Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (03-11-08 03:03 AM)

Filed with the SEC from Feb 28 to Mar 05:

Dillard's (DDS)
Barington Cos. Equity Partners and Clinton Multistrategy Master Fund sent a letter to Dillard's, requesting a listing of the retailer's stockholders, plus some related corporate records. In the letter, the Barington group indicated that it might solicit proxies to elect directors at the next annual meeting. The group currently owns about 3.7 million shares (5.2%). For more, please see The Activist Spotlight at left.

BUSINESS OVERVIEW

Dillard’s, Inc. (the “Company”, “we”, “us”, “our” or “Registrant”) ranks among the nation’s largest apparel and home furnishing retailers. Our Company, originally founded in 1938 by William T. Dillard, was incorporated in Delaware in 1964. As of February 3, 2007, we operated 328 Dillard’s stores offering a wide selection of merchandise including fashion apparel for women, men and children, accessories, cosmetics, home furnishings and other consumer goods.

Our store base is diversified, with the character and culture of the community served determining the size of facility and, to a large extent, the merchandise mix presented. Most stores are located in suburban shopping malls. Our customers may also purchase merchandise on-line at our website, www.dillards.com , which features on-line gift registries and a variety of other services. We operate retail department stores located primarily in the southwest, southeast and midwest regions of the United States. The stores are located in 29 states, with 51 stores located in the western region, 125 stores in the eastern region and 152 stores in the central region.

We conduct our retail merchandise business under highly competitive conditions. Although we are a large regional department store, we have numerous competitors at the national and local level that compete with our individual stores, including specialty, off-price, discount, internet, and mail-order retailers. Competition is characterized by many factors including location, reputation, assortment, advertising, price, quality, service and credit availability. We believe that our stores are in a strong competitive position with regard to each of these factors. In an effort to strengthen this position, we will continue to make notable changes to our merchandise mix, positioning our stores toward a more upscale and contemporary tone to attract new customers who are seeking exciting statements in fashion. At the same time, we will work to maintain valued relationships with our existing loyal customer base by continuing to provide updated fashion choices, dependable quality, reliable service and measurable value. Our expanded selections of more upscale and contemporary choices include, but are not limited to, Dillard’s improved lines of exclusive brand merchandise such as Antonio Melani, Gianni Bini, Roundtree & Yorke and Daniel Cremieux. Other retailers may compete for customers on some or all of these factors, or on other factors, and may be perceived by some potential customers as being better aligned with their particular preferences. The Company’s earnings depend to a significant extent on the results of operations for the last quarter of its fiscal year. Due to holiday buying patterns, sales for that period average approximately one-third of annual sales.

We purchase merchandise from many suppliers, no one of which accounted for more than 5% of our net purchases during 2006. We have no long-term purchase commitments or arrangements with any of our suppliers, and we do not believe we are dependent on any one supplier. We consider our relationships with our suppliers to be strong and mutually beneficial.

Our merchandising, sales promotion, and store operating support functions are conducted in multiple locations. Our back office sales support functions for the Company, such as accounting, product development, store planning and information technology, are centralized.

We have developed a knowledge of each of our trade areas and customer bases for our stores. This knowledge is gained through our regional merchandising structure in conjunction with store visits by senior management and merchandising personnel complemented by the use of on-line merchandise information. We will continue to use existing technology and research to edit assortments by store to meet the specific preference, taste and size requirements of each local operating area.

Certain departments in our stores are licensed to independent companies in order to provide high quality service and merchandise where specialization, focus and expertise are critical. The licensed departments vary by store to complement our own merchandising departments. The principal licensed departments are fine jewelry and an upscale women’s apparel vendor in certain stores. The terms of the license agreements typically range between three and five years with one year renewals and require the licensee to pay for fixtures and provide its own employees. We regularly evaluate the performance of the licensed departments and require compliance with established customer service guidelines.

In November 2004, the Company sold substantially all of the assets of its private label credit card business to GE Consumer Finance (“GE”). These assets included the proprietary credit card accounts owned by our ownership interest in the assets of the Dillard’s Credit Card Master Trust, which previously owned and securitized the accounts receivable generated by the proprietary credit card accounts.

As a result of the transaction and pursuant to a long-term marketing and servicing alliance with an initial term of ten years, GE establishes and owns proprietary credit card accounts for customers of our operating subsidiaries, 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 long-term marketing and servicing alliance, we receive on-going cash compensation from GE. With the sale, we became a more focused retailer and used the proceeds generated from the sale and ongoing compensation to strengthen our balance sheet and return value to our shareholders. Further pursuant to this agreement, we have no continuing involvement other than to honor the GE credit cards in our stores. Although not obligated to a specific level of marketing commitment, we participate in the marketing of the GE credit cards and accept payments on the GE credit cards in our stores as a convenience to customers who prefer to pay in person rather than by mailing their payments to GE.

We seek to expand the number and use of the proprietary credit cards by, among other things, providing incentives to sales associates to open new credit accounts, which generally can be opened while a customer is visiting one of our stores. Customers who open accounts are entitled to discounts on initial purchases. Proprietary credit card customers are sometimes offered private shopping nights, direct mail catalogs, special discounts, and advance notice of sale events. GE has created various loyalty programs that reward customers for frequency and volume of proprietary charge card usage.

Our fiscal year ends on the Saturday nearest January 31 of each year. Fiscal years 2006, 2005 and 2004 ended on February 3, 2007, January 28, 2006, and January 29, 2005, respectively. Fiscal year 2006 included 53 weeks, and fiscal years 2005 and 2004 included 52 weeks.

