UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 2, 2013
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 000-26207
BELK, INC.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 56-2058574 |
| (State of incorporation) | | (IRS Employer Identification No.) |
| |
| 2801 West Tyvola Road, Charlotte, North Carolina | | 28217-4500 |
| (Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
(704) 357-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
|
Title of each class |
| Class A Common Stock, $0.01 per share |
| Class B Common Stock, $0.01 per share |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such file). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | | x |
| | | |
Non-accelerated filer | | ¨ (Do not check if smaller reporting company) | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and directors are “affiliates” of the Registrant) as of July 28, 2012 (based on the price at which the common equity was last sold on July 27, 2012, the date closest to the last business day of the Company’s most recently completed second fiscal quarter) was $529,256,640. 43,013,745 shares of common stock were outstanding as of April 5, 2013, comprised of 41,813,861 shares of the Registrant’s Class A Common Stock, par value $0.01, and 1,199,884 shares of the Registrant’s Class B Common Stock, par value $0.01.
Documents Incorporated By Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 are incorporated herein by reference in Part III.
BELK, INC
TABLE OF CONTENTS
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PART I
General
Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the largest family owned and operated department store business in the United States, with 301 stores in 16 states, as of the fiscal year ended February 2, 2013. Located primarily in the southern United States, the Company generated revenues of $4.0 billion for the fiscal year 2013, and together with its predecessors, has been successfully operating department stores since 1888. Belk is committed to providing its customers a compelling shopping experience and merchandise that reflects “Modern. Southern. Style.”
The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. Fiscal year 2014 will contain 52 weeks and will end on February 1, 2014. Fiscal year 2013 contained 53 weeks and ended on February 2, 2013, while fiscal years 2012 and 2011 contained 52 weeks and ended on January 28, 2012 and January 29, 2011, respectively.
Belk seeks to provide customers with a convenient and enjoyable shopping experience both in stores and online at belk.com, by offering an appealing merchandise mix that includes extensive assortments of brands, styles, and sizes. Belk stores and belk.com sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, fine jewelry, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.
The Company operates 93 stores that exceed 100,000 square feet in size, although the majority of Belk stores range in size from 60,000 to 100,000 square feet. Most of the Belk stores are anchor tenants in major regional malls or in open-air shopping centers in medium and smaller markets. In the aggregate, the Belk stores occupy approximately 22.7 million square feet of selling space.
Management of Belk’s store operations is organized into three regional operating divisions, with offices in Raleigh, NC, Atlanta, GA and Birmingham, AL, respectively. Each unit is headed by a division chair and a director of stores. Division offices execute centralized initiatives at the individual stores, and their primary activities relate to providing management and support for the personnel, operations and maintenance of the Belk stores in their regions. These divisions are not considered segments for financial reporting purposes.
Belk Stores Services, Inc., a subsidiary of Belk, Inc., and its subsidiary Belk Administration Company, along with Belk International, Inc., a subsidiary of Belk, Inc., and its subsidiary, Belk Merchandising Company, LLC (collectively “BSS”), coordinate the operations of Belk stores on a company-wide basis. BSS provides a wide range of services to the Belk division offices and stores, such as merchandising, merchandise planning and allocation, advertising and sales promotion, information systems, human resources, public relations, accounting, real estate and store planning, credit, legal, tax, distribution and purchasing.
The Company was incorporated in Delaware in 1997. The Company’s principal executive offices are located at 2801 West Tyvola Road, Charlotte, North Carolina 28217-4500, and its telephone number is (704) 357-1000.
Business Strategy
Belk adopted a new mission and vision as part of its re-branding launch in the third quarter of fiscal year 2011. The mission is “to satisfy the modern Southern lifestyle like no one else, so that our customers get the fashion they desire and the value they deserve.” The vision is “for the modern Southern woman to count on Belk first. For her, for her family, for life.” Belk is positioning itself for success by providing modern Southern fashion that is aligned with its customers’ lifestyles, by delivering Southern hospitality to deepen customer relationships, and by impacting local communities positively through its charitable contributions. The Company continues to seek opportunities to grow its business and has set a goal of increasing annual sales to $6.0 billion within five years.
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The Company seeks to maximize its sales opportunities by providing quality merchandise assortments of fashion goods that differentiate its stores from competitors. Belk merchants and buyers monitor fashion merchandising trends, shop domestic and international markets and leverage relationships with key vendors in order to provide the latest seasonal assortments of most-wanted styles and brands of merchandise. Through merchandise planning and allocation, the Company tailors its assortments to meet the particular needs of customers in each market. The Company conducts customer research and participates in market studies on an ongoing basis in order to obtain information and feedback from customers that will enable it to better understand their merchandise needs and service preferences.
The Company’s marketing and sales promotion strategy seeks to attract customers to shop at Belk by keeping them informed of the latest fashion trends, merchandise offerings, and sales promotions through a combination of advertising and interactive media, including direct mail, circulars, broadcast, Internet, social media (including email, Facebook, Twitter, Pinterest and YouTube) and in-store special events. Belk uses its proprietary database to communicate directly to key customer constituencies with special offers designed to appeal to these specific audiences. The sales promotions are designed to promote desirable merchandise brands and styles at compelling price values with adequate inventories planned and allocated to ensure that stores will be in stock on featured merchandise.
Belk strives to attract and retain talented, well-qualified associates who provide a high level of friendly, personal service to enhance the customer’s shopping experience. Through the Company’s service excellence program, Belk associates are trained to be knowledgeable about the merchandise they sell, approach customers promptly, help when needed, and provide quick checkout. The Company desires to be an inclusive Company that embraces diversity among its associates, customers, and vendors. Its ongoing diversity program includes a number of company-wide initiatives aimed at increasing the diversity of its management and associate teams, increasing its spend with diverse vendors, creating awareness of diversity issues, and demonstrating the Company’s respect for, and responsiveness to, the rapidly changing cultural and ethnic diversity in Belk markets.
Belk has also planned investments totaling approximately $600 million over a five-year period that began in fiscal year 2011 for key strategic initiatives including, approximately $42 million for branding, $14 million for customer service enhancements, $270 million for store expansions and remodels, and $263 million for technology.
Growth Strategy
The Company has continued to focus its growth strategy on remodeling and expanding existing stores, developing new merchandising concepts in targeted demand centers, and expanding its online capabilities. In addition, the Company recently announced a strategy to expand the number of Belk flagship locations. Belk currently operates 16 flagship stores that meet certain standards based on size, sales volume, location, premium brand assortments and Belk brand image. Under this strategy, the Company plans to nearly double the number of flagship stores over the next five years through expansions and remodels of existing stores, enhancement of premium brand offerings in existing stores, and opening new stores that meet the flagship store criteria.
The Company will continue to explore new store opportunities within its existing 16-state footprint and in contiguous markets where Belk can leverage its name and reputation to distinguish its stores from the competition. The Company will also consider closing stores in markets where more attractive locations become available or where the Company does not believe there is potential for long term growth and success. In addition, the Company periodically reviews and adjusts its space requirements to create greater operating efficiencies and convenience for the customer.
In fiscal 2013, the Company completed major remodel projects in 11 stores, opened two new stores as replacements for existing stores and completed expansions of four stores. In addition, the Company completed 10 shoe and jewelry department remodels. The new store and store expansions include:
New Store
| | | | | | | | | | |
Location | | Size
(Selling Sq. Ft.) | | | Opening Date | | | New or
Existing
Market |
Pensacola, FL | | | 114,160 | | | | 10/10/12 | | | Existing |
Waynesville, NC | | | 75,650 | | | | 10/10/12 | | | Existing |
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Store Expansions
| | | | | | | | |
Location | | Expanded Size
(Selling Sq. Ft) | | | Completion
Date | |
Decatur, AL (Decatur Mall) | | | 90,886 | | | | 10/10/12 | |
Christiansburg, VA (New River Valley) | | | 80,082 | | | | 10/10/12 | |
North Augusta, SC (Martintown Plaza) | | | 57,793 | | | | 10/10/12 | |
Warner Robbins, GA (Houston County Galleria) | | | 92,417 | | | | 10/10/12 | |
In fiscal year 2014, the Company plans to open one store in a new market, open two new stores as replacements of existing stores, and complete eight store expansions and 10 remodels. Expansions and remodels of shoe and jewelry departments are also planned in 24 store locations.
Merchandising
Belk stores and belk.com feature quality name brand and private label merchandise in moderate to better price ranges, providing fashion, selection and value to customers. The merchandise mix is targeted to middle and upper income customers shopping for their families and homes, and includes a wide selection of fashion apparel, accessories and shoes for women, men and children, as well as cosmetics, home furnishings, housewares, gift and guild, jewelry, and other types of department store merchandise. The goal is to position Belk as the leader in providing modern, fashionable assortments with depth in style, selection and value to its store and online customers.
