of the gift card liability is included in trade accounts payable and accrued expenses, and a portion of the gift card liability is included in other liabilities on the condensed consolidated balance sheets. Our retail operations segment contract liabilities are as follows:
Retail | ||||||||||||||||
(in thousands of dollars) | November 2, 2019 | February 2, 2019 | November 3, 2018 | February 3, 2018 | ||||||||||||
Contract liabilities | $ | 60,742 | $ | 72,852 | $ | 56,704 | $ | 73,059 | ||||||||
13
During the nine months ended November 2, 2019 and November 3, 2018, the Company recorded $45.2 million and $47.1 million, respectively, in revenue that was previously included in the retail operations contract liability balances of $72.9 million and $73.1 million, at February 2, 2019 and February 3, 2018, respectively.
Construction contracts give rise to accounts receivable, contract assets and contract liabilities. We record accounts receivable based on amounts billed to customers. We also record costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) in other current assets and trade accounts payable and accrued expenses in the condensed consolidated balance sheets, respectively. The amounts included in the condensed consolidated balance sheets are as follows:
Construction | ||||||||||||||||
(in thousands of dollars) | November 2, 2019 | February 2, 2019 | November 3, 2018 | February 3, 2018 | ||||||||||||
Accounts receivable | $ | 33,154 | $ | 31,867 | $ | 51,603 | $ | 20,136 | ||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 2,479 | 1,165 | 1,823 | 1,213 | ||||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 6,800 | 7,414 | 6,774 | 5,503 | ||||||||||||
During the nine months ended November 2, 2019 and November 3, 2018, the Company recorded $7.1 million and $4.8 million, respectively, in revenue that was previously included in billings in excess of costs and estimated earnings on uncompleted contracts of $7.4 million and $5.5 million at February 2, 2019 and February 3, 2018, respectively.
The remaining performance obligations related to executed construction contracts totaled $71.9 million, $143.9 million and $318.6 million at November 2, 2019, February 2, 2019 and November 3, 2018, respectively.
Note 5. Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).
Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Net income | $ | 5,462 | $ | 7,425 | $ | 43,393 | $ | 85,105 | ||||||||
Weighted average shares of common stock outstanding | 24,913 | 27,309 | 25,604 | 27,588 | ||||||||||||
Basic and diluted earnings per share | $ | 0.22 | $ | 0.27 | $ | 1.69 | $ | 3.08 | ||||||||
The Company maintains a capital structure in which common stock is the only equity security issued and outstanding, and there were no shares of preferred stock, stock options, other dilutive securities or potentially dilutive securities issued or outstanding during the three and nine months ended November 2, 2019 and November 3, 2018.
Note 6. Commitments and Contingencies
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, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s financial position, cash flows or results of operations.
At November 2, 2019, letters of credit totaling $20.6 million were issued under the Company’s revolving credit facility.
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Note 7. Benefit Plans
The Company has an unfunded, nonqualified defined benefit plan (“Pension Plan”) for its officers. The Pension Plan is noncontributory and provides benefits based on years of service and compensation during employment. The Company determines pension expense using an actuarial cost method to estimate the total benefits ultimately payable to officers and allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The Company contributed $1.4 million and $4.1 million to the Pension Plan during the three and nine months ended November 2, 2019, respectively, and expects to make additional contributions to the Pension Plan of approximately $1.4 million during the remainder of fiscal 2019.
The components of net periodic benefit costs are as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Components of net periodic benefit costs: | ||||||||||||||||
Service cost | $ | 906 | $ | 922 | $ | 2,716 | $ | 2,766 | ||||||||
Interest cost | 1,916 | 1,783 | 5,750 | 5,349 | ||||||||||||
Net actuarial loss | — | 132 | — | 396 | ||||||||||||
Net periodic benefit costs | $ | 2,822 | $ | 2,837 | $ | 8,466 | $ | 8,511 | ||||||||
The service cost component of net periodic benefit costs is included in selling, general and administrative expenses, and the interest cost and net actuarial loss components are included in other expense.
Note 8. Revolving Credit Agreement
At November 2, 2019, the Company maintained an unsecured revolving credit facility that provides a borrowing capacity of $800 million with a $200 million expansion option and matures on August 9, 2022 (“credit agreement”). The credit agreement is available to the Company for general corporate purposes including, among other uses, working capital financing, the issuance of letters of credit, capital expenditures and, subject to certain restrictions, the repayment of existing indebtedness and share repurchases. The Company pays a variable rate of interest on borrowings under the credit agreement and a commitment fee to the participating banks based on the Company's debt rating. The rate of interest on borrowings is LIBOR plus 1.375%, and the commitment fee for unused borrowings is 0.20% per annum.
At November 2, 2019, $98.6 million in borrowings were outstanding, and letters of credit totaling $20.6 million were issued under the credit agreement leaving unutilized availability under the facility of $680.8 million.
To be in compliance with the financial covenants of the credit agreement, the Company's total leverage ratio cannot exceed 3.5 to 1.0, and the coverage ratio cannot be less than 2.5 to 1.0, as defined in the credit agreement. At November 2, 2019, the Company was in compliance with all financial covenants related to the credit agreement.
Note 9. Stock Repurchase Program
In March 2018, the Company's Board of Directors authorized the Company to repurchase up to $500 million of the Company’s Class A Common Stock pursuant to an open-ended stock repurchase plan (the "March 2018 Plan"). The March 2018 Plan authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions. The March 2018 plan has no expiration date.
The following is a summary of share repurchase activity for the periods indicated (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Cost of shares repurchased | $ | 35,213 | $ | 53,997 | $ | 101,514 | $ | 91,876 | ||||||||
Number of shares repurchased | 600 | 722 | 1,665 | 1,240 | ||||||||||||
Average price per share | $ | 58.64 | $ | 74.81 | $ | 60.96 | $ | 74.12 | ||||||||
15
All repurchases of the Company’s Class A Common Stock above were made at the market price at the trade date. Accordingly, all amounts paid to reacquire these shares were allocated to treasury stock. As of November 2, 2019, $305.4 million of authorization remained under the March 2018 Plan.