For additional information with respect to our business, reference is made to information contained under the headings “Net sales,” “Net income,” “Total assets” and “Number of employees-average,” under item 6 hereof.


COMPENSATION

Base Salary

Our executive officers receive a base salary established by the Compensation Committee on an annual basis. Base salaries are set at the discretion of the Compensation Committee and are not specifically related to any company performance criteria, as are both the annual cash performance bonus and equity-based portions of the compensation program (excluding any stock option grants), which are discussed below. In establishing base salary levels, the Compensation Committee considers the aggregate compensation and benefits of the executive officers and bases any increase in salary on targets established by a regression analysis of salaries paid versus total revenues for our comparison group. The regression analysis relates each component of compensation expense to total revenue for each company in the comparison group and provides an expected level of aggregate compensation expense based on Dillard’s, Inc. total revenue. For fiscal 2006, the salaries set by the Compensation Committee were below the expected level of salaries produced by this analysis.

Adjustments to the base salary level may be made based on various factors, including comparisons to the comparative data and evaluation of the executive’s level of responsibility and experience as well as company-wide performance. The Committee also considers the executive’s success in achieving business results, promoting our core values and demonstrating leadership. Previous compensation levels and awards are not taken into account in setting base salary; rather the Committee considers appropriate ranges of compensation given the level of position and performance of the individual and the company for the period under consideration. Finally, the Compensation Committee insures that the recommended level of base salary is less than the expected level of base salary produced by the regression analysis described above.

Annual Cash Performance Bonus

Our compensation program includes performance bonuses payable under our Senior Management Cash Bonus Plan to reward executive officers based on our performance and the individual executive’s contribution to that performance. Annual performance bonuses reflect a policy of requiring a certain level of financial and operational performance before any cash bonuses are earned by the named executive officers. Specifically, performance bonuses may be paid only if the company realizes positive net income before federal and state income taxes for the fiscal year, which we refer to as pre-tax income. The Compensation Committee, within ninety (90) days after the start of a fiscal year and in its sole discretion, designates those individuals in senior management eligible to receive a cash performance bonus. Bonuses are paid at the conclusion of the fiscal year from a bonus pool, which is equal to the sum of (a) one and one-half percent (1 1 / 2 %) of the company’s pre-tax income, plus (b) three and one-half percent (3 1 / 2 %) of the increase in pre-tax income over the prior fiscal year. When the Compensation Committee designates the individuals eligible to participate in the cash performance bonus program, it also designates the percent of the bonus pool each individual will be entitled to receive. The Compensation Committee retains the discretion to reduce or eliminate any bonuses that might otherwise be due under the terms of the plan. The Compensation Committee cannot, however, increase the amounts payable under this plan. For fiscal 2005, for example, the company experienced a pre-tax income of $135,785,000, and no increase in pre-tax income. This resulted in a total available bonus pool and bonuses paid of $2,037,000. In fiscal 2006, we realized pre-tax income of $266,226,000, and a bonus pool of $8,558,000, all of which was paid out.

Equity-Based Compensation

We believe that equity ownership in our company is important to tie the ultimate level of an executive officer’s compensation to the performance of our stock and stockholder gains while creating an incentive for sustained growth. To meet these objectives, each member of our senior management team receives equity-based compensation in the forms described below. In determining the appropriate amounts of equity-based compensation to be granted during any fiscal year, the Compensation Committee considers (i) the compensation practices of our comparison group, and (ii) its own judgment as to the appropriate level of equity-based compensation for a company of our size and financial performance.

Stock Option Grants. Stock options may be awarded to our executive officers under our 2000 Incentive and Non-Qualified Stock Option Plan. These grants are used to provide long-term incentive compensation to our executive officers and tie the amount of compensation directly to the market performance of our stock. The exercise price for the options granted is one hundred percent (100%) of the fair market value of the shares underlying such options on the date of grant and have value to the executive officers only if our stock price subsequently increases. No options were granted during our 2006 fiscal year.


•

Retirement Plan. We offer a qualified defined contribution retirement plan that permits executives to make elective contributions to the plan of up to five percent (5%) of their total annual cash

compensation. These contributions are matched 100% by the company, with all contributions being used to purchase company stock at market prices.


•

Stock Purchase Plan . The Dillard’s, Inc. Stock Purchase Plan allows executives to make contributions only to the extent that they were prevented from contributing to the Retirement Plan because of the nondiscrimination rules and dollar limitations of the Internal Revenue Code. All contributions to the stock purchase plan are applied to the purchase of company stock at market prices.


•

Stock Bonus Plan . The Dillard’s, Inc. Stock Bonus Plan provides a stock grant award equal to six percent (6%) of each executive’s annual total cash compensation in excess of $15,000 (less applicable withholding) divided by the current fair market value per share on the date that the stock bonus is granted.

Although we encourage our executives to own stock in the company, as demonstrated by the equity-based incentives described above, we do not impose stock ownership guidelines on our executive officers.

Pension Plan

We also maintain a non-qualified defined benefit pension plan for our executive officers. The plan provides an annual award at retirement based upon the level of each officer’s salary and bonus during the officer’s tenure as well as the total years of service provided to the company. Specifically, the award is calculated by multiplying each officer’s years of service by 1.5% and multiplying the result by the average of the highest three years of each officer’s “pension earnings”. Pension earnings are defined as total salary plus total bonus minus the maximum wage base for FICA withholding in that year.

Other Benefits

Health Insurance—We provide an enhanced health insurance plan to our executive officers. This plan provides for their physical well being and insures that they are able to devote their energies to the management of the Company.