Consumer research conducted by the Company has identified significant sales opportunities with customers seeking modern and trendy merchandise. As a result, a focus is being placed on expanding assortments of this type of merchandise across all categories. The Company is also seeking to enhance its value proposition to customers through its merchandise offerings, pricing and sales promotion strategies, rewards card programs, and its returns policy and positive customer service reputation.
Belk stores and belk.com offer large assortments of many national brands. The Company has enjoyed excellent long-term relationships with many top apparel and cosmetics suppliers and is often the sole distributor of desirable apparel, accessories and cosmetic lines in its markets. Belk stores and belk.com also offer exclusive private brands in selected merchandise categories that are designed and manufactured to provide compelling fashion assortments that meet customers’ needs and set Belk apart from competitors through their styling, quality and price. The Company’s private brands include Madison, ND-New Directions, ND Weekend, Via Neroli, Kim Rogers, J. Khaki, Pro Tour, Saddlebred, Red Camel, Nursery Rhyme, Belk Silverworks, Be Inspired, Biltmore™ For Your Home, Home Accents and Cook’s Tools.
The Company introduced two new lines of men’s private brand merchandise during fiscal year 2013 — Black Brown 1826, a line of modern men’s sportswear offered in partnership with designer Joseph Abboud and Lord & Taylor, and Ocean & Coast, a new modern, Southern brand inspired by the casual island and coastal lifestyle prevalent in many Belk markets. In addition, Belk launched two new private brands in early fiscal year 2014 — MADE Cam Newton, a menswear line being offered in 133 stores and at belk.com, and CYNTHIA Cynthia Rowley, an exclusive line of apparel, handbags, jewelry, scarves, accessories and small leather goods available in 149 stores and at belk.com.
In the fourth quarter of fiscal year 2010, Belk began a strategic initiative to strengthen its merchandising and planning organization. The Company is investing in additional staffing and enhanced merchandise information systems in order to improve buying and planning processes. The initiative seeks to enable Belk to better meet customers’ shopping needs by effectively tailoring merchandise assortments by market area.
In fiscal year 2007, the Company established its own fine jewelry business, with buying and administrative offices at the corporate office in Charlotte and a state of the art repair and distribution center located in Ridgeland, Mississippi. The shops replaced the Company’s former leased fine jewelry operations and offer expanded assortments of high quality diamond jewelry, rubies, emeralds and other fine gemstones, and top brands of fine watches and jewelry. During fiscal year 2013, the Company opened six new fine jewelry shops and was operating 153 fine jewelry shops in its stores under the “Belk and Co. Fine Jewelers” name as of the fiscal year end. Belk and Co. Fine Jewelers merchandise is also sold on belk.com.
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Marketing and Branding
The Company employs strategic marketing initiatives to develop and enhance the equity of the Belk brand and to create and strengthen “one-to-one” relationships with customers. The Company’s marketing strategy involves a combination of mass media print and broadcast advertising, direct marketing, Internet marketing, social media, comprehensive store visual merchandising, and signing and in-store special events, such as trunk shows, celebrity and designer appearances, Charity Sale, Educator Appreciation Day, Healthcare Appreciation Day and Senior Day.
In the third quarter of fiscal year 2011, Belk launched a company-wide re-branding and corporate marketing initiative that included a new logo and tag line, “Modern. Southern. Style.” and the installation of new logo signs in all stores. The corporate identity re-launch was supported by an extensive re-branding, advertising and public relations campaign that included market-wide television and print advertising, circulars, direct mail and social media, all of which promoted Belk’s new graphic elements and brand messages. During fiscal year 2012, the Company became the title sponsor of the annual college football bowl held at Bank of America Stadium in Charlotte, NC. The game is televised nationally on ESPN and provides a vehicle for the Company to market the Belk brand beyond its geographic footprint.
eCommerce
The Company continues to grow its eCommerce business and expand capabilities on the belk.com website. The belk.com website features a wide assortment of home and gift merchandise, fashion apparel, accessories, shoes and cosmetics. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands. The website also includes expanded information about the Company, including its history, career opportunities, community involvement, diversity and sustainability initiatives, a Company newsroom, its Securities and Exchange Commission (“SEC”) filings, and more.
In fiscal year 2013, the Company strengthened its eCommerce business with systems improvements, expansion of merchandise assortments, increased multimedia marketing and implementation of new social community engagement strategies. The Company’s 142,000 square foot eCommerce fulfillment center in Pineville, NC was expanded by 117,000 square feet in the fourth quarter of fiscal year 2011. Additionally, in February 2012, the Company entered into a lease for a 515,000 square foot fulfillment center in Jonesville, SC, which began operations in June 2012.
Gift Cards
The Company’s gift card program provides a convenient option for customer gift-giving and enables stores to issue electronic credits to customers in lieu of cash refunds for merchandise returned without sales receipts. Several types of gift cards are available, each featuring a distinctive design and appeal. During fiscal year 2013, the Company began allowing redemption of Belk gift cards for purchases made on belk.com. It also continued to expand its efforts to offer Belk gift cards for sale outside of Belk stores, mainly in select grocery store outlets through partnerships with regional and national grocery store chains.
Salons and Spas
As of the end of fiscal year 2013, the Company owned and operated salons and spas in 19 Belk locations that specialize in the latest trends in hair, spa and relaxation services. The salons and spas offer assortments of top brand name beauty products, including Aveda, Bumble and Bumble, Redken and Pureology. The spas offer massage therapy, full skincare, manicure and pedicure services, and specialized body treatments. Eight of the salons and spas operate under the name “Carmen! Carmen! Prestige Salon and Spa at Belk,” two under the name “Richard Joseph Studio Salon/Spa at Belk,” and the balance under the name “Belk Salon and Spa.”
Belk Gift Registry
The Company’s gift registry offers a wide assortment of bridal merchandise that can be registered for and purchased online at belk.com or in local Belk stores and shipped directly to the customer or gift recipient. Brides and engaged couples can conveniently create their gift registry and make selections through the belk.com website, or they can go to a Belk store where a certified professional bridal consultant can provide assistance using the store’s online gift registry kiosk. In the Belk stores that have kiosks, brides and engaged couples can use a portable scanning device, which enables them to quickly and easily enter information on their gift selections directly into the registry system.
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Belk Proprietary Charge Programs
In fiscal year 2013, Belk and GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance, continued to plan and execute enhanced marketing programs designed to recognize and reward Belk card customers, attract profitable new customers and increase sales from existing card customers. The Company’s customer loyalty program (“Belk Rewards Card Loyalty Program”) issues certificates for discounts on future purchases to Belk Rewards Card customers based on their spending levels. The rewards program is cumulative, issuing a $10 certificate for every 400 points earned in a calendar year. Belk Rewards Card customers whose purchases total $600 or more in a calendar year qualify for a Belk Premier Rewards Card that entitles them to unlimited free gift wrapping and basic alterations, an interest-free Flex Pay Plan account and notifications of special savings and sales events. Customers who spend more than $1,500 annually at Belk qualify for a Belk Elite Rewards Card that offers additional benefits, including a specially designed black Elite credit card, free shipping for belk.com and store purchases, triple points events, a 20% off birthday shopping pass, points that never expire and quarterly Pick Your Own Sale Days.
Systems and Technology
The Company substantially increased its investments in technology and information systems during fiscal year 2013 to support sales and merchandising initiatives, reduce costs, improve core business processes and support its overall business strategy. These investments included people, processes and technology. Key systems initiatives included the implementation of new merchandising tools such as merchandise financial planning and demand forecasting as part of the Company’s strategic merchandising and retail technology program. The Company also continued to invest significantly in enhancements to thebelk.com website and its fulfillment capabilities, including the opening of a new direct to consumer web commerce fulfillment facility in Jonesville, SC. In addition to these customer facing technologies, the Company implemented an automated talent management program that supports the continued development of Company associates. The Company also continued to invest in foundational technologies that are a key component of the Company’s strategy to deliver a seamless omnichannel experience to customers. Belk expects to continue to make significant investments in its information systems and new technology in fiscal year 2014 in order to expand its business and provide improved decision making tools that enable management to react quickly to changing sales trends, improve merchandise mix, distribute merchandise based on individual market needs and manage inventory levels based on customer demand.
Inventory Management and Logistics
The Company currently operates five distribution facilities that receive and process merchandise for delivery to Belk stores and belk.com customers. A 410,000 square foot distribution center in Blythewood, SC services the stores located in the northern and eastern areas of the Company’s footprint; a 174,000 square foot distribution center at the Greater Jackson Industrial Park in Byram, MS services the central and western areas; an 8,300 square foot distribution center in Ridgeland, MS services the Company’s fine jewelry operations; and a 259,000 square foot fulfillment center in Pineville, NC services orders from the belk.com website. In fiscal year 2013, the Company began operating a 515,000 square foot fulfillment center in Jonesville, SC that also services belk.com orders. The Company’s “store ready” merchandise receiving processes enable stores to receive and process merchandise shipments and move goods to the sales floor quickly and efficiently.