Note 10. Income Taxes
During the three and nine months ended November 2, 2019, income taxes differed from what would be computed using the statutory federal tax rate primarily due to the effects of federal tax credits and state and local income taxes which included tax benefits recognized of approximately $2.8 million for amended state income tax return filings and related decreases to accrued state income taxes.
During the three and nine months ended November 3, 2018, income taxes differed from what would be computed using the statutory federal tax rate primarily due to tax benefits recognized of approximately $1.5 million for an update to the provisional amounts previously recorded related to the Tax Cuts and Jobs Act of 2017 (“the Act”); additional prior year federal tax credits of approximately $1.4 million; and current year federal tax credits partially offset by the effect of state and local income tax expense.
Note 11. Reclassifications from Accumulated Other Comprehensive Loss (“AOCL”)
Reclassifications from AOCL are summarized as follows (in thousands):
Amount Reclassified from AOCL | |||||||||||||||||
Three Months Ended | Nine Months Ended | Affected Line Item in the Statement Where Net Income Is Presented | |||||||||||||||
Details about AOCL Components | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Defined benefit pension plan items | |||||||||||||||||
Amortization of actuarial losses | $ | — | $ | 132 | $ | — | $ | 396 | Total before tax (1) | ||||||||
— | 32 | — | 95 | Income tax expense | |||||||||||||
$ | — | $ | 100 | $ | — | $ | 301 | Total net of tax | |||||||||
For fiscal year 2019, there is no amortization of the net loss in AOCL as the net loss did not exceed 10% of the projected benefit obligation.
_______________________________
(1) This item is included in the computation of net periodic pension cost. See Note 7, Benefit Plans, for additional information.
Note 12. Changes in Accumulated Other Comprehensive Loss
Changes in AOCL by component (net of tax) are summarized as follows (in thousands):
Defined Benefit Pension Plan Items | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||||||
Beginning balance | $ | 12,809 | $ | 17,785 | $ | 12,809 | $ | 15,444 | ||||||||
Amounts reclassified from AOCL | — | (100 | ) | — | (301 | ) | ||||||||||
Reclassification due to the adoption of ASU No. 2018-02 | — | — | — | 2,542 | ||||||||||||
Ending balance | $ | 12,809 | $ | 17,685 | $ | 12,809 | $ | 17,685 | ||||||||
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Note 13. Leases
We adopted the requirements of ASU No. 2016-02 as of February 3, 2019, utilizing the optional effective date transition method allowing the application of the new standard at the adoption date with comparative periods presented in accordance with ASC 840, Leases. At adoption, we made the following practical expedient policy elections:
• | We applied the new standard using the package of practical expedients permitted under the transition guidance, which allowed us to not reassess: |
◦Whether any expired or existing contracts are or contain leases;
◦ | Lease classification for any expired or existing leases, which allowed us to carry forward the historical lease classifications; and |
◦Indirect costs for any existing leases.
• | We elected the practical expedient that allowed us to use hindsight in determining the lease term. |
• | We elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. |
• | We elected the accounting policy to not recognize a right-of-use asset and operating lease liability for leases with an initial term of twelve months or less. The Company records lease expense for short term leases on a straight-line basis over the lease term in rentals on the condensed consolidated statements of operations. |
• | We elected the accounting policy to account for lease components (e.g. fixed rent payments) separately from non-lease components (e.g. common area maintenance costs). |
The Company leases retail stores, office space and equipment under operating leases. The majority of these operating leases were impacted by the adoption of the new standard. At adoption, we recorded right-of-use operating lease assets and operating lease liabilities totaling $57.0 million and $56.2 million, respectively. As of November 2, 2019, right-of-use operating lease assets, which are recorded in operating lease assets in the condensed consolidated balance sheets, totaled $48.6 million, and operating lease liabilities, which are recorded in current portion of operating lease liabilities and operating lease liabilities, totaled $48.2 million. The impact of the adoption of the new standard was immaterial to our condensed consolidated statements of income, condensed consolidated statements of cash flows and condensed consolidated statements of stockholders' equity.
In determining our operating lease assets and operating lease liabilities, we applied an incremental borrowing rate to the minimum lease payments within each lease agreement. ASU No. 2016-02 requires the use of the rate implicit in the lease whenever that rate is readily determinable; furthermore, if the implicit rate is not readily determinable, a lessee may use its incremental borrowing rate. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. To estimate our specific incremental borrowing rates that align with applicable lease terms, we utilized a model consistent with the credit quality of our outstanding debt instruments.
Renewal options from two to 20 years exist on the majority of leased properties. The Company has sole discretion in exercising the lease renewal options. We do not recognize operating lease assets or operating lease liabilities for renewal periods unless it has been determined that we are reasonably certain of renewing the lease at inception. The depreciable life of operating lease assets and related leasehold improvements is limited by the expected lease term.
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 Company's operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.
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The following table summarizes the Company's operating and finance leases:
(in thousands of dollars) | Classification - Condensed Consolidated Balance Sheets | November 2, 2019 | February 2, 2019(a) | November 3, 2018(a) | |||||||||
Assets | |||||||||||||
Finance lease assets | Property and equipment, net (b) | $ | 776 | $ | 1,093 | $ | 1,213 | ||||||
Operating lease assets | Operating lease assets | 48,600 | — | — | |||||||||
Total leased assets | $ | 49,376 | $ | 1,093 | $ | 1,213 | |||||||
Liabilities | |||||||||||||
Current | |||||||||||||
Finance | Current portion of finance lease liabilities | $ | 1,148 | $ | 1,214 | $ | 1,187 | ||||||
Operating | Current portion of operating lease liabilities | 15,250 | — | — | |||||||||
Noncurrent | |||||||||||||
Finance | Finance lease liabilities | 1,029 | 1,666 | 1,980 | |||||||||
Operating | Operating lease liabilities | 32,958 | — | — | |||||||||
Total lease liabilities | $ | 50,385 | $ | 2,880 | $ | 3,167 | |||||||
(a) The Company adopted and applied ASU No. 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification and related amendments on February 3, 2019. The prior periods are presented under ASC 840, Leases.