Company Aircraft—Executive officers are allowed access to company owned aircraft for both business flights as well as personal use. This benefit increases the level of safety and security for the executive officers as well as allowing them to make better use of their time by being able to travel more efficiently. The company reports imputed income for income tax purposes for the value of any personal use based upon the Standard Industry Fare Level (SIFL) in accordance with the Internal Revenue Code and Treasury Regulations. For financial reporting purposes, the company reports imputed income based on the incremental cost for flights constituting personal use.

Relationship Among the Various Elements of Our Compensation Program

We have designed our compensation package in attempting to achieve our primary objectives of (a) attracting and retaining qualified personnel by providing compensation levels equivalent to those offered by comparable companies, (b) motivating our senior officers by rewarding them for attainment of profitability of the company, and (c) aligning the interests of executives with the long-term interests of stockholders by awarding equity-based compensation to executives as part of the compensation provided to them. Our Compensation Committee has determined that the various elements provided in our compensation program compliment one another in achieving these objectives. Specifically, the amount of compensation provided through our retirement, stock bonus and stock purchase plans is tied directly to the aggregate amount of cash compensation paid in the forms of salary and cash bonuses.

Because one of our primary objectives is to provide competitive total compensation packages on a current basis, the Compensation Committee, in establishing current year compensation amounts, does not consider amounts realized or realizable from prior equity-based compensation grants.

Compensation Benchmarking

An important component of setting and structuring compensation for our executive officers is determining the compensation packages offered by our leading competitors. While we do not specifically benchmark our compensation to these or other companies, our Compensation Committee annually performs a compensation regression analysis to companies in our comparable group, as described above, and periodically does surveys the compensation practices of those companies to assess our competitiveness. In doing so, we take into account factors such as the relative financial performance of those companies and various factors that differentiate us from those companies.

Tax Deductibility of Executive Compensation

Within our performance-based compensation program, we aim to compensate our executive officers in a manner that is tax effective, but we do not let tax considerations drive compensation decisions. Section 162(m) of the Internal Revenue Code generally disallows an income tax deduction to publicly-held corporations for compensation in excess of $1,000,000 paid for any fiscal year to the corporation’s chief executive officer or to any of its four most highly compensated officers. However, the statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met. The policy of the Compensation Committee in the past has been to attempt to structure the compensation of our executive officers to avoid the loss of the deductibility of any compensation, even though Section 162(m) does not preclude the payment of compensation in excess of $1,000,000. In 2006, no executive officer was paid amounts for which Section 162(m) of the Internal Revenue Code would disallow an income tax deduction for the company.

In certain situations, the Compensation Committee may approve compensation that will not meet these requirements in order to assure competitive total compensation for our executive officers. Compensation deemed paid with respect to stock option awards under the 2000 Incentive and Nonqualified Stock Option Plan may be subject to the $1,000,000 limitation, unless considered “performance-based” compensation. In this regard, the stock option awards granted in January, 2006 to our executive officers qualify as performance-based compensation.

Other Compensation Considerations

Employment Agreements . We do not have written employment agreements with any of our executive officers, and each executive serves as an at-will employee of the company.

Severance and Change in Control Arrangements. We have not entered into agreements or arrangements to provide severance or change-in-control payments to any of our executives. Our past practice has not included the payment of severance or change-in-control payments to any executives.

Compensation Recovery Policy. The Compensation Committee does not have a specific policy on seeking reimbursement of compensation awards; however, it will evaluate on a case by case basis whether to seek the reimbursement of certain compensation awards paid to an executive officer if such executive engages in material misconduct that caused, or partially caused, a restatement of financial results.

Stock Option Practices

Stock options provide for financial gain derived from the potential appreciation in stock price from the date that the option is granted until the date that the option is exercised. As described above, stock options may be awarded to our executive officers under our 2000 Incentive and Non-Qualified Stock Option Plan. The exercise price for the options granted is one hundred percent (100%) of the fair market value of the shares underlying such options on the date of grant and have value to the executive officers only if our stock price increases. The determination of whether to grant these awards to specific individuals, and the amount and timing of any such grants, is made in the sole discretion of the Compensation Committee. We do not backdate options or grant options retroactively. In addition, we do not plan to coordinate grants of options so that they are made before announcement of favorable information or after announcement of unfavorable information. Compensation Committee meetings are held at least once annually. The timing of the grants is determined by the Compensation Committee. There are times when the Compensation Committee may grant stock options after quarter end and after quarterly reports are filed with the SEC.

Our executive officers, and primarily our chief executive officer, participate to a limited extent in the granting of stock options by recommending the granting of options to non-executive employees. The decision of whether to grant options, however, is left solely to the Compensation Committee.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE OVERVIEW

Dillard’s, Inc. operates 328 retail department stores in 29 states. Our stores are located in suburban shopping malls and open-air lifestyle centers and offer a broad selection of fashion apparel and home furnishings. We offer an appealing and attractive assortment of merchandise to our customers at a fair price. We offer national brand merchandise as well as our exclusive brand merchandise. We seek to enhance our income by maximizing the sale of this merchandise to our customers by promoting and advertising our merchandise and by making our stores an attractive and convenient place for our customers to shop.

Fundamentally, our business model is to offer the customer a compelling price/value relationship through the combination of high quality, fashionable products and services at a competitive price. We seek to deliver a high level of profitability and cash flow by:


•

maximizing the effectiveness of our pricing and brand awareness;


•

minimizing costs through leveraging our centralized overhead expense structure without sacrificing service to our customers;


•

sourcing goods from both domestic and foreign enterprises;


•

reinvesting operating cash flows into store growth, and distribution initiatives, and improving product quality in our exclusive brands;


•

returning profits to shareholders through dividends, share repurchases and increased share price; and


•

continuing to offer access to credit services and financial products to our customers through our long-term marketing and servicing alliance with GE Consumer Finance (“GE”).