Revitalizing Our Customer Care
In fiscal year 2012, the Company launched a 36-month initiative aimed at fostering a dynamic selling environment in stores by reducing or eliminating non-selling tasks. The first phase of the project focuses on support re-engineering to improve in-store support processes such as increasing dock efficiencies and processing all inbound freight in a timely manner. Phase two includes achieving customer service excellence by developing associates’ selling skills and behaviors, and the final phase will focus on the implementation of a new workforce management and scheduling system.
Strategic Sourcing
The Company continued its strategic sourcing program started in fiscal year 2011 designed to streamline and institute best practices for its sourcing and procurement processes for non-retail goods and supplies. Strategic sourcing has become a standard business practice for the Company, with sourcing efforts continuing to yield significant savings in many areas of the business including purchases for construction projects and fixture, software and supply purchases.
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Sustainability
The Company continued implementation of sustainability initiatives aimed at fulfilling its commitment to be a good steward of the environment by eliminating waste, conserving energy, using resources more responsibly and embracing and promoting sustainable practices. Current initiatives include expanding the recycling of cardboard, hangers and plastic; increasing energy efficiency; implementing sustainability in store construction and maintenance; reducing product packaging materials; and using solar energy. During fiscal 2013, the Company implemented energy efficient LED lighting systems, retrofitted stores with other energy efficient lighting, and installed variable frequency drives to reduce energy consumption by mechanical systems. The Company continued its Employee Environment giving campaign and partnered with EarthShare to create a new recyclable shopping bag. It also partnered with the HERproject, which links multinational companies and their factories to create sustainable workplace programs that increase women’s health awareness.
Philanthropy
In fiscal year 2013, the Company and its associates, customers and vendors contributed over $19.3 million to local communities. Of that amount, the Company funded $6.2 million to over 250 nonprofit organizations, with a focus on education, breast cancer research and awareness, and community strengthening. The remainder of the funding included associate, vendor and customer dollars raised in Belk-led charitable initiatives, including the semi-annual Belk Charity Sale, local United Way campaigns, the American Heart Association’s “Our Heart to Yours” campaign, and the Susan G. Komen for the Cure campaign.
125th Anniversary
Belk is celebrating its 125th anniversary in fiscal year 2014 with numerous special promotions and events designed to express appreciation to customers, associates, vendors and other stakeholders for their contributions to the Company’s success. Activities will include exclusive product offerings, celebrity appearances and community service projects across the Company’s 16-state market area. More information is available on the Company’s website at belk.com/125.
Non-Retail Businesses
Several of the Company’s subsidiaries engage in businesses that indirectly or directly support the operations of the retail department stores. The non-retail businesses include United Electronic Services (“UES”), a division of the Company, which provides equipment maintenance services to Belk stores and third parties.
Industry and Competition
The Company operates department stores in the highly competitive retail industry. Management believes that the principal competitive factors for retail department store operations include merchandise selection, quality, value, customer service and convenience. The Company believes its stores are strong competitors in all of these areas. The Company’s primary competitors are traditional department stores, mass merchandisers, national apparel chains, individual specialty apparel stores and direct merchant firms, including Macy’s, Inc., Dillard’s, Inc., Nordstrom, Inc., Kohl’s Corporation, Target Corporation, Sears Holding Corporation, TJX Companies, Inc., Wal-Mart Stores, Inc., J.C. Penney Company, Inc, and Amazon.com, Inc.
Trademarks and Service Marks
Belk Stores Services, Inc. owns all of the principal trademarks and service marks now used by the Company, including “belk.” These marks are registered with the United States Patent and Trademark Office. The term of each of these registrations is generally ten years, and they are generally renewable indefinitely for additional ten-year periods, so long as they are in use at the time of renewal. Most of the trademarks, trade names and service marks employed by the Company are used in its private brands program. The Company intends to vigorously protect its trademarks and service marks and initiate appropriate legal action whenever necessary.
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Seasonality and Quarterly Fluctuations
Due to the seasonal nature of the retail business, the Company has historically experienced, and expects to continue to experience, seasonal fluctuations in its revenues, operating income and net income. A disproportionate amount of the Company’s revenues and a substantial amount of operating and net income are realized during the fourth quarter, which includes the holiday selling season. Working capital requirements also fluctuate during the year, increasing somewhat in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday selling season when the Company carries higher inventory levels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”
Associates
As of the end of fiscal year 2013, the Company had approximately 23,800 full-time and part-time associates. Because of the seasonal nature of the retail business, the number of associates fluctuates from time to time and is highest during the holiday shopping period in November and December. The Company as a whole considers its relations with associates to be good. None of the associates of the Company are represented by unions or subject to collective bargaining agreements.
Where You Can Find More Information
The Company makes available free of charge through its website, www.belk.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.
Certain statements made in this report, and other written or oral statements made by or on our behalf, may constitute “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. You can identify these forward-looking statements through our use of words such as “may,” “will,” “intend,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or other similar words.
Forward-looking statements include information concerning possible or assumed future results from merchandising, marketing and advertising in our stores and through the Internet, general economic conditions, our ability to be competitive in the retail industry, our ability to execute profitability and efficiency strategies, our ability to execute growth strategies, anticipated benefits from our strategic initiatives to strengthen our merchandising and planning organizations, anticipated benefits from our belk.com website and our eCommerce fulfillment centers, the expected benefits of new systems and technology, and the anticipated benefits under our Program Agreement with GE. These forward-looking statements are subject to certain risks and uncertainties that may cause our actual results to differ significantly from the results we discuss in such forward-looking statements.
We believe that these forward-looking statements are reasonable. However, you should not place undue reliance on such statements. Any such forward-looking statements are qualified by the following important risk factors and other risks which may be disclosed from time to time in our filings that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them.
Economic, political and business conditions could negatively affect our financial condition and results of operations.
Economic, political and business conditions, nationally and in our market areas, are beyond our control. These factors influence our forecasts and impact actual performance. Factors include rates of economic growth, interest rates, inflation or deflation, consumer credit availability, levels of consumer debt and bankruptcies, tax rates and policy, unemployment trends, a health pandemic, catastrophic events, potential acts of terrorism and threats of such acts and other matters that influence consumer confidence and spending. Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely
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affected. The downturn in the economy during fiscal years 2009 and 2010, and the continuing uncertain economic climate in fiscal years 2011, 2012 and 2013 have affected, and will continue to affect for an undetermined period of time, consumer purchases of our merchandise. The precise future impact and duration of these economic conditions are uncertain, but they could continue to adversely impact our financial condition and results of operations.
Our sales and operating results depend on accurately anticipating customer demands.
Our business depends upon the ability to anticipate the demands and expectations of our customers for a wide variety of merchandise and services. We routinely make predictions about the merchandise mix, quality, style, service, convenience and credit availability of our customers. If we do not accurately anticipate changes in buying, charging and payment behavior among our customers, or consumer tastes, preferences, spending patterns and other lifestyle decisions, we may be faced with excess inventories for some products and/or missed opportunities for others. Excess inventories can result in lower gross margins due to greater than anticipated discounts and markdowns that might be necessary to reduce inventory levels. Low inventory levels can adversely affect the fulfillment of customer demand and diminish sales and brand loyalty. Our inability to identify and respond to lifestyle and customer preferences and buying trends could have an adverse impact on our business, and our failure to accurately predict inventory demands could adversely impact our results of operations.
Unseasonable and extreme weather conditions in our market areas may adversely affect our business.
Apparel comprises a majority of our sales. If the weather in our market areas is unseasonably warm or cold for an extended period of time, it can affect the timing of apparel purchases by our customers and result in an inventory imbalance. In addition, frequent or unusually heavy snow or ice storms, hurricanes or tropical rain storms in our market areas may decrease customer traffic in our stores and adversely affect our business.
The seasonal nature of our business could have a material adverse effect on our financial results and cash flows.
We experience seasonal fluctuations in quarterly net income, as is typical in the retail industry. A significant portion of our revenues are generated during the holiday season in the fourth fiscal quarter. Because we order merchandise in advance of our peak season, we carry a significant amount of inventory during that time. A decrease in the availability of working capital needed in the months before the peak period could impact our ability to build up an appropriate level of merchandise in our stores. If we do not order the merchandise mix demanded by our customers or if there is a decrease in customer spending during the peak season, we may be forced to rely on markdowns or promotional sales to dispose of the inventory, which could have a material adverse effect on our financial results and cash flows.