(b) Finance lease assets are recorded net of accumulated amortization of $13.8 million, $13.5 million and $22.4 million as of November 2, 2019, February 2, 2019 and November 3, 2018, respectively.
Lease Cost | Three Months Ended | Nine Months Ended | |||||||||||||||
(in thousands of dollars) | Classification - Condensed Consolidated Statements of Operations | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | ||||||||||||
Operating lease cost (a) | Rentals | $ | 5,927 | $ | 6,578 | $ | 18,254 | $ | 19,683 | ||||||||
Finance lease cost | |||||||||||||||||
Amortization of leased assets | Depreciation and amortization | 106 | 120 | 317 | 1,876 | ||||||||||||
Interest on lease liabilities | Interest and debt expense, net | 109 | 77 | 367 | 250 | ||||||||||||
Net lease cost | $ | 6,142 | $ | 6,775 | $ | 18,938 | $ | 21,809 | |||||||||
(a) Includes short term lease costs of $0.8 million and $2.5 million and variable lease costs of $0.3 million and $1.0 million for the three and nine months ended November 2, 2019, respectively.
Maturities of Lease Liabilities
(in thousands of dollars) Fiscal Year | Operating Leases | Finance Leases | Total | ||||||||
2019 (excluding the nine months ended November 2, 2019) | $ | 4,054 | $ | 357 | $ | 4,411 | |||||
2020 | 16,822 | 1,428 | 18,250 | ||||||||
2021 | 12,471 | 726 | 13,197 | ||||||||
2022 | 6,127 | — | 6,127 | ||||||||
2023 | 3,357 | — | 3,357 | ||||||||
After 2023 | 15,017 | — | 15,017 | ||||||||
Total minimum lease payments | 57,848 | 2,511 | 60,359 | ||||||||
Less amount representing interest | (9,640 | ) | (334 | ) | (9,974 | ) | |||||
Present value of lease liabilities | $ | 48,208 | $ | 2,177 | $ | 50,385 | |||||
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Lease Term and Discount Rate
November 2, 2019 | |||
Weighted-average remaining lease term | |||
Operating leases | 5.4 years | ||
Finance leases | 1.9 years | ||
Weighted-average discount rate | |||
Operating leases | 6.6 | % | |
Finance leases | 16.4 | % | |
Other Information
(in thousands of dollars) | Nine Months Ended November 2, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities | ||||
Operating cash flows from operating leases | $ | 15,060 | ||
Operating cash flows from finance leases | 367 | |||
Financing cash flows from finance leases | 703 | |||
Lease assets obtained in exchange for new operating lease liabilities | $ | 4,601 | ||
The Company adopted ASU No. 2016-02 on February 3, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. The future minimum rental commitments as of February 2, 2019 for all non-cancelable leases for buildings and equipment were as follows:
(in thousands of dollars) Fiscal Year | Operating Leases | Finance Leases | |||||
2019 | $ | 19,847 | $ | 1,428 | |||
2020 | 15,423 | 1,077 | |||||
2021 | 10,691 | 726 | |||||
2022 | 4,896 | — | |||||
2023 | 3,378 | — | |||||
After 2023 | 14,532 | — | |||||
Total minimum lease payments | $ | 68,767 | 3,231 | ||||
Less amount representing interest | (351 | ) | |||||
Present value of net minimum lease payments (of which $1,214 is currently payable) | $ | 2,880 | |||||
Note 14. Loss (Gain) on Disposal of Assets
During the three months ended November 2, 2019, the Company recorded a loss of $0.3 million primarily from the sale of one store location in Midland, Texas that was recorded in loss (gain) on disposal of assets.
During the nine months ended November 2, 2019, the Company received proceeds of $22.0 million and recorded a net gain of $12.0 million primarily from the sale of three store locations in Boynton Beach, Florida, Boardman, Ohio and Cary, North Carolina. During the nine months ended November 3, 2018, the Company received proceeds of $2.0 million primarily from the sale of a store property, resulting in a loss of $0.1 million that was recorded in loss (gain) on disposal of assets.
Note 15. Fair Value Disclosures
The estimated fair values of financial instruments 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.
19
The fair value of the Company’s long-term debt and subordinated debentures is based on market prices and is categorized as Level 1 in the fair value hierarchy.
The fair value of the Company’s cash, cash equivalents, restricted cash, accounts receivable and other short term borrowings approximates their carrying values at November 2, 2019 due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt at November 2, 2019 was approximately $408 million. The carrying value of the Company’s long-term debt at November 2, 2019 was $365.7 million. The fair value of the Company’s subordinated debentures at November 2, 2019 was approximately $209 million. The carrying value of the Company’s subordinated debentures at November 2, 2019 was $200.0 million.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended February 2, 2019.
EXECUTIVE OVERVIEW
The Company's performance in the third quarter of fiscal 2019 was a substantial sequential improvement from the second quarter. Gross margins improved, comparable store sales were flat and inventory decreased 4% from last year's third quarter. Gross margin from retail operations increased 13 basis points of net sales following a 319 basis point decline in the second quarter. Selling, general and administrative expenses from retail operations increased 18 basis points of net sales. The Company reported consolidated net income of $5.5 million ($0.22 per share) for the current year third quarter compared to consolidated net income of $7.4 million ($0.27 per share) for the prior year third quarter.
Included in net income for the quarter ended November 2, 2019 is a pretax loss on disposal of assets of $0.3 million ($0.2 million after tax or $0.01 per share) related to the sale of a store property. Also included in net income for the quarter is $2.8 million ($0.11 per share) in tax benefits related to amended state tax return filings.
Included in net income for the three months ended November 3, 2018 is $2.9 million ($0.11 per share) in tax benefits related to additional federal tax credits and an update of the provisional amounts recorded for the income tax effects of the Tax Cuts and Jobs Act of 2017.
During the three months ended November 2, 2019, the Company purchased $35.2 million of its outstanding Class A Common Stock under its stock repurchase plan authorized by the Company's Board of Directors in March 2018 (the "March 2018 Plan"). As of November 2, 2019, authorization of $305.4 million remained under the March 2018 Plan.