The consumer retail sector is extremely competitive. Many different retail establishments compete for our customers’ business. These include other department stores, specialty retailers, discounters, internet and mail order retailers.

In accordance with the National Retail Federation fiscal reporting calendar, the 2006 reporting periods presented and discussed below ended February 3, 2007 and contained 53 weeks. The corresponding periods ended January 28, 2006 contained 52 weeks. For comparability purposes, where noted, some of the information discussed below is based upon comparison of the 52 weeks ended January 27, 2007 to the prior year corresponding period ended January 28, 2006.

Trends and uncertainties

We have identified the following key uncertainties whose fluctuations may have a material effect on our operating results.


•

Cash flow—Cash from operating activities is a primary source of liquidity that is adversely affected when the industry faces market driven challenges and new and existing competitors seek areas of growth to expand their businesses. If our customers do not purchase our merchandise offerings in sufficient quantities, we respond by taking markdowns. If we have to reduce our prices, the cost of goods sold on our income statement will correspondingly rise, thus reducing our income.


•

Success of brand—The success of our exclusive brand merchandise is dependent upon customer fashion preferences.


•

Store growth—Our growth is dependent on a number of factors which could prevent the opening of new stores, such as identifying suitable markets and locations.


•

Sourcing—Store merchandise is dependent upon adequate and stable availability of materials and production facilities from which the Company sources its merchandise.

2007 Estimates

A summary of estimates on key financial measures for fiscal 2007, on a generally accepted accounting principles (“GAAP”) basis, is shown below. There have been no changes in the estimates for 2007 since the Company released its fourth quarter earnings on February 27, 2007.

General

Net Sales . Net sales include sales of comparable stores and non-comparable stores. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores, sales from new stores opened in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.

Service Charges and Other Income . Service Charges and Other Income include income generated through the long-term marketing and servicing alliance between the Company and GE subsequent to November 1, 2004 and the resulting gain on the sale of its credit card business to GE during fiscal 2004. Service Charges and Other Income also includes interest and service charges, net of service charge write-offs, related to the Company’s proprietary credit card sales prior to November 1, 2004. Other income relates to rental income, shipping and handling fees and net lease income on leased departments.

Cost of Sales . Cost of sales include the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific vendor allowances and direct payroll for salon personnel.

Advertising, selling, administrative and general expenses . Advertising, selling, administrative and general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

Depreciation and amortization . Depreciation and amortization expenses include depreciation and amortization on property and equipment.

Rentals . Rentals include expenses for store leases and data processing and equipment rentals.

Interest and debt expense, net . Interest and debt expense includes interest, net of interest income, relating to the Company’s unsecured notes, mortgage notes, the Guaranteed Beneficial Interests in the Company’s subordinated debentures, gains and losses on note repurchases, amortization of financing costs, call premiums and interest on capital lease obligations.

Asset impairment and store closing charges . Asset impairment and store closing charges consist of write-downs to fair value of under-performing properties and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

Equity in earnings of joint ventures. Equity in earnings of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures.

Critical Accounting Policies and Estimates

The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results will differ from these under different assumptions or conditions.

Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Merchandise inventory . Approximately 98% of the inventories are valued at lower of cost or market using the retail last-in, first-out (“LIFO”) inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management believes that the Company’s RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 2% of the inventories are valued at lower of cost or market using the specific identified cost method.

Revenue recognition. The Company recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns. The provision for sales returns is based on historical evidence of our return rate. We recorded an allowance for sales returns of $7.2 million and $7.7 million as of February 3, 2007 and January 28, 2006, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision have been insignificant for the years ended February 3, 2007, and January 28, 2006 and January 29, 2005.

Prior to the sale of its credit card business to GE, finance charge revenue earned on customer accounts serviced by the Company under its proprietary credit card program was recognized in the period in which it was earned. Beginning November 1, 2004, the Company’s share of income earned under the long-term marketing and servicing alliance is included as a component of Service Charges and Other Income. The Company received income of approximately $125 million, $105 million and $14 million from GE in 2006, 2005 and 2004, respectively. Further pursuant to this agreement, the Company has no continuing involvement other than to honor the GE credit cards in its stores. Although not obligated to a specific level of marketing commitment, the Company participates in the marketing of the GE credit cards and accepts payments on the GE credit cards in its stores as a convenience to customers who prefer to pay in person rather than by mailing their payments to GE.

Merchandise vendor allowances . The Company receives concessions from its merchandise vendors through a variety of programs and arrangements, including co-operative advertising, payroll reimbursements and margin maintenance programs.

Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. Similarly, we are not able to assess the impact of vendor advertising allowances on creating additional revenues, as such allowances do not directly generate revenue for our stores.

Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred. All other merchandise vendor allowances are recognized as a reduction of cost purchases when received. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses. The amounts recognized as a reduction in cost of sales have not varied significantly over the past three fiscal years.

Insurance accruals . The Company’s consolidated balance sheets include liabilities with respect to self-insured workers’ compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $1 million per claim) claims. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As of February 3, 2007 and January 28, 2006, insurance accruals of $54.5 million and $51.6 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for the years ended February 3, 2007 and January 28, 2006. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. A 10% change in our self-insurance reserve would have affected net earnings by $3.5 million for the fiscal year ended February 3, 2007.

Finite-lived assets . The Company’s judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:


•

Significant changes in the manner of our use of assets or the strategy for our overall business;


•

Significant negative industry or economic trends; or


•

Store closings.