The retail industry is highly competitive, which could adversely impact our revenues and profitability.
We face competition from other department and specialty stores and other retailers, including luxury goods retailers, general merchandise stores, Internet retailers, mail order retailers and off-price and discount stores in the highly competitive retail industry. Although we offer extensive Internet purchasing options and online gift registry for our customers, we rely on in-store sales for a substantial majority of our revenues. Competition is characterized by many factors, including price, merchandise mix, quality, style, service, convenience, credit availability and advertising. We have expanded and continue to expand into new markets served by our competitors. We have also expanded our eCommerce capabilities in the past few years. We face the entry of new competitors into or expansion of existing competitors in our existing markets, all of which further increase the competitive environment and cause downward pressure on prices and reduced margins, which could adversely impact our revenues and profitability. In addition, a significant shift in consumer buying patterns from in-store purchases to Internet purchases could negatively impact our revenues.
We may not be able to develop and implement effective advertising, marketing and promotional campaigns.
We spend significant amounts on advertising, marketing and promotional campaigns. Our business depends on effective marketing to generate high customer traffic in our stores and through online sales. If our advertising, marketing and promotional efforts are not effective, it could negatively impact our operating results.
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Variations in the amount of vendor allowances received could adversely impact our operating results.
We receive vendor allowances for advertising, payroll and margin maintenance that are a strategic part of our operations. A reduction in the amount of cooperative advertising allowances would likely cause us to consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase/decrease our expenditures and/or revenue. Decreased payroll reimbursements would either cause payroll costs to rise, negatively impacting operating income, or cause us to reduce the number of employees, which may cause a decline in sales. A decline in the amount of margin maintenance allowances would either increase cost of sales, which would negatively impact gross margin and operating income, or cause us to reduce merchandise purchases, which may cause a decline in sales.
If we do not successfully implement our new information technology platform, our financial performance could be adversely affected.
We have undertaken a process of transforming our technology infrastructure and implementing new systems that will impact our primary merchandising, planning and core financial processes. If we do not implement these systems successfully, our ability to perform our key business processes could be disrupted and our financial performance could be adversely affected.
If we do not successfully operate our website and our fulfillment facilities, our financial performance could be adversely affected.
In fiscal year 2009, we launched a substantially updated and redesigned website that enhanced customers’ online shopping capabilities, offered expanded merchandise assortments and enabled customers to access a broader range of our information online, including current sales promotions, special events and corporate information. In fiscal year 2011, we expanded our online capabilities, increased multimedia marketing, implemented social community engagement strategies and expanded our Pineville, NC fulfillment facility. In fiscal year 2013, we began operating a fulfillment center in Jonesville, SC that also services orders from the belk.com website. If we do not successfully meet the challenges of successfully operating our website, managing our social community engagement and efficiently operating our fulfillment centers, our financial performance could be adversely affected.
Our ability to manage multiple initiatives simultaneously could impact our operating results.
The Company is currently managing a number of significant change initiatives, such as systems and technology enhancements, changes in our merchandising and planning processes, store process improvements, strategic sourcing, store remodels and others. If we are unable to successfully coordinate and execute these initiatives while managing the other areas of our business, our results could be adversely affected.
Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.
Our merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors, including the vendor’s ability to secure adequate financing and obtain access to products in a timely and efficient manner, could be a significant challenge, especially with respect to goods sourced outside the United States.
Political or financial instability, trade restrictions, tariffs, transport capacity, costs and other factors relating to foreign trade are beyond our control, and we may experience supply problems or untimely delivery of merchandise as a result. If we are not able to source merchandise at an acceptable price and in a timely manner, it could negatively impact our results.
Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of goods and negatively impact our financial results.
We have experienced inflation in some of our merchandise costs due to increases in raw materials, fuel and labor costs. The cost of cotton, which is a key raw material in many of our products, has had the most significant increases in the recent past. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs,
10
energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Inflation has not to date had a material negative impact on our sales or profitability, but an inability to mitigate future cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability; while any related pricing actions might cause a decline in our sales volume. Additionally, any decrease in the availability of raw materials could impair the ability of our suppliers to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.
Changes in the income and cash flow from our long-term marketing and servicing alliance related to our proprietary credit cards could impact operating results and cash flows.
In fiscal year 2006, we sold our proprietary credit card business to, and entered into a 10-year strategic alliance with, GE to operate our private label credit card business, and we recently extended that alliance for an additional 18 months to December 2017. Sales of merchandise and services are facilitated by these credit card operations. We receive income from GE relating to the credit card operations based on a variety of variables, but primarily from the amount of purchases made through the proprietary credit cards. The income we receive from this alliance and the timing of receipt of payments will vary based on changes in customers’ credit card use, and GE’s ability to extend credit to our customers, all of which can vary based on changes in federal and state banking and consumer protection laws and from a variety of economic, legal, social, and other factors that we cannot control.
If we do not manage expenses appropriately, our results of operations could be adversely affected.
Our performance depends on appropriate management of our expense structure, including our selling, general and administrative costs. If we fail to meet our anticipated cost structure based on our anticipated sales level or to appropriately reduce expenses during a weak sales environment, our results of operations could be adversely affected.
Capital investments in store growth and remodels may not produce the returns we anticipate.
Our ability to identify strategic opportunities to open new stores, or to remodel or expand existing stores, will depend in part upon general economic conditions and the availability of existing retail stores or store sites on acceptable terms. It will also depend on our ability to successfully execute our retailing concept in new markets and geographic regions and to design and implement remodeling plans and new merchandising concepts. In addition, we will need to identify, hire and retain a sufficient number of qualified personnel to work in our new and remodeled stores. Increases in real estate, construction and development costs, consolidation or viability of prospective developers and the availability of financing to potential developers could limit our growth opportunities. If consumers are not receptive to us in new markets or regions or to our remodels and expansions in existing markets, our financial performance could be adversely affected.
Our ownership and leasing of real estate could expose us to potential liabilities or losses.
We own or lease 315 store buildings, which subjects us to all the risks associated with owning and leasing real estate. If a store is not profitable and we make the decision to close it, we may remain committed to perform certain obligations under the lease, including the payment of rent, for the balance of the lease term. In addition, as each of the leases expires, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. If an existing owned store is not profitable and we make the decision to close it, we may be required to record an impairment charge and/or exit costs associated with the closing of that store. In addition, lease or other obligations may restrict our right to cease operations of an unprofitable owned or leased store, which may cause us to continue to operate the location at a loss.
If our logistics or distribution processes do not operate effectively, our business could be disrupted.
We currently operate distribution centers in South Carolina and Mississippi that service all of our stores and fulfillment centers in North Carolina and South Carolina that process belk.com customer orders. The efficient operation of our business is dependent on receiving and distributing merchandise in a cost-effective and timely manner. We also rely on information systems to effectively manage sales, distribution, merchandise planning and allocation functions. We are continuing to implement software technology to assist with these functions. If we do not effectively operate the distribution network or if information systems fail to perform as expected, our business could be disrupted.
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A security breach that results in the unauthorized disclosure of Company, employee or customer information could adversely affect our business, reputation and financial condition.
The protection of our customer, employee and company data is critical to the Company. In addition, customers have a high expectation that the Company will adequately protect their personal information. The regulatory environment surrounding information security and privacy is increasingly demanding, with new and constantly changing requirements across our business units. A significant breach of customer, employee or company data associated with Belk, whether by one of our employees or by a third party, could damage our reputation, our brand and our relationship with our customers and result in lost sales, fines and lawsuits. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in disruption of our operations.
We rely on third party vendors for certain business support.
Some business support processes are outsourced to third parties. We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, including secure data transfers between us and third-party vendors; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting.
Loss of our key management, or an inability to attract such management and other personnel, could adversely impact our business.
We depend on our senior executive officers to run our business. The loss of any of these officers could materially adversely affect our operations. Competition for qualified employees is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could adversely impact our business.
Changes in federal, state or local laws and regulations could expose us to legal risks and adversely affect our results of operations.
Our business is subject to a wide array of laws and regulations. While our management believes that our associate relations are good, significant legislative changes that impact our relationship with our associates could increase our expenses and adversely affect our results of operations. Examples of possible legislative changes impacting our relationship with our associates include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to legal risk, including government enforcement action and class action civil litigation. Changes in the regulatory environment regarding other topics such as privacy and information security, product safety or environmental protection, among others, could also cause our expenses to increase and adversely affect our results of operations.
Covenants in our debt agreements impose some financial restrictions on us.