As of November 2, 2019, the Company had working capital of $849.0 million (including cash, cash equivalents and restricted cash of $87.5 million) and $664.3 million of total debt outstanding, excluding finance lease liabilities and operating lease liabilities. Cash flows provided by operating activities were $23.0 million for the nine months ended November 2, 2019.
The Company operated 289 Dillard's locations, including 30 clearance centers, and one internet store at November 2, 2019.
Key Performance Indicators
We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:
Three Months Ended | ||||||||
November 2, 2019 | November 3, 2018 | |||||||
Net sales (in millions) | $ | 1,388.3 | $ | 1,419.2 | ||||
Retail stores sales trend | (1 | )% | 2 | % | ||||
Comparable retail stores sales trend | — | % | 3 | % | ||||
Gross profit (in millions) | $ | 461.5 | $ | 464.3 | ||||
Gross profit as a percentage of net sales | 33.2 | % | 32.7 | % | ||||
Retail gross profit as a percentage of net sales | 34.5 | % | 34.4 | % | ||||
Selling, general and administrative expenses as a percentage of net sales | 30.1 | % | 29.5 | % | ||||
Cash flow provided by operations (in millions)* | $ | 23.0 | $ | 69.7 | ||||
Total retail store count at end of period | 289 | 292 | ||||||
Retail sales per square foot | $ | 28 | $ | 28 | ||||
Retail store inventory trend | (4 | )% | 4 | % | ||||
Annualized retail merchandise inventory turnover | 2.0 | 2.0 | ||||||
*Cash flow from operations data is for the nine months ended November 2, 2019 and November 3, 2018.
21
General
Net sales. Net sales includes merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company. Comparable store sales includes sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior year, including our internet store. Comparable store sales excludes changes in the allowance for sales returns. Non-comparable store sales includes: sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns.
Sales occur as a result of interaction with customers across multiple points of contact, creating an interdependence between in-store and online sales. Online orders are fulfilled from both fulfillment centers and retail stores. Additionally, online customers have the ability to buy online and pick up in-store. Retail in-store customers have the ability to purchase items that may be ordered and fulfilled from either a fulfillment center or another retail store location. Online customers may return orders via mail, or customers may return orders placed online to retail store locations. Customers who earn reward points under the private label credit card program may earn and redeem rewards through in-store or online purchases.
Service charges and other income. Service charges and other income includes income generated through the long-term private label card alliance with Wells Fargo Bank, N.A. (“Wells Fargo Alliance”). Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.
Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts, non-specific margin maintenance allowances and merchandise margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, shipping to customers and direct payroll for salon personnel. Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.
Selling, general and administrative expenses. Selling, general and administrative expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
Depreciation and amortization. Depreciation and amortization expenses include depreciation and amortization on property and equipment.
Rentals. Rentals includes expenses for store leases, including contingent rent, office space and data processing and other equipment rentals.
Interest and debt expense, net. Interest and debt expense includes interest, net of interest income and capitalized interest, relating to the Company’s unsecured notes, subordinated debentures and borrowings under the Company’s credit facility. Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on finance lease liabilities.
Other expense. Other expense includes the interest cost and net actuarial loss components of net periodic benefit costs related to the Company's unfunded, nonqualified defined benefit plan and charges related to the write-off of deferred financing fees, if any.
Loss (gain) on disposal of assets. Loss (gain) on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment, as well as gains from insurance proceeds in excess of the cost basis of insured assets, if any.
LIBOR
The use of LIBOR is expected to be phased out by the end of 2021. At this time, there is no definitive information regarding the future utilization of LIBOR beyond 2021 or of any particular replacement rate. Going forward, we intend to work with our lenders to use a suitable alternative reference rate for the credit agreement, the Wells Fargo Alliance and any other applicable agreements. We will continue to monitor, assess and plan for the phase out of LIBOR.
22
Seasonality
Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
RESULTS OF OPERATIONS
The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding):
Three Months Ended | Nine Months Ended | ||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | ||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Service charges and other income | 2.5 | 2.5 | 2.3 | 2.3 | |||||||
102.5 | 102.5 | 102.3 | 102.3 | ||||||||
Cost of sales | 66.8 | 67.3 | 67.4 | 66.2 | |||||||
Selling, general and administrative expenses | 30.1 | 29.5 | 28.8 | 28.4 | |||||||
Depreciation and amortization | 4.0 | 3.9 | 3.8 | 3.9 | |||||||
Rentals | 0.4 | 0.5 | 0.4 | 0.5 | |||||||
Interest and debt expense, net | 0.8 | 0.9 | 0.8 | 0.9 | |||||||
Other expense | 0.1 | 0.1 | 0.1 | 0.1 | |||||||
Loss (gain) on disposal of assets | — | — | (0.3 | ) | — | ||||||
Income before income taxes | 0.2 | 0.3 | 1.2 | 2.4 | |||||||
Income taxes (benefit) | (0.2 | ) | (0.2 | ) | 0.2 | 0.4 | |||||
Net income | 0.4 | % | 0.5 | % | 1.0 | % | 2.0 | % | |||
Net Sales
Three Months Ended | ||||||||||||
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | |||||||||
Net sales: | ||||||||||||
Retail operations segment | $ | 1,334,205 | $ | 1,341,845 | $ | (7,640 | ) | |||||
Construction segment | 54,105 | 77,368 | (23,263 | ) | ||||||||
Total net sales | $ | 1,388,310 | $ | 1,419,213 | $ | (30,903 | ) | |||||
23
The percent change in the Company’s sales by segment and product category for the three months ended November 2, 2019 compared to the three months ended November 3, 2018 as well as the sales percentage by segment and product category to total net sales for the three months ended November 2, 2019 are as follows:
% Change 2019 - 2018 | % of Net Sales | |||||
Retail operations segment | ||||||
Cosmetics | (0.5 | )% | 14 | % | ||
Ladies’ apparel | — | 23 | ||||
Ladies’ accessories and lingerie | (0.7 | ) | 14 | |||
Juniors’ and children’s apparel | (1.7 | ) | 10 | |||
Men’s apparel and accessories | 1.0 | 17 | ||||
Shoes | (2.3 | ) | 15 | |||
Home and furniture | (0.6 | ) | 3 | |||
96 | ||||||
Construction segment | (30.1 | ) | 4 | |||
Total | 100 | % | ||||
Net sales from the retail operations segment decreased $7.6 million during the three months ended November 2, 2019 compared to the three months ended November 3, 2018, decreasing 1% in total and remaining essentially flat in comparable stores. Sales of juniors' and children's apparel and shoes decreased moderately over the third quarter last year. Sales of ladies' accessories and lingerie and home and furniture decreased slightly over the third quarter last year, while sales of ladies' apparel and cosmetics remained relatively flat. Sales of men's apparel and accessories increased slightly over the third quarter last year.