The Company performs an analysis annually as of the last day of the fourth quarter of the anticipated undiscounted future net cash flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company’s strategies change, the conclusion regarding impairment may differ from the current estimates.

Goodwill . The Company evaluates goodwill annually as of the last day of the fourth quarter and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates.

Estimates of fair value are primarily determined using projected discounted cash flows and are based on our best estimate of future revenue and operating costs and general market conditions. These estimates are subject to review and approval by senior management. This approach uses significant assumptions, including projected future cash flows, the discount rate reflecting the risk inherent in future cash flows and a terminal growth rate.

Income taxes . Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management’s estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company’s actual results differ from estimated results due to changes in tax laws, new store locations or tax planning, the Company’s effective tax rate and tax balances could be affected. As such these estimates may require adjustment in the future as additional facts become known or as circumstances change.

The Company’s federal income tax return for each fiscal year is audited by the Internal Revenue Service. Periodically, the Company’s income tax returns are audited by various state and local jurisdictions. The Company reserves for tax contingencies when it is probable that a liability has been incurred and the contingent amount is reasonably estimable. These reserves are based upon the Company’s best estimation of the potential exposures associated with the timing and amount of deductions as well as various tax filing positions. Due to the complexity of these examination issues, for which reserves have been recorded, it may be several years before the final resolution is achieved.

Discount rate . The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate had increased to 5.90% as of February 3, 2007 from 5.60% as of January 28, 2006. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $105 million is appropriately stated as of February 3, 2007; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would generate an experience gain or loss of approximately $6.3 million. We adopted SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) as of February 3, 2007 (see Notes 1 and 9 in the Notes to Consolidated Financial Statements for a further discussion regarding the impact of adoption).

RESULTS OF OPERATIONS


Sales increased 1% for the 53 weeks ended February 3, 2007 compared to the 52 weeks ended January 28, 2006, and comparable store sales were unchanged on a percentage basis for the same periods. Sales declined 1% for the 52 weeks ended January 27, 2007 compared to the 52 weeks ended January 28, 2006 in both total and comparable stores. During the 52 weeks ended January 27, 2007, sales were strongest in shoes with sales increases also noted in the men’s apparel and accessories category. In the same 52-week period, sales were flat in cosmetics while sales declined in the remaining merchandising categories with a significant decrease noted in juniors’ and children’s apparel. During the 52 weeks ended January 27, 2007, sales were strongest and increased in the Western region while sales declined in the Central and Eastern regions.

Sales were unchanged on a percentage basis for the 52 weeks ended January 28, 2006 compared to the 52 weeks ended January 29, 2005 on both a total and comparable store basis. Sales were strongest in shoes with sales increases also noted in cosmetics and men’s apparel and accessories. Sales declined in the remaining merchandising categories with a significant decrease noted in the home and other category. Sales were strongest and increased in the Western and Eastern regions in fiscal 2005 while sales declined in the Central region.

During the year ended January 28, 2006, Hurricane Katrina, Hurricane Rita and Hurricane Wilma interrupted operations in approximately 60 of the Company’s stores for varying amounts of time. We are not able to determine with any degree of certainty the impact that these hurricanes had on our results of operations. Property and merchandise losses in the affected stores were covered by insurance. Our insurance coverage did not include business interruption but did include a provision for reimbursement of the loss of inventory in excess of the carrying value of the inventory. Our insurance coverage also covered losses sustained on damaged stores, and we are entitled to receive money for reimbursement of costs incurred to restore the damaged stores to their preexisting condition. Not all of the insurance money has been received for costs incurred on damaged stores affected by the hurricanes, but we will receive these amounts once all repairs are completed and a final settlement is reached with the insurance carrier. One store in Biloxi, Mississippi, not in operation during fiscal 2006 due to the hurricanes of 2005 and included in the 2006 closed store total, is scheduled to re-open in early fiscal 2008. One store in the New Orleans area which was also damaged by the hurricanes of 2005 will not re-open due to the closing of the mall in which it operated.

Penetration of exclusive brand merchandise for the fiscal years 2006, 2005 and 2004 was 23.8%, 24.0% and 23.1%, respectively.

Cost of Sales

Cost of sales as a percentage of sales decreased to 65.9% during fiscal 2006 compared with 66.4% for fiscal 2005, resulting in gross margin improvement of 50 basis points of sales. Included in gross margin for fiscal 2005 is a $29.7 million hurricane recovery gain related to insurance settlements received covering losses incurred in the 2005 hurricane season. Excluding the effect of the hurricane gain, which had an impact of 40 basis points of sales, gross margin improved 90 basis points of sales as a result of lower levels of markdowns partially offset by lower markups during the year ended February 3, 2007 compared to the year ended January 28, 2006. Gross margins were higher in cosmetics, ladies’ apparel and accessories, juniors’ and children’s apparel and shoes compared to the prior year with lower gross margins noted in men’s apparel and accessories and home and other categories.

Total inventory at February 3, 2007 compared to January 28, 2006 decreased 2% while inventory in comparable stores decreased 4% for the same period.

Cost of sales as a percentage of sales decreased to 66.4% during 2005 compared with 66.7% for 2004. The increase of 30 basis points in gross margin during fiscal 2005 was due to the $29.7 million hurricane recovery gain mentioned above. Excluding the effect of the insurance gain, gross margin declined six basis points of sales as a result of slightly higher levels of markdowns compared to the year ended January 29, 2005. Gross margins improved in shoes and juniors’ and children’s apparel compared with the prior year with lower gross margins noted in cosmetics, ladies’ apparel and accessories, men’s apparel and accessories, and home and other categories.