Our debt agreements contain certain restrictive financial covenants, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. Our failure to comply with these covenants could adversely affect capital resources, financial condition and liquidity. As of February 2, 2013, we were in compliance with our debt covenants; however, if we fail to comply with our debt covenants, we could be forced to settle outstanding debt obligations, negatively impacting cash flows, and our ability to obtain future financing.
| Item 1B. | Unresolved Staff Comments |
None.
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Store Locations
As of the end of fiscal year 2013, the Company operated a total of 301 retail stores, with approximately 22.7 million selling square feet, in the following 16 states:
| | | | |
Alabama - 22 | | Louisiana - 4 | | Oklahoma - 3 |
Arkansas - 7 | | Maryland - 2 | | South Carolina - 37 |
Florida - 27 | | Mississippi - 16 | | Tennessee - 23 |
Georgia - 46 | | Missouri - 1 | | Texas - 13 |
Kentucky - 6 | | North Carolina - 70 | | Virginia - 20 |
| | | | West Virginia - 4 |
Belk stores are located in regional malls (152), strip shopping centers (96), “power” centers (27) and “lifestyle” centers (24). Additionally, there are two freestanding stores. Approximately 83% of the gross square footage of the typical Belk store is devoted to selling space to ensure maximum operating efficiencies. New and renovated stores feature the latest in retail design, including updated exteriors and interiors. The interiors are designed to create an exciting, comfortable and convenient shopping environment for customers. They include the latest lighting and merchandise fixtures, as well as quality decorative floor and wall coverings and other special decor. The store layout is designed for ease of shopping, and store signage is used to help customers identify and locate merchandise.
As of the end of fiscal year 2013, the Company owned 75 store buildings, leased 166 store buildings under operating leases and owned 74 store buildings under ground leases. The typical operating lease has an initial term of between 15 and 20 years, with four renewal periods of five years each, exercisable at the Company’s option. The typical ground lease has an initial term of 20 years, with a minimum of four renewal periods of five years each, exercisable at the Company’s option.
Non-Store Facilities
The Company also owns or leases the following distribution and fulfillment centers, division offices and headquarters facilities:
| | | | |
| Belk Property | | Location | | Own/Lease |
Belk, Inc. Corporate Offices (Two locations) | | Charlotte, NC | | Lease |
Belk Central Distribution Center | | Blythewood, SC | | Lease |
Belk Distribution Center | | Byram, MS | | Own |
Belk, Inc. Fine Jewelry Distribution Center | | Ridgeland, MS | | Own |
Belk, Inc. eCommerce Fulfillment Center | | Pineville, NC | | Lease |
Belk, Inc. eCommerce Fulfillment Center | | Jonesville, SC | | Lease |
Other
The Company owns or leases various other real properties, including primarily former store locations. Such property is not material, either individually or in the aggregate, to the Company’s consolidated financial position or results of operations.
In the ordinary course of business, the Company is subject to various legal proceedings and claims. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on its consolidated financial position or results of operations.
| Item 4. | Mine Safety Disclosures |
None.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
In fiscal year 2013, there was no established public trading market for either the Belk Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) or the Belk Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”). There were limited and sporadic quotations of bid and ask prices for the Class A Common Stock and the Class B Common Stock on the Over the Counter Bulletin Board and on the OTC Market, in the OTCQB Tier (formally known as the “Pink Sheets”), under the symbols “BLKIA” and “BLKIB,” respectively. As of April 5, 2013, there were approximately 551 holders of record of the Class A Common Stock and 297 holders of record of the Class B Common Stock.
On December 11, 2012, the Company declared a regular dividend of $0.75 and a special one-time additional dividend of $0.25 on each share of Class A and Class B Common Stock outstanding on that date. The $0.75 per share regular dividend represented an acceleration of the regular dividend normally paid in April. On March 28, 2012, the Company declared a regular dividend of $0.75, and on March 30, 2011, the Company declared a regular dividend of $0.55 on each share of the Class A and Class B Common Stock outstanding on those dates. The amount of dividends paid out with respect to fiscal year 2014 and each subsequent year will be determined at the sole discretion of the Board of Directors based upon the Company’s results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. For a discussion of the Company’s debt facilities and their restrictions on dividend payments, see “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There were no purchases of issuer equity securities during the fourth quarter of fiscal year 2013.
| Item 6. | Selected Financial Data |
The following selected financial data are derived from the consolidated financial statements of the Company. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. All fiscal years for which financial information is set forth below contained 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks. The comparable store revenue increase for fiscal year 2013 discussed below is based on 52 weeks.
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2, | | | January 28, | | | January 29, | | | January 30, | | | January 31, | |
| | | 2013(2) | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
| | | (in thousands, except per share amounts) | |
SELECTED STATEMENT OF INCOME DATA: | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 3,956,866 | | | $ | 3,699,592 | | | $ | 3,513,275 | | | $ | 3,346,252 | | | $ | 3,499,423 | |
Cost of goods sold | | | 2,636,140 | | | | 2,461,515 | | | | 2,353,536 | | | | 2,271,925 | | | | 2,430,332 | |
Goodwill impairment | | | — | | | | — | | | | — | | | | — | | | | 326,649 | |
Depreciation and amortization expense | | | 122,622 | | | | 122,761 | | | | 140,239 | | | | 158,388 | | | | 165,267 | |
Operating income (loss) | | | 339,937 | | | | 300,910 | | | | 245,981 | | | | 147,441 | | | | (232,643 | ) |
Income (loss) before income taxes | | | 290,504 | | | | 250,098 | | | | 195,871 | | | | 97,190 | | | | (283,281 | ) |
Net income (loss) | | | 188,370 | | | | 183,148 | | | | 127,628 | | | | 67,136 | | | | (212,965 | ) |
Basic net income (loss) per share | | | 4.34 | | | | 4.04 | | | | 2.72 | | | | 1.39 | | | | (4.35 | ) |
Diluted net income (loss) per share | | | 4.31 | | | | 4.02 | | | | 2.71 | | | | 1.39 | | | | (4.35 | ) |
Cash dividends per share | | | 1.750 | | | | 0.550 | | | | 0.800 | | | | 0.200 | | | | 0.400 | |
SELECTED BALANCE SHEET DATA: | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net (1) | | | 36,315 | | | | 39,431 | | | | 31,119 | | | | 22,427 | | | | 34,043 | |
Merchandise inventory | | | 1,009,687 | | | | 887,029 | | | | 808,503 | | | | 775,342 | | | | 828,497 | |
Working capital | | | 788,620 | | | | 845,418 | | | | 924,450 | | | | 986,234 | | | | 808,031 | |
Total assets | | | 2,482,363 | | | | 2,514,216 | | | | 2,389,631 | | | | 2,582,575 | | | | 2,503,588 | |
Long-term debt and capital lease obligations | | | 399,824 | | | | 523,679 | | | | 539,239 | | | | 688,856 | | | | 693,190 | |
Stockholders’ equity | | | 1,262,621 | | | | 1,236,230 | | | | 1,156,272 | | | | 1,094,295 | | | | 1,032,027 | |
SELECTED OPERATING DATA: | | | | | | | | | | | | | | | | | | | | |
Number of stores at end of period | | | 301 | | | | 303 | | | | 305 | | | | 305 | | | | 307 | |
Comparable store revenue increase (decrease) (2) | | | 6.3 | % | | | 5.5 | % | | | 5.1 | % | | | (4.6 | )% | | | (8.7 | )% |
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| (1) | The Company previously presented amounts due from vendors on a gross basis due to systems constraints and the lack of available information in fiscal year 2009 and prior. The Company presents amounts due from vendors on a net basis, and revised amounts presented in the fiscal year 2009 balance sheet for comparability purposes. |
| (2) | This fiscal year was a 53-week year. On a 53- versus 52-week basis, comparable store revenues increased 7.5% in fiscal year 2013. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Belk, Inc., together with its subsidiaries (collectively, the “Company” or “Belk”), is the largest family owned and operated department store business in the United States, with 301 stores in 16 states, primarily in the southern United States, as of the end of fiscal year 2013. The Company generated revenues of $4.0 billion for the fiscal year ended February 2, 2013, and together with its predecessors, has been successfully operating department stores since 1888 by seeking to provide superior service and merchandise that meets customers’ needs for fashion, value and quality.
The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. Fiscal year 2014 will contain 52 weeks and will end on February 1, 2014. Fiscal year 2013 contained 53 weeks and ended on February 2, 2013, while fiscal years 2012 and 2011 contained 52 weeks and ended on January 28, 2012 and January 29, 2011, respectively. All fiscal years for which financial information is set forth below contained 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks. The comparable store net revenue increase for fiscal year 2013 discussed below is based on 52 weeks.