The number of sales transactions decreased by 1%, and the average dollars per sales transactions remained relatively flat for the three months ended November 2, 2019 compared to the three months ended November 3, 2018.
We recorded a return asset of $11.1 million and $11.7 million and an allowance for sales returns of $17.8 million and $18.0 million as of November 2, 2019 and November 3, 2018, respectively.
During the three months ended November 2, 2019, net sales from the construction segment decreased $23.3 million or 30.1% compared to the three months ended November 3, 2018 due to a decrease in construction activity. The backlog of awarded construction contracts at November 2, 2019 totaled $307.9 million, decreasing approximately 8% from February 2, 2019 and decreasing approximately 7% from November 3, 2018. We expect the backlog to be earned over the next nine to twenty-four months.
Nine Months Ended | ||||||||||||
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | |||||||||
Net sales: | ||||||||||||
Retail operations segment | $ | 4,132,890 | $ | 4,161,992 | $ | (29,102 | ) | |||||
Construction segment | 147,724 | 183,506 | (35,782 | ) | ||||||||
Total net sales | $ | 4,280,614 | $ | 4,345,498 | $ | (64,884 | ) | |||||
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The percent change in the Company’s sales by segment and product category for the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018 as well as the sales percentage by segment and product category to total net sales for the nine months ended November 2, 2019 are as follows:
% Change 2019 - 2018 | % of Net Sales | |||||
Retail operations segment | ||||||
Cosmetics | (1.8 | )% | 13 | % | ||
Ladies’ apparel | (1.3 | ) | 24 | |||
Ladies’ accessories and lingerie | (1.7 | ) | 15 | |||
Juniors’ and children’s apparel | 1.8 | 10 | ||||
Men’s apparel and accessories | 1.2 | 17 | ||||
Shoes | (2.0 | ) | 15 | |||
Home and furniture | 1.5 | 3 | ||||
97 | ||||||
Construction segment | (19.5 | ) | 3 | |||
Total | 100 | % | ||||
Net sales from the retail operations segment decreased $29.1 million during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018, decreasing 1% in total and remaining essentially flat in comparable stores. Sales of ladies' accessories and lingerie, shoes and cosmetics decreased moderately over the prior year period, while sales of ladies' apparel decreased slightly. Sales of men's apparel and accessories increased slightly, while sales of juniors' and children's apparel and home and furniture increased moderately over the prior year period.
The number of sales transactions decreased 1% for the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018 while the average dollars per sales transaction remained relatively flat.
During the nine months ended November 2, 2019, net sales from the construction segment decreased $35.8 million or 19.5% compared to the nine months ended November 3, 2018 due to a decrease in construction activity.
Service Charges and Other Income
Three Months Ended | Nine Months Ended | Three Months | Nine Months | |||||||||||||||||||||
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | $ Change 2019-2018 | $ Change 2019-2018 | ||||||||||||||||||
Service charges and other income: | ||||||||||||||||||||||||
Retail operations segment | ||||||||||||||||||||||||
Income from Wells Fargo Alliance | $ | 23,879 | $ | 23,697 | $ | 66,219 | $ | 67,141 | $ | 182 | $ | (922 | ) | |||||||||||
Shipping and handling income | 6,670 | 6,047 | 18,908 | 18,815 | 623 | 93 | ||||||||||||||||||
Leased department income | 993 | 1,211 | 3,202 | 3,720 | (218 | ) | (518 | ) | ||||||||||||||||
Other | 2,482 | 3,794 | 8,604 | 9,914 | (1,312 | ) | (1,310 | ) | ||||||||||||||||
34,024 | 34,749 | 96,933 | 99,590 | (725 | ) | (2,657 | ) | |||||||||||||||||
Construction segment | 1,325 | 1,003 | 2,892 | 2,004 | 322 | 888 | ||||||||||||||||||
Total service charges and other income | $ | 35,349 | $ | 35,752 | $ | 99,825 | $ | 101,594 | $ | (403 | ) | $ | (1,769 | ) | ||||||||||
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Gross Profit
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | % Change | |||||||||||
Gross profit: | |||||||||||||||
Three months ended | |||||||||||||||
Retail operations segment | $ | 460,549 | $ | 461,476 | $ | (927 | ) | (0.2 | )% | ||||||
Construction segment | 979 | 2,800 | (1,821 | ) | (65.0 | ) | |||||||||
Total gross profit | $ | 461,528 | $ | 464,276 | $ | (2,748 | ) | (0.6 | )% | ||||||
Nine months ended | |||||||||||||||
Retail operations segment | $ | 1,392,057 | $ | 1,463,251 | $ | (71,194 | ) | (4.9 | )% | ||||||
Construction segment | 1,994 | 6,392 | (4,398 | ) | (68.8 | ) | |||||||||
Total gross profit | $ | 1,394,051 | $ | 1,469,643 | $ | (75,592 | ) | (5.1 | )% | ||||||
Three Months Ended | Nine Months Ended | |||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | |||||||||
Gross profit as a percentage of segment net sales: | ||||||||||||
Retail operations segment | 34.5 | % | 34.4 | % | 33.7 | % | 35.2 | % | ||||
Construction segment | 1.8 | 3.6 | 1.3 | 3.5 | ||||||||
Total gross profit as a percentage of net sales | 33.2 | 32.7 | 32.6 | 33.8 | ||||||||
Gross profit decreased $2.7 million and increased 53 basis points of net sales during the three months ended November 2, 2019 compared to the three months ended November 3, 2018.