Expenses

2006 Compared to 2005

Advertising, selling, administrative and general (“SG&A”) expenses increased to 27.5% of sales for fiscal 2006 compared to 27.0% for fiscal 2005. During fiscal 2006, SG&A expenses increased $54.5 million primarily because of increases in payroll expense of $45.4 million, utilities expense of $12.0 million, and a $21.7 million charge for a preliminary settlement agreement reached in a lawsuit filed on behalf of a putative class of former Mercantile Stores Pension Plan participants. These increases were partially offset by savings in advertising expenses of $23.3 million. The increase in payroll expense was due to an increase in incentive compensation to store managers, merchants and management due to improved company performance during fiscal 2006 as well as the addition of the 53 rd week in fiscal 2006. The increase in utility expense was a result of higher utility rates compared to the prior year in addition to the 53 rd week in fiscal 2006. The savings in advertising expense was mainly due to the repositioning of our advertising efforts toward the most appropriate media sources to reach our targeted customers.

Depreciation and amortization expense decreased slightly to 3.9% of sales for fiscal 2006 compared to 4.0% of sales in fiscal 2005.

Rental expense as a percentage of net sales was 0.7% for the year ended February 3, 2007 compared to 0.6% for the same period in fiscal 2005. The increase of $8.0 million in rental expense during fiscal 2006 was a result of higher equipment rent compared to the prior year partially offset by a decline in the number of leased stores.

Interest and debt expense, net, decreased to 1.2% of sales for fiscal 2006 compared to 1.4% of sales for fiscal 2005 as a result of lower debt levels and due to an interest credit of $10.5 million related to statute expirations and audit settlements with federal and state tax authorities for multiple tax years. Interest and debt expense declined $18.0 million during fiscal 2006. Average debt outstanding declined approximately $179 million in fiscal 2006. The Company had maturities and repurchases of $200.2 million on various notes and mortgages during 2006.

During 2006, the Company sold its interest in a joint venture, Yuma Palms, for $20.0 million, and recognized a gain of $13.5 million which is included in gain on sales of assets.

No asset impairment and store closing charges were recorded during fiscal 2006 compared to $61.7 million or 0.8% of sales recorded during fiscal 2005. The fiscal 2005 charge included a write-down to fair value for certain under-performing properties. Included in asset impairment and store closing charges is a pretax loss on the disposition of all the outstanding capital stock of an indirect wholly-owned subsidiary in the amount of $40.1 million. The Company realized an income tax benefit of $45.4 million for the year ended January 28, 2006 related to the sale of the subsidiary’s stock. The charge also consists of a write-down of goodwill on one store of $1.0 million, an accrual for future rent, property tax and utility payments on four stores of $3.7 million and a write-down of property and equipment on nine stores in the amount of $16.9 million.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General

Net sales . Net sales include sales of comparable and non-comparable stores. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores, sales from new stores opened in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.

Service charges and other income. Service charges and other income include income generated through the long-term marketing and servicing alliance between the Company and GE Consumer Finance (“GE”). Other income relates to rental income, shipping and handling fees and net lease income on leased departments.

Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific vendor allowances and direct payroll for salon personnel.

Advertising, selling, administrative and general expenses . Advertising, selling, administrative and general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal, and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

Depreciation and amortization . Depreciation and amortization expenses include depreciation and amortization on property and equipment.

Rentals. Rentals include expenses for store leases and data processing and equipment rentals.

Interest and debt expense, net . Interest and debt expense includes interest, net of interest income, relating to the Company’s unsecured notes, mortgage notes, the guaranteed beneficial interests in the Company’s subordinated debentures, gains and losses on note repurchases, amortization of financing costs, call premiums and interest on capital lease obligations.

Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and joint ventures.

Asset impairment and store closing charges . Asset impairment and store closing charges consists of write-downs to fair value of under-performing properties and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

Equity in earnings of joint ventures. Equity in earnings of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures.


Critical Accounting Policies and Estimates

The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007. As disclosed in this note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results will differ from these under different assumptions or conditions.

Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the condensed consolidated financial statements.

Merchandise inventory . Approximately 98% of the inventories are valued at lower of cost or market using the retail last-in, first-out (“LIFO”) inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management believes that the Company’s RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 2% of the inventories are valued at lower of cost or market using the specific identified cost method.

Revenue recognition. The Company recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns. The provision for sales returns is based on historical evidence of our return rate. We recorded an allowance for sales returns of $7.4 million and $7.7 million as of November 3, 2007 and October 28, 2006, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision have been insignificant for the three and nine months ended November 3, 2007 and October 28, 2006.

The Company’s share of income earned under the long-term marketing and servicing alliance with GE is included as a component of service charges and other income. The Company received income of approximately $89.2 million and $94.6 million from GE during the nine months ended November 3, 2007 and October 28, 2006, respectively. Further pursuant to this agreement, the Company has no continuing involvement other than to honor the GE credit cards in its stores. Although not obligated to a specific level of marketing commitment, the Company participates in the marketing of the GE credit cards and accepts payments on the GE credit cards in its stores as a convenience to customers who prefer to pay in person rather than by mailing their payments to GE.

Merchandise vendor allowances . The Company receives concessions from its merchandise vendors through a variety of programs and arrangements, including cooperative advertising, payroll reimbursements and margin maintenance programs.

Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. Similarly, we are not able to assess the impact of vendor advertising allowances on creating additional revenue as such allowances do not directly generate revenue for our stores.

Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred. All other merchandise vendor allowances are recognized as a reduction of cost purchases when received. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses. The amounts recognized as a reduction in cost of sales have not varied significantly during the three and nine months ended November 3, 2007 and October 28, 2006.