The Company’s total revenues increased 7.0% in fiscal year 2013 to $4.0 billion. Comparable store sales increased 6.3%, which included a $60.8 million, or 84.0%, increase in eCommerce revenues, as a result of the Company’s investments in key strategic merchandising, marketing, branding, eCommerce and service excellence initiatives aimed at delivering Modern. Southern. Style. to customers and fulfilling their needs for fashion merchandise and value. Merchandising categories with the highest growth rate for the year included women’s accessories, children’s, men’s and home. The Company calculates comparable store revenue as sales from stores that have reached the one-year anniversary of their opening as of the beginning of the fiscal year and eCommerce revenues, but excludes closed stores. Stores undergoing remodeling, expansion or relocation remain in the comparable store revenue calculation. Definitions and calculations of comparable store revenue differ among companies in the retail industry. Net income was $188.4 million or $4.34 per basic share and $4.31 per diluted share in fiscal year 2013 compared to net income of $183.1 million or $4.04 per basic share and $4.02 per diluted share in fiscal year 2012. The increase in net income is primarily a result of higher sales and expense leverage in fiscal year 2013, offset by the release of a $20.2 million deferred tax valuation allowance in the prior year.
Management believes that consumers will remain focused on value in fiscal year 2014. The Company intends to continue to be flexible in sales and inventory planning and in expense management in order to react to changes in consumer demand. Although the Company expects that operations will be influenced by general economic conditions, including rising food, fuel and energy prices, management does not believe that inflation has had a material effect on the Company’s results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.
Belk stores seek to provide customers the convenience of one-stop shopping, with an appealing merchandise mix and extensive offerings of brands, styles, assortments and sizes. Belk stores sell top national brands of fashion apparel, shoes and accessories for women, men and children, as well as cosmetics, home furnishings, housewares, fine jewelry, gifts and other types of quality merchandise. The Company also sells exclusive private label brands, which offer customers differentiated merchandise selections. Larger Belk stores may include hair salons, spas, restaurants, optical centers and other amenities.
The Company seeks to be the leading department store in its markets by selling merchandise to customers that meet their needs for fashion, selection, value, quality and service. To achieve this goal, Belk’s business strategy focuses on quality merchandise assortments, effective marketing and sales promotional strategies, attracting and retaining talented, well-qualified associates to deliver superior customer service, and operating efficiently with investments in information technology and process improvement.
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The Company operates retail department stores in the highly competitive retail industry. Management believes that the principal competitive factors for retail department store operations include merchandise selection, quality, value, customer service and convenience. The Company believes its stores are strong competitors in all of these areas. The Company’s primary competitors are traditional department stores, mass merchandisers, national apparel chains, individual specialty apparel stores, direct merchant firms and online retailers, including Macy’s, Inc., Dillard’s, Inc., Nordstrom, Inc., Kohl’s Corporation, Target Corporation, Sears Holding Corporation, TJX Companies, Inc., Wal-Mart Stores, Inc., J.C. Penney Company, Inc, and Amazon.com, Inc.
The Company has focused its growth strategy in the last several years on remodeling and expanding existing stores, developing new merchandising concepts in targeted demand centers, and expanding its online capabilities. The Company will, however, continue to explore new store opportunities in markets where the Belk name and reputation are well known and where Belk can distinguish its stores from the competition. In fiscal year 2013, the net store selling square footage remained consistent due to four store closings, offset by two store openings and five store expansions.
eCommerce
The Company continues to grow its eCommerce business and expand capabilities on the belk.com website. The belk.com website features a wide assortment of fashion apparel, accessories and shoes, plus a large selection of cosmetics, home and gift merchandise. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands. The Company generated eCommerce revenues of $135.2 million, $72.4 million and $34.8 million in fiscal years 2013, 2012 and 2011, respectively. On a 52- versus 52-week basis, eCommerce revenues increased 84.0%, 108.1% and 69.5%, and contributed 1.6%, 1.0% and 0.4% to the comparable store revenue increases in fiscal years 2013, 2012 and 2011, respectively.
In fiscal year 2013, the Company strengthened its eCommerce business with systems improvements, expansion of merchandise assortments, increased multimedia marketing and implementation of new social community engagement strategies. The Company’s 142,000 square foot eCommerce center in Pineville, NC was expanded by 117,000 square feet in the fourth quarter of fiscal year 2011. Additionally, in February 2012, the Company entered into a lease for a 515,000 square foot fulfillment center in Jonesville, SC, which began operations in June 2012.
Results of Operations
The following table sets forth, for the periods indicated, the percentage relationship to revenues of certain items in the Company’s consolidated statements of income and other pertinent financial and operating data.
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2, | | | January 28, | | | January 29, | |
| | | 2013(1) | | | 2012 | | | 2011 | |
| | | |
SELECTED FINANCIAL DATA | | | | | | | | | | | | |
Revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of goods sold | | | 66.6 | | | | 66.5 | | | | 67.0 | |
Selling, general and administrative expenses | | | 24.9 | | | | 25.4 | | | | 26.0 | |
Gain on sale of property and equipment | | | 0.1 | | | | 0.1 | | | | 0.2 | |
Asset impairment and exit costs | | | — | | | | 0.1 | | | | 0.2 | |
Operating income | | | 8.6 | | | | 8.1 | | | | 7.0 | |
Interest expense | | | 1.3 | | | | 1.4 | | | | 1.4 | |
Income tax expense | | | 2.6 | | | | 1.8 | | | | 1.9 | |
Net income | | | 4.8 | | | | 5.0 | | | | 3.6 | |
SELECTED OPERATING DATA: | | | | | | | | | | | | |
Selling square footage (in thousands) | | | 22,700 | | | | 22,800 | | | | 22,800 | |
Store revenues per selling square foot | | $ | 174 | | | $ | 162 | | | $ | 154 | |
Comparable store revenue increase (1) | | | 6.3 | % | | | 5.5 | % | | | 5.1 | % |
| | | |
Number of stores | | | | | | | | | | | | |
Opened | | | 2 | | | | 1 | | | | 1 | |
Closed | | | (4 | ) | | | (3 | ) | | | (1 | ) |
Total - end of period | | | 301 | | | | 303 | | | | 305 | |
| (1) | Fiscal year 2013 was a 53-week year. On a 53- versus 52-week basis, comparable store net revenues increased 7.5% in fiscal year 2013. |
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The Company’s store and eCommerce operations have been aggregated into one reporting segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.
The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.
| | | | | | | | | | | | |
Merchandise Areas | | Fiscal Year 2013 | | | Fiscal Year 2012 | | | Fiscal Year 2011 | |
Women’s | | | 33 | % | | | 34 | % | | | 35 | % |
Cosmetics, Shoes and Accessories | | | 34 | % | | | 34 | % | | | 33 | % |
Men’s | | | 17 | % | | | 17 | % | | | 17 | % |
Home | | | 10 | % | | | 9 | % | | | 9 | % |
Children’s | | | 6 | % | | | 6 | % | | | 6 | % |
| | | | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
Comparison of Fiscal Years Ended February 2, 2013 and January 28, 2012
Revenues. In fiscal year 2013, the Company’s revenues increased 7.0%, or $0.3 billion, to $4.0 billion from $3.7 billion in fiscal year 2012. The increase was primarily attributable to a 53- versus 52-week increase in revenues from comparable stores of 7.5%, partially offset by a $11.8 million decrease in revenues due to closed stores. Revenues for the 53rd week were $44.4 million and contributed 1.2% of the 7.5% comparable store revenue increase.
Cost of Goods Sold. Cost of goods sold was $2.6 billion, or 66.6% of revenues in fiscal year 2013 compared to $2.5 billion, or 66.5% of revenues in fiscal year 2012. The increase in cost of goods sold of $174.6 million was primarily due to the increase in revenues.
17
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) were $985.2 million, or 24.9% of revenues in fiscal year 2013, compared to $938.0 million, or 25.4% of revenues for fiscal year 2012. The increase in SG&A expenses was primarily due to an increase in payroll, benefits, and advertising expense for fiscal year 2013. The SG&A expense rate decreased due to the fixed cost leveraging as a result of the 7.5% increase in comparable store revenues, partially offset by an incremental increase in payroll and benefits expense as a percentage of revenues.
Gain on property and equipment.Gain on property and equipment was $4.2 million for fiscal year 2013 compared to $3.1 million for fiscal year 2012. The fiscal year 2013 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods. The fiscal year 2012 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as a $1.2 million gain on the nonmonetary exchange of a retail location.
Asset Impairment and Exit Costs.In fiscal year 2013, the Company recorded a $0.7 million rent adjustment due to space reductions at two stores, partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book value to fair value and a $0.2 million charge for exit costs primarily associated with the closing of two stores. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. In fiscal year 2012, the Company recorded a $3.5 million charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date.