Gross profit from retail operations increased 13 basis points of net sales during the three months ended November 2, 2019 compared to the three months ended November 3, 2018. Gross margin increased moderately in ladies' accessories and lingerie, shoes and juniors' and children's apparel, while remaining relatively flat in home and furniture. Gross margin declined slightly in men's apparel and accessories and ladies' apparel and declined moderately in cosmetics.
Gross profit decreased $75.6 million and 125 basis points of net sales during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018.
Gross profit from retail operations decreased 148 basis points of net sales during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018 primarily due to increased markdowns. Gross margin declined moderately in men's apparel and accessories. Gross margin declined slightly in ladies' apparel, ladies' accessories and lingerie, juniors' and children's apparel, cosmetics and home and furniture, while increasing slightly in shoes.
Gross profit from the construction segment decreased 181 basis points and 213 basis points of construction sales for the three and nine months ended November 2, 2019 compared to the three and nine months ended November 3, 2018, respectively.
Inventory decreased 4% in total as of November 2, 2019 compared to November 3, 2018. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $3 million and $9 million for the three and nine months ended November 2, 2019, respectively.
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Selling, General and Administrative Expenses (“SG&A”)
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | % Change | |||||||||||
SG&A: | |||||||||||||||
Three months ended | |||||||||||||||
Retail operations segment | $ | 416,707 | $ | 416,576 | $ | 131 | — | % | |||||||
Construction segment | 1,442 | 2,320 | (878 | ) | (37.8 | ) | |||||||||
Total SG&A | $ | 418,149 | $ | 418,896 | $ | (747 | ) | (0.2 | )% | ||||||
Nine months ended | |||||||||||||||
Retail operations segment | $ | 1,227,588 | $ | 1,227,055 | $ | 533 | — | % | |||||||
Construction segment | 4,846 | 6,073 | (1,227 | ) | (20.2 | ) | |||||||||
Total SG&A | $ | 1,232,434 | $ | 1,233,128 | $ | (694 | ) | (0.1 | )% | ||||||
Three Months Ended | Nine Months Ended | ||||||||||
November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | ||||||||
SG&A as a percentage of segment net sales: | |||||||||||
Retail operations segment | 31.2 | % | 31.0 | % | 29.7 | % | 29.5 | % | |||
Construction segment | 2.7 | 3.0 | 3.3 | 3.3 | |||||||
Total SG&A as a percentage of net sales | 30.1 | 29.5 | 28.8 | 28.4 | |||||||
SG&A increased 60 basis points of net sales during the three months ended November 2, 2019 compared to the three months ended November 3, 2018. SG&A from retail operations increased 18 basis points of net sales during the three months ended November 2, 2019 compared to the three months ended November 3, 2018.
SG&A increased 41 basis points of net sales during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018. SG&A from retail operations increased 22 basis points of net sales during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018.
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Depreciation and Amortization
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | % Change | |||||||||||
Depreciation and amortization: | |||||||||||||||
Three months ended | |||||||||||||||
Retail operations segment | $ | 55,963 | $ | 55,605 | $ | 358 | 0.6 | % | |||||||
Construction segment | 180 | 157 | 23 | 14.6 | |||||||||||
Total depreciation and amortization | $ | 56,143 | $ | 55,762 | $ | 381 | 0.7 | % | |||||||
Nine months ended | |||||||||||||||
Retail operations segment | $ | 162,364 | $ | 167,513 | $ | (5,149 | ) | (3.1 | )% | ||||||
Construction segment | 526 | 473 | 53 | 11.2 | |||||||||||
Total depreciation and amortization | $ | 162,890 | $ | 167,986 | $ | (5,096 | ) | (3.0 | )% | ||||||
Depreciation and amortization expense decreased $5.1 million during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018, primarily due to the timing and composition of capital expenditures.
Interest and Debt Expense, Net
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | % Change | |||||||||||
Interest and debt expense (income), net: | |||||||||||||||
Three months ended | |||||||||||||||
Retail operations segment | $ | 11,562 | $ | 12,117 | $ | (555 | ) | (4.6 | )% | ||||||
Construction segment | (26 | ) | (13 | ) | (13 | ) | (100.0 | ) | |||||||
Total interest and debt expense, net | $ | 11,536 | $ | 12,104 | $ | (568 | ) | (4.7 | )% | ||||||
Nine months ended | |||||||||||||||
Retail operations segment | $ | 35,104 | $ | 40,480 | $ | (5,376 | ) | (13.3 | )% | ||||||
Construction segment | (83 | ) | (33 | ) | (50 | ) | (151.5 | ) | |||||||
Total interest and debt expense, net | $ | 35,021 | $ | 40,447 | $ | (5,426 | ) | (13.4 | )% | ||||||
Net interest and debt expense decreased $0.6 million during the three months ended November 2, 2019 compared to the three months ended November 3, 2018 primarily due to lower short term borrowings under the credit facility. Net interest and debt expense decreased $5.4 million during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018 primarily due to lower average debt levels related to note maturities. Total weighted average debt decreased by $81.0 million during the three months ended November 2, 2019 compared to the three months ended November 3, 2018 due to a decrease in short term borrowings. Total weighted average debt decreased by $99.1 million during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018 primarily due to a note maturity in August 2018.
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Loss (Gain) on Disposal of Assets
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | |||||||||
Loss (gain) on disposal of assets: | ||||||||||||
Three months ended | ||||||||||||
Retail operations segment | $ | 303 | $ | (1 | ) | $ | 304 | |||||
Construction segment | 1 | (1 | ) | 2 | ||||||||
Total loss (gain) on disposal of assets | $ | 304 | $ | (2 | ) | $ | 306 | |||||
Nine months ended | ||||||||||||
Retail operations segment | $ | (11,997 | ) | $ | 65 | $ | (12,062 | ) | ||||
Construction segment | 1 | (2 | ) | 3 | ||||||||
Total loss (gain) on disposal of assets | $ | (11,996 | ) | $ | 63 | $ | (12,059 | ) | ||||
During the three months ended November 2, 2019, the Company recorded a loss of $0.3 million primarily from the sale of one store location in Midland, Texas.