Insurance accruals . The Company’s condensed consolidated balance sheets include liabilities with respect to self-insured workers’ compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $1 million per claim) claims. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As of November 3, 2007 and October 28, 2006, insurance accruals of $57.0 million and $51.6 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for the three and nine months ended November 3, 2007 and October 28, 2006.

Finite-lived assets . The Company’s judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:




•

Significant changes in the manner of our use of assets or the strategy for the overall business;


•

Significant negative industry or economic trends; or


•

Store closings.

The Company performs an analysis of the anticipated undiscounted future net cash flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company’s strategies change, the conclusion regarding impairment may differ from the current estimates.

Goodwill. The Company evaluates goodwill annually as of the last day of the fourth quarter and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates.

Estimates of fair value are primarily determined using projected discounted cash flows and are based on our best estimate of future revenue and operating costs and general market conditions. These estimates are subject to review and approval by senior management. This approach uses significant assumptions, including projected future cash flows, the discount rate reflecting the risk inherent in future cash flows and a terminal growth rate.

Income taxes . Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management’s estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company’s actual results differ from estimated results due to changes in tax laws, new store locations or tax planning, the Company’s effective tax rate and tax balances could be affected. As such these estimates may require adjustment in the future as additional facts become known or as circumstances change.

The Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”) effective for fiscal years beginning after December 15, 2006. The Company adopted the new requirement as of February 4, 2007 with the cumulative effects recorded as an adjustment to retained earnings as of the beginning of the period. The Company classifies interest and penalties relating to income tax in the financial statements as income tax expense. The total amount of unrecognized tax benefits as of the date of adoption was $27.6 million, of which $17.8 million would, if recognized, affect the effective tax rate. The total amount of accrued interest and penalty as of the date of adoption was $13.7 million. The total amount of unrecognized tax benefits as of November 3, 2007 was $28.5 million, of which $18.8 million would, if recognized, affect the effective tax rate. The total amount of accrued interest and penalties as of November 3, 2007 was $15.3 million.

The Company is currently being examined by the Internal Revenue Service for the fiscal tax years 2003 through 2005. The Company is also under examination by various state and local taxing jurisdictions for various fiscal years. The tax years that remain subject to examination for major tax jurisdictions are fiscal tax years 2003 and forward, with the exception of fiscal 1997 through 2002 amended state and local tax returns related to the reporting of federal audit adjustments. With the exception of amounts that are under examination or subject to administrative proceedings by income tax authorities, for which an estimate cannot be made due to uncertainties, the Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change within the next twelve months.

Discount rate . The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate had increased to 5.90% as of February 3, 2007 from 5.60% as of January 28, 2006. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $105 million was appropriately stated as of February 3, 2007; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would generate an experience gain or loss of approximately $6.3 million.


Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last quarter of each fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results during the periods presented; however, there can be no assurance that our business will not be affected by this factor in the future.


RESULTS OF OPERATIONS

Net sales decreased 5% on a total basis and 6% on a comparable store basis for the three months ended November 3, 2007 compared to the three months ended October 28, 2006. Net sales decreased 4% on a total basis and 5% on a comparable store basis for the nine months ended November 3, 2007 compared to the nine months ended October 28, 2006. During these periods, all product categories experienced declines in net sales, with significant declines noted in the juniors’ and children’s apparel category and the home and other category.

During the three months ended November 3, 2007, net sales in the Central region were slightly better than the Company’s total performance trend compared to the three months ended October 28, 2006 while sales were slightly below trend in the Eastern and Western regions for the same period.

During the nine months ended November 3, 2007, net sales in the Central region were slightly better than the Company’s total performance trend compared to the nine months ended October 28, 2006 while sales were in line with trend in the Western region and slightly below trend in the Eastern region for the same period.

Service charges and other income increased to $40.7 million during the three months ended November 3, 2007 compared to $40.0 million for the three months ended October 28, 2006. This increase of $0.7 million was primarily due to an increase in leased department income over the prior year.

Service charges and other income decreased to $117.8 million during the nine months ended November 3, 2007 compared to $129.3 million for the nine months ended October 28, 2006. This decrease of $11.5 million was due in part to the $6.5 million recorded during the period in the prior year from the Visa Check/Mastermoney Antitrust litigation settlement as well as a decrease of $5.4 million in the income from the marketing and servicing alliance with GE compared to the prior year.


Cost of Sales

Cost of sales increased to 65.5% of net sales for the three months ended November 3, 2007 from 65.0% for the three months ended October 28, 2006. The gross margin decline of 50 basis points of sales was primarily driven by higher markdowns. Juniors’ and children’s apparel, ladies’ apparel and accessories and the home and other categories posted the weakest performances compared to the total decline for the period while gross margin performance improved in shoes and men’s apparel and accessories categories during the period.

Cost of sales increased to 65.9% of net sales for the nine months ended November 3, 2007 from 65.3% for the nine months ended October 28, 2006. The gross margin decline of 60 basis points of sales was primarily driven by higher markdowns. While all merchandise categories experienced declines in gross margin, the weakest performance was noted in the home and other category, which significantly exceeded the Company’s average decline for the period.

Inventory levels decreased 1% and 2% on total and comparable store bases, respectively, as of November 3, 2007 compared to October 28, 2006.


Advertising, Selling, Administrative and General Expenses

Advertising, selling, administrative and general (“SG&A”) expenses for the three months ended November 3, 2007 increased $7.8 million to 31.9% of net sales from 29.8% of net sales during the three months ended October 28, 2006. The increase was driven primarily by increases in payroll ($4.3 million), services purchased ($3.6 million) and pre-opening expenses ($1.8 million) partially offset by declines in advertising expense ($1.8 million).