Interest Expense. In fiscal year 2013, the Company’s interest expense decreased $0.7 million to $49.5 million from $50.2 million for fiscal year 2012. The decrease was primarily due to a decrease in total debt for a majority of fiscal year 2013 as a result of the $125.0 million discretionary payment to extinguish the term loan outstanding under the credit facility in the fourth quarter of fiscal year 2012 and the payment of $100.0 million of senior notes upon maturity in the second quarter of fiscal year 2013, partially offset by $100.0 million in new private placement notes issued by the Company in the fourth quarter of fiscal year 2012.
Interest Income. In fiscal year 2013, the Company’s interest income decreased to $0.2 million from $0.3 million in fiscal year 2012. The decrease was primarily due to lower short-term investments and lower market interest rates in fiscal year 2013 as compared to fiscal year 2012.
Income tax expense.Income tax expense for fiscal year 2013 was $102.1 million, or 35.2%, compared to $67.0 million, or 26.8%, for the same period in fiscal year 2012. The effective tax rate increased primarily as a result of the release of the $20.2 million deferred state tax valuation allowance during fiscal year 2012.
Comparison of Fiscal Years Ended January 28, 2012 and January 29, 2011
Revenues.In fiscal year 2012, the Company’s revenues increased 5.3%, or $0.2 billion, to $3.7 billion from $3.5 billion in fiscal year 2011. The increase was primarily attributable to a 5.5% increase in revenues from comparable stores, partially offset by a $6.8 million decrease in revenues due to closed stores.
Cost of Goods Sold. Cost of goods sold was $2.5 billion, or 66.5% of revenues in fiscal year 2012 compared to $2.4 billion, or 67.0% of revenues in fiscal year 2011. The increase in cost of goods sold of $108.0 million was primarily due to the increase in revenues. The decrease in cost of goods sold as a percentage of revenues was primarily attributable to reduced markdown activity, as well as reduced occupancy costs due to the closure of three leased locations, coupled with increasing revenues.
Selling, General and Administrative Expenses. SG&A expenses were $938.0 million, or 25.4% of revenues in fiscal year 2012, compared to $914.1 million, or 26.0% of revenues for fiscal year 2011. The increase in SG&A expenses was primarily due to an increase in payroll, benefits, and advertising expense, partially offset by a reduction in depreciation expense for fiscal year 2012. The SG&A expense rate decreased due to the 5.5% increase in comparable store revenues combined with a decrease in depreciation expense, partially offset by an incremental increase in payroll and benefits expense as a percentage of revenues.
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Gain on sale of property and equipment.Gain on sale of property and equipment was $3.1 million for fiscal year 2012 compared to $6.4 million for fiscal year 2011. The fiscal year 2012 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as a $1.2 million gain on the nonmonetary exchange of a retail location. The fiscal year 2011 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as $2.3 million in gains on the sale of three former retail locations.
Asset Impairment and Exit Costs.In fiscal year 2012, the Company recorded a $3.5 million charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date. In fiscal year 2011, the Company recorded $5.9 million in asset impairment charges primarily to adjust two retail locations’ net book values to fair value. The Company also recorded a $3.5 million charge for real estate holding costs, offset by a $3.5 million revision to a previously estimated lease buyout reserve.
Interest Expense. In fiscal year 2012, the Company’s interest expense decreased $0.5 million to $50.2 million from $50.7 million for fiscal year 2011. The decrease was primarily due to a decrease in total debt for a majority of fiscal year 2012 as a result of the $125.0 million discretionary payment towards the bank term loan made on November 23, 2010.
Interest Income. In fiscal year 2012, the Company’s interest income decreased to $0.3 million from $0.6 million in fiscal year 2011. The decrease was primarily due to lower short-term investments and lower market interest rates in fiscal year 2012 as compared to fiscal year 2011.
Income tax expense.Income tax expense for fiscal year 2012 was $67.0 million, or 26.8%, compared to $68.2 million, or 34.8%, for the same period in fiscal year 2011. The effective tax rate decreased primarily as a result of a $20.2 million deferred state tax valuation allowance that was released during fiscal year 2012.
Seasonality and Quarterly Fluctuations
Due to the seasonal nature of the retail business, the Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenues, operating income and net income. A disproportionate amount of the Company’s revenues and a substantial amount of operating and net income are realized during the fourth quarter, which includes the holiday selling season. If for any reason the Company’s revenues were below seasonal norms during the fourth quarter, the Company’s annual results of operations could be adversely affected. The Company’s inventory levels generally reach their highest levels in anticipation of increased revenues during these months.
The following table illustrates the seasonality of revenues by quarter as a percentage of the full year for the fiscal years indicated.
| | | | | | | | | | | | |
| | | 2013 | | | 2012 | | | 2011 | |
First quarter | | | 23.0 | % | | | 22.9 | % | | | 22.9 | % |
Second quarter | | | 21.9 | | | | 22.5 | | | | 22.4 | |
Third quarter | | | 21.2 | | | | 21.4 | | | | 21.2 | |
Fourth quarter | | | 33.9 | | | | 33.2 | | | | 33.5 | |
The Company’s quarterly results of operations could also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, expansions and remodels.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash on hand of $269.2 million as of February 2, 2013, cash flows from operations, and borrowings under debt facilities, which consist of a $350.0 million credit facility and $375.0 million in senior notes.
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The credit facility, which matures in November 2015, allows for up to $250.0 million of outstanding letters of credit. The credit facility charges interest based upon certain Company financial ratios and the interest spread was calculated at February 2, 2013 using LIBOR plus 125 basis points, or 1.45%. The credit facility contains restrictive covenants including leverage and fixed charge coverage ratios. The Company’s calculated leverage ratio dictates the LIBOR spread that will be charged on outstanding borrowings in the subsequent quarter. The leverage ratio is calculated by dividing adjusted debt, which is the sum of the Company’s outstanding debt and last four quarters of rent expense multiplied by a factor of eight, by the last four quarters of pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. At February 2, 2013, the maximum leverage ratio allowed under the credit facility was 4.0, and the calculated leverage ratio was 1.78. The Company was in compliance with all covenants as of February 2, 2013 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future. As of February 2, 2013, the Company had $13.1 million of standby letters of credit outstanding under the credit facility, and availability under the credit facility was $336.9 million.
The senior notes have restrictive covenants that are similar to the Company’s credit facility, and had the following terms as of February 2, 2013:
| | | | | | | | | | | | |
Amount (in millions) | | | Type of Rate | | Rate | | | Maturity Date | |
| $ | 100.0 | | | Fixed | | | 5.31 | % | | | July 2015 | |
| | 125.0 | | | Fixed | | | 6.20 | % | | | August 2017 | |
| | 50.0 | | | Fixed | | | 5.70 | % | | | November 2020 | |
| | 100.0 | | | Fixed | | | 5.21 | % | | | January 2022 | |
| | | | | | | | | | | | |
| $ | 375.0 | | | | | | | | | | | |
| | | | | | | | | | | | |
On January 30, 2013, the Company paid the $17.8 million, 20-year variable rate, 0.20% at January 30, 2013, state bond facility which would have matured in October 2025. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.1 million related to the state bond facility and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income. Associated with this bond was an $18.0 million standby letter of credit outstanding under the credit facility, which was canceled upon payment of the $17.8 million state bond facility.
On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note and $20.0 million of its 5.05% fixed rate senior note. The $80.0 million floating rate senior note had an associated interest rate swap, with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments.
The debt facilities place certain restrictions on mergers, consolidations, acquisitions, sales of assets, indebtedness, transactions with affiliates, leases, liens, investments, dividends and distributions, exchange and issuance of capital stock and guarantees, and require maintenance of minimum financial ratios, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. These ratios are calculated exclusive of non-cash charges, such as fixed asset, goodwill and other intangible asset impairments.
The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. As of February 2, 2013, the Company does not have any interest rate swaps outstanding. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt. The difference between the fixed rate leg and the variable rate leg of the swap, to be paid or received, was accrued and recognized as an adjustment to interest expense. Additionally, the change in the fair value of a swap designated as a cash flow hedge was marked to market through accumulated other comprehensive income.
Belk has also planned investments totaling approximately $600 million over a five-year period that began in fiscal year 2011 for key strategic initiatives including approximately $42 million for branding, $14 million for customer service enhancements, $270 million for store expansions and remodels, and $263 million for technology.
Management believes that cash on hand of $269.2 million as of February 2, 2013, cash flows from operations and existing credit facilities will be sufficient to cover working capital needs, stock repurchases, dividends, capital expenditures, pension contributions and debt service requirements for the next twelve months and foreseeable future.