During the nine months ended November 2, 2019, the Company recorded a net gain of $12.0 million primarily from the sale of three store locations in Boynton Beach, Florida, Boardman, Ohio and Cary, North Carolina.
Income Taxes
The Company’s estimated federal and state effective income tax rate was approximately -88.2% and -55.5% for the three months ended November 2, 2019 and November 3, 2018, respectively. During the three months ended November 2, 2019, income taxes differed from what would be computed using the statutory federal tax rate primarily due to the effects of federal tax credits and state and local income taxes which included tax benefits recognized of approximately $2.8 million for amended state income tax return filings and related decreases to accrued state income taxes.
During the three months ended November 3, 2018, income taxes differed from what would be computed using the statutory federal tax rate primarily due to tax benefits recognized of approximately $1.5 million for an update to the provisional amounts previously recorded related to the Tax Cuts and Jobs Act of 2017 ("the Act"); additional prior year federal tax credits of approximately $1.4 million; and current year federal tax credits partially offset by the effect of state and local income tax expense.
The Company’s estimated federal and state effective income tax rate was approximately 15.8% and 18.3% for the nine months ended November 2, 2019 and November 3, 2018, respectively. During the nine months ended November 2, 2019, income taxes differed from what would be computed using the statutory federal tax rate primarily due to the effects of federal tax credits and state and local income taxes which included tax benefits recognized of approximately $2.8 million for amended state income tax return filings and related decreases to accrued state income taxes.
During the nine months ended November 3, 2018, income taxes differed from what would be computed using the statutory federal tax rate primarily due to tax benefits recognized of approximately $1.5 million for an update to the provisional amounts previously recorded related to the Act; additional prior year federal tax credits of approximately $1.4 million; and current year federal tax credits partially offset by the effect of state and local income tax expense.
The Company expects the federal and state effective income tax rate for the remainder of fiscal 2019 to approximate 20% to 21%. This rate may change if results of operations for fiscal 2019 differ from management’s current expectations. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.
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FINANCIAL CONDITION
A summary of net cash flows for the nine months ended November 2, 2019 and November 3, 2018 follows:
Nine Months Ended | ||||||||||||
(in thousands of dollars) | November 2, 2019 | November 3, 2018 | $ Change | |||||||||
Operating Activities | $ | 22,984 | $ | 69,659 | $ | (46,675 | ) | |||||
Investing Activities | (47,534 | ) | (107,593 | ) | 60,059 | |||||||
Financing Activities | (11,427 | ) | (70,938 | ) | 59,511 | |||||||
Total Decrease in Cash, Cash Equivalents and Restricted Cash | $ | (35,977 | ) | $ | (108,872 | ) | $ | 72,895 | ||||
Net cash flows from operations decreased $46.7 million during the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018 primarily due to changes in trade accounts payable and accrued expenses and other liabilities, partially offset by changes in inventory and income taxes.
Wells Fargo owns and manages the Dillard's private label cards under the Wells Fargo Alliance. Under the Wells Fargo Alliance, Wells Fargo establishes and owns private label card accounts for our customers, retains the benefits and risks associated with the ownership of the accounts, provides key customer service functions, including new account openings, transaction authorization, billing adjustments and customer inquiries, receives the finance charge income and incurs the bad debts associated with those accounts.
Pursuant to the Wells Fargo Alliance, we receive on-going cash compensation from Wells Fargo based upon the portfolio's earnings. The compensation received from the portfolio is determined monthly and has no recourse provisions. The amount the Company receives is dependent on the level of sales on Wells Fargo accounts, the level of balances carried on Wells Fargo accounts by Wells Fargo customers, payment rates on Wells Fargo accounts, finance charge rates and other fees on Wells Fargo accounts, the level of credit losses for the Wells Fargo accounts as well as Wells Fargo's ability to extend credit to our customers. We participate in the marketing of the private label cards, which includes the cost of customer reward programs. The Wells Fargo Alliance expires in fiscal 2024.
The Company received income of approximately $66 million and $67 million from the Wells Fargo Alliance during the nine months ended November 2, 2019 and November 3, 2018, respectively.
Capital expenditures were $70.9 million and $114.2 million for the nine months ended November 2, 2019 and November 3, 2018, respectively. The capital expenditures were primarily related to equipment purchases and the remodeling of existing stores during the current year. Capital expenditures for fiscal 2019 are expected to be approximately $115 million compared to actual expenditures of $137 million during fiscal 2018.
Dillard's plans to open an expansion at Killeen Mall in Killeen, Texas by the end of the fiscal year, replacing a 70,000 square foot leased facility with a 75,000 square foot owned facility at this dual-anchor location totaling 110,000 square feet. During the first quarter of 2020, the Company plans to open an 85,000 square foot expansion at Columbia Mall in Columbia, Missouri (dual-anchor location totaling 185,000 square feet). Also in early 2020, Dillard's plans to replace a 100,000 square foot leased facility at Richland Fashion Mall in Waco, Texas with a 125,000 square foot owned facility (dual-anchor location totaling 190,000 square feet).
During the nine months ended November 2, 2019, we closed our locations in Boardman, Ohio (186,000 square feet) and Muskogee, Oklahoma (70,000 square feet). Dillard's has announced the upcoming closures of our locations in Enid, Oklahoma (70,000 square feet), Cary, North Carolina (145,000 square feet), Council Bluffs, Iowa (Clearance Center - 100,000 square feet) and Mesa, Arizona (Clearance Center - 100,000 square feet). We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to such stores when they close.