SG&A expenses for the nine months ended November 3, 2007 decreased $2.3 million compared to the nine months ended October 28, 2006 while SG&A expenses increased to 30.1% of net sales from 29.0% for the same period. The Company recorded a pretax charge of $21.7 million during the nine months ended October 28, 2006 for a preliminary settlement agreement in a lawsuit filed on behalf of a putative class of former Mercantile Stores Pension Plan participants. Exclusive of this prior year settlement charge, SG&A expenses increased $19.4 million primarily as a result of increases in payroll ($14.4 million), services purchased ($9.0 million), pension expense ($1.5 million) and pre-opening expenses ($1.3 million) partially offset by a decrease in advertising expense ($8.0 million).


Depreciation and Amortization Expense

Depreciation and amortization expense as a percentage of net sales was 4.6% for the three months ended November 3, 2007 compared to 4.3% for the similar period of 2006. Depreciation and amortization expense as a percentage of net sales was 4.4% for the nine months ended November 3, 2007 compared to 4.2% for the similar period of 2006. Depreciation expense increased $1.5 million and $3.9 million for the three and nine months ended November 3, 2007, respectively, compared to the similar periods of 2006. This increase in depreciation and amortization expense is primarily related to capital expenditures incurred to continue to improve Dillard’s stores as well as to add new stores.


Rentals

Rentals were 0.9% and 0.8% of sales for the three and nine months ended November 3, 2007, respectively, compared to 0.8% and 0.7% of sales for the three and nine months ended October 28, 2006, respectively. Rentals increased $1.1 million and $4.7 million for the three and nine months ended November 3, 2007, respectively, compared to the same periods in 2006. The increase in rentals is mainly due to an increase in leased equipment including upgrades of point-of-sale terminals at the stores.


Interest and Debt Expense, Net

Interest and debt expense decreased $0.3 million to $23.1 million during the three months ended November 3, 2007 from $23.4 million during the three months ended October 28, 2006. Average long-term debt levels decreased during the period due to normal maturities of various notes outstanding. Average short-term borrowings, however, increased for the period.

Interest and debt expense decreased $5.0 million to $66.6 million during the nine months ended November 3, 2007 from $71.6 million during the nine months ended October 28, 2006. This decline in interest expense for the nine months ended November 3, 2007 was a result of lower debt levels. Average debt outstanding declined approximately $30.4 million during the nine months ended November 3, 2007 compared to the similar periods of 2006. The debt reduction was due to normal maturities of various outstanding notes.

Gain on Disposal of Assets

Gain on disposal of assets increased $10.7 million during the three months ended November 3, 2007 compared to the same period of the prior year. This increase was primarily a result of a gain of $11.1 million that was recorded during the three months ended November 3, 2007 relating to reimbursement for property damages incurred during the 2005 hurricane season as the Company completed the cleanup of the damaged location during the current year.

Gain on disposal of assets decreased $4.1 million for the nine months ended November 3, 2007 to $12.3 million compared to $16.4 million for the same period of the prior year. During the nine months ended October 28, 2006, the Company sold its interest in the Yuma Palms joint venture for $20.0 million and recognized a pretax gain of $13.5 million related to the sale. The decrease between the periods was further enhanced by the Company’s sale of properties in Longmont, Colorado and Richardson, Texas for $5.8 million, resulting in a net loss of $2.5 million on the sales. These decreases were partially offset by the $11.1 million insurance recovery gain recorded during the nine months ended November 3, 2007.


Asset Impairment and Store Closing Charges

During the three and nine months ended November 3, 2007, the Company recorded pretax expense of $3.7 million (0.2% of net sales) and $4.4 million (0.1% of net sales), respectively, for asset impairment and store closing costs. The expense includes a $1.1 million future lease obligation on a store closed during the third quarter of 2007 and a $2.6 million write-off of goodwill for a leased store planned to close during the fourth quarter of 2007 where the projected cash flows were unable to sustain the amount of goodwill.

There were no asset impairment and store closing charges recorded during the three and nine months ended October 28, 2006.


Income Taxes

The federal and state income tax rates were approximately 37.6% and 36.1% for the three months ended November 3, 2007 and October 28, 2006, respectively. During the three months ended November 3, 2007, income taxes included the net increase in FIN 48 liabilities of approximately $1.3 million and included recognition of tax benefits of approximately $1.6 million due to additional tax credits on the prior year tax return. During the three months ended October 28, 2006, income taxes included recognition of tax benefits of approximately $0.3 million for the change in a capital loss valuation allowance due to capital gain income.

The federal and state income tax rates were approximately 15.9% and 26.4% for the nine months ended November 3, 2007 and October 28, 2006, respectively. During the nine months ended November 3, 2007, income taxes included the net increase in FIN 48 liabilities of approximately $2.2 million and included recognition of tax benefits of approximately $0.3 million for the change in a capital loss valuation allowance due to capital gain income, approximately $1.3 million for a reduction in state tax liabilities due to a restructuring that occurred during this period and approximately $1.6 million due to additional tax credits on the prior year tax return. During the nine months ended October 28, 2006, income taxes included recognition of tax benefits of approximately $6.1 million for the change in a capital loss valuation allowance due to capital gain income and $7.5 million due to the release of tax reserves resulting from resolution of various federal and state income tax issues.

Our income tax rate for the remainder of fiscal 2007 is dependent upon results of operations and may change if the results for fiscal 2007 are different from current expectations. We currently estimate that our effective rate for the remainder of fiscal 2007 will approximate 37.1%.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

33937 Views