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Net cash provided by operating activities was $300.1 million for fiscal year 2013 compared to $251.9 million for fiscal year 2012. The increase in cash provided by operating activities for fiscal year 2013 was principally due to a $41.0 million decrease in pension contributions, a $23.2 million increase in accounts payable resulting from the increase in inventory purchases, and a $7.4 million increase in accrued liabilities resulting from increased taxes, other than income. This was partially offset by the increase in inventory to support current sales trends and a $33.0 million increase in income taxes paid in fiscal year 2013 primarily as a result of lower estimated tax payments made during fiscal year 2012.
Net cash used by investing activities increased $43.4 million to $178.3 million for fiscal year 2013 from $134.9 million for fiscal year 2012. The increase in cash used by investing activities primarily resulted from increased purchases of property and equipment of $38.9 million.
The Company’s capital expenditures of $182.8 million during fiscal year 2013 were comprised primarily of amounts related to store remodeling and expansion projects, as well as eCommerce and information technology enhancements. The Company has increased the amount of its anticipated capital expenditures for fiscal year 2014 primarily due to information technology and eCommerce enhancements.
Net cash used by financing activities increased $194.7 million to $308.8 million for fiscal year 2013 from $114.1 million for fiscal year 2012. The increase in cash used by financing activities primarily relates to the $100.0 million payment of senior notes, a $51.0 million increase in dividends paid primarily due to the accelerated fiscal year 2014 dividend payment, and a $17.8 million payment of the state bond facility.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of the Company’s contractual obligations and commercial commitments, the following data is provided:
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period | |
Contractual Obligations | | Total | | | Within 1 Year | | | 1 - 3 Years | | | 3 - 5 Years | | | After 5
Years | |
| | | (dollars in thousands) | |
| | | | | |
Long-Term Debt | | $ | 375,000 | | | $ | — | | | $ | 100,000 | | | $ | 125,000 | | | $ | 150,000 | |
Estimated Interest Payments on Debt (a) | | | 119,123 | | | | 21,791 | | | | 40,189 | | | | 28,384 | | | | 28,759 | |
Capital Lease Obligations | | | 24,824 | | | | 9,714 | | | | 11,372 | | | | 2,507 | | | | 1,231 | |
Operating Leases (b) | | | 550,029 | | | | 74,830 | | | | 131,330 | | | | 99,432 | | | | 244,437 | |
Purchase Obligations (c) | | | 134,076 | | | | 94,895 | | | | 38,511 | | | | 670 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Contractual Cash Obligations | | $ | 1,203,052 | | | $ | 201,230 | | | $ | 321,402 | | | $ | 255,993 | | | $ | 424,427 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | Amount of Commitment Expiration per Period | |
Other Commercial Commitments | | Total Amounts
Committed | | | Within 1 Year | | | 1 - 3 Years | | | 3 - 5 Years | | | After 5
Years | |
| | | (dollars in thousands) | |
| | | | | |
Standby Letters of Credit | | $ | 13,145 | | | $ | 13,145 | | | $ | — | | | $ | — | | | $ | — | |
| (a) | Interest rates used to compute estimated interest payments utilize the stated rate. |
| (b) | Lease payments consist of base rent only and do not include amounts for percentage rents, real estate taxes, insurance and other expenses related to those locations. |
| (c) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty, such as merchandise purchase orders, have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts. |
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Obligations under the deferred compensation and postretirement benefit plans are not included in the contractual obligations table. The Company’s deferred compensation and postretirement plans are not funded in advance. Deferred compensation and other non-qualified plan payments during fiscal years 2013 and 2012 totaled $8.1 million and $7.5 million, respectively. Postretirement benefit payments during fiscal years 2013 and 2012 totaled $2.1 million and $2.6 million, respectively.
Obligations under the Company’s defined benefit pension plan are not included in the contractual obligations table. Under the current requirements of the Pension Protection Act of 2006 (“PPA”), the Company is required to fund the net pension liability over the subsequent seven years. The net pension liability under PPA is calculated based on certain assumptions at January 1 of each year that are subject to change based on economic conditions (and any regulatory changes) in the future. The Company expects to contribute sufficient amounts to the pension plan so that the PPA guidelines are exceeded.
As of February 2, 2013, the total uncertain tax position liability was approximately $18.8 million, including tax, penalty and interest. The Company is not able to reasonably estimate the timing of these tax related future cash flows and has excluded these liabilities from the table. At this time, the Company does not expect a material change to its gross unrecognized tax benefit during fiscal year 2014.
Also excluded from the contractual obligations table are payments the Company may make for employee medical costs and workers compensation, general liability and automobile claims.
Off-Balance Sheet Arrangements
The Company has not provided any financial guarantees as of February 2, 2013. The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
New Accounting Pronouncements
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force),” which requires measurement of obligations within the scope of this guidance to be the sum of the amount agreed to pay on the basis of arrangement among co-obligors and any additional amounts expected to pay on behalf of co-obligors, in addition to disclosure of the nature and amount of the obligation. This guidance will be effective at the beginning of fiscal year 2015. The Company does not expect the adoption to have a material impact on the consolidated financial statements.
In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred the requirement to present on the face of the financial statements items that are reclassified from other comprehensive income to net income. In February 2013, the Financial Accounting Standards Board issued Accounting Standard Update No.2013-02,” which finalized the reporting requirements of reclassifications out of accumulated other comprehensive income. This guidance will be effective at the beginning of fiscal year 2014. The Company does not expect the adoption to have a material impact on the consolidated financial statements.
In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” which requires disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to agreements similar to a master netting arrangements. In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarified the scope of Accounting Standards Update No. 2011-11. This guidance will be effective at the beginning of fiscal year 2014. The Company does not expect the adoption to have a material impact on the consolidated financial statements.
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Impact of Inflation or Deflation
Although the Company expects that operations will be influenced by general economic conditions, including rising food, fuel and energy prices, management does not believe that inflation has had a material effect on the Company’s results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.
Critical Accounting Policies
Management’s discussion and analysis discusses the results of operations and financial condition as reflected in the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. As discussed in the Company’s notes to the consolidated financial statements, the preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation, vendor allowances, property and equipment, rent expense, useful lives of depreciable assets, recoverability of long-lived assets, including intangible assets, store closing reserves, customer loyalty programs, income taxes, derivative financial instruments, credit income, the calculation of pension and postretirement obligations, self-insurance reserves and stock based compensation.
Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See the Company’s notes to the consolidated financial statements for a discussion of the Company’s significant accounting policies.
While the Company believes that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the Company cannot guarantee that its estimates and assumptions will be accurate, which could require the Company to make adjustments to these estimates in future periods.
The following critical accounting policies are used in the preparation of the consolidated financial statements:
Inventory Valuation. Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a 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. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at 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 and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate markdowns currently can result in an overstatement of inventory under the lower of cost or market principle.
Vendor Allowances. The Company receives allowances from its vendors through a variety of programs and arrangements, including markdown reimbursement programs. These vendor allowances are generally intended to offset the Company’s costs of selling the vendors’ products in its stores. Allowances are recognized in the period in which the Company completes its obligations under the vendor agreements. Most incentives are deducted from amounts owed to the vendor at the time the Company completes its obligations to the vendor or shortly thereafter.
The following summarizes the types of vendor incentives and the Company’s applicable accounting policies:
| | • | | Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to SG&A expenses in the period that the advertising expense is incurred. |
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| | • | | Markdown allowances — Represents reimbursement for the cost of markdowns to the selling price of the vendor’s merchandise. Amounts are recognized as a reduction to cost of goods sold in the later of the period that the merchandise is marked down or the reimbursement is negotiated. Amounts received prior to recognizing the markdowns are recorded as a reduction to the cost of inventory. |
| | • | | Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expense in the period that the payroll cost is incurred. |
Property and Equipment, net. Property and equipment owned by the Company are stated at cost less accumulated depreciation and amortization. Property and equipment leased by the Company under capital leases are stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are recorded utilizing straight-line and in certain circumstances accelerated methods, typically over the shorter of estimated asset lives or related lease terms. The Company amortizes leasehold improvements over the shorter of the estimated asset life or expected lease term that would include cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the date the assets are placed in service, to be reasonably assured. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.
Intangibles. Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.” Leasehold intangibles, which represent the excess of fair value over the carrying value (assets) or the excess of carrying value over fair value (liabilities) of acquired leases, are amortized on a straight-line basis over the remaining terms of the lease agreements. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears to be reasonably assured. The lease intangibles are included in other current assets and accrued liabilities for the current portions and other assets and other noncurrent liabilities for the noncurrent portions. Customer relationships, which represent the value of customer relationships obtained in acquisitions or purchased, are amortized on a straight-line basis over their estimated useful life and are included in other assets. The carrying value of intangible assets is reviewed by the Company’s management to assess the recoverability of the assets when facts and circumstances indicate that the carrying value may not be recoverable.
Rent Expense.The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Developer incentives are recognized as a reduction to occupancy costs over the lease term. The lease term commences on the date when the Company gains control