During the nine months ended November 2, 2019, the Company received cash proceeds of $22.0 million and recorded a related gain of $12.0 million for the sale of three store locations in Boardman, Ohio, Boynton Beach, Florida and Cary, North Carolina. The proceeds from the Cary, North Carolina store sale are being held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow account is administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash is restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. As of November 2, 2019, the acquisition of a replacement property had not yet occurred; therefore, the proceeds were classified as restricted cash on the condensed consolidated balance sheets. The proceeds from the
30
Boardman, Ohio store sale were previously held in escrow prior to the acquisition of the replacement property at Columbia Mall in Columbia, Missouri during the third quarter.
During the nine months ended November 3, 2018, the Company received cash proceeds of $1.9 million from the sale of a location classified as an asset held for sale. These proceeds were being held in escrow for the acquisition of replacement property under like-kind exchange agreements. The Company used the proceeds for the acquisition of a replacement property at the Oaks Mall in Gainesville, Florida (104,000 square feet).
During the nine months ended November 3, 2018, the Company paid the remaining $161.0 million principal on the 7.13% unsecured notes that matured on August 1, 2018.
The Company had cash on hand of $79.1 million as of November 2, 2019. As part of our overall liquidity management strategy and for peak working capital requirements, the Company maintains an unsecured revolving credit facility that provides a borrowing capacity of $800 million with a $200 million expansion option ("credit agreement"). The credit agreement is available to the Company for general corporate purposes including, among other uses, working capital financing, the issuance of letters of credit, capital expenditures and, subject to certain restrictions, the repayment of existing indebtedness and share repurchases. The rate of interest on borrowings is LIBOR plus 1.375%, and the commitment fee for unused borrowings is 0.20% per annum. To be in compliance with the financial covenants of the credit agreement, the Company's total leverage ratio cannot exceed 3.5 to 1.0, and the Company's coverage ratio cannot be less than 2.5 to 1.0, as defined in the credit agreement. At November 2, 2019, the Company was in compliance with all financial covenants related to the credit agreement.
At November 2, 2019, $98.6 million in borrowings were outstanding, and letters of credit totaling $20.6 million were issued under the credit agreement leaving unutilized availability under the facility of $680.8 million.
During the nine months ended November 2, 2019, the Company repurchased 1.7 million shares of Class A Common Stock at an average price of $60.96 per share for $101.5 million under the Company's March 2018 Plan. During the nine months ended November 3, 2018, the Company repurchased 1.2 million shares of Class A Common Stock at an average price of $74.12 per share for $91.9 million (including the accrual of $2.0 million of share repurchases that had not settled as of November 3, 2018). Additionally, the Company paid $2.0 million for share repurchases that had not yet settled but were accrued at February 3, 2018. At November 2, 2019, $305.4 million of authorization remained under the March 2018 Plan. The ultimate disposition of the repurchased stock has not been determined.
During fiscal 2019, the Company expects to finance its capital expenditures, working capital requirements and stock repurchases from cash on hand, cash flows generated from operations and utilization of the credit facility. Depending on conditions in the capital markets and other factors, the Company may from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.
There have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
31
OFF-BALANCE-SHEET ARRANGEMENTS
The Company has not created, and is not party to, any special-purpose entities or off-balance-sheet arrangements for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources.
32
NEW ACCOUNTING STANDARDS
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2, Accounting Standards, in the "Notes to Condensed Consolidated Financial Statements," in Part I, Item I hereof.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company’s future occurrences, plans and objectives, including statements regarding management’s expectations and forecasts for the remainder of fiscal 2019 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements concerning capital expenditures and sources of liquidity, statements concerning share repurchases, statements concerning pension contributions and statements concerning estimated taxes. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company's stores are located and the effect of these factors on the buying patterns of the Company's customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer confidence, spending patterns, debt levels and their ability to meet credit obligations; high levels of unemployment; changes in tax legislation; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company's future business; fluctuations in LIBOR and other base borrowing rates; the potential impact on the Company's debt obligations of developments regarding LIBOR, including the potential phasing out of this metric; potential disruption from terrorist activity, including active shooter occurrences, and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended February 2, 2019, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
Item 4. Controls and Procedures
The Company has established and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). The Company’s management, with the participation of our Principal Executive Officer and Co-Principal Financial Officers, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the fiscal quarter covered by this quarterly report, and based on that evaluation, the Company’s Principal Executive Officer and Co-Principal Financial Officers have concluded that these disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended November 2, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation relating to claims arising out of the Company’s operations in the normal course of business. This may include litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of December 11, 2019, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.
Item 1A. Risk Factors
There have been no material changes in the information set forth under caption “Item 1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities
Issuer Purchases of Equity Securities | ||||||||||||||
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
August 4, 2019 through August 31, 2019 | 318,210 | $ | 56.56 | 318,210 | $ | 322,631,524 | ||||||||
September 1, 2019 through October 5, 2019 | 282,269 | 60.98 | 282,269 | 305,417,522 | ||||||||||
October 6, 2019 through November 2, 2019 | — | — | — | 305,417,522 | ||||||||||
Total | 600,479 | $ | 58.64 | 600,479 | $ | 305,417,522 | ||||||||
In March 2018, the Company's Board of Directors authorized the repurchase of up to $500 million of the Company's Class A Common Stock under an open-ended stock repurchase plan ("March 2018 Plan"). This repurchase plan permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions. The March 2018 Plan has no expiration date.
During the three months ended November 2, 2019, the Company repurchased 0.6 million shares totaling $35.2 million. As of November 2, 2019, $305.4 million of authorization remained under the March 2018 Plan. Reference is made to the discussion in Note 9, Stock Repurchase Program, in the “Notes to Condensed Consolidated Financial Statements” in Part I of this Quarterly Report on Form 10-Q, which information is incorporated by reference herein.
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Item 6. Exhibits
Number | Description | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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SIGNATURES
Pursuant to the requirements 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.
DILLARD’S, INC. | |||
(Registrant) | |||
Date: | December 11, 2019 | /s/ Phillip R. Watts | |
Phillip R. Watts | |||
Senior Vice President, Co-Principal Financial Officer and Principal Accounting Officer | |||
/s/ Chris B. Johnson | |||
Chris B. Johnson | |||
Senior Vice President and Co-Principal Financial Officer | |||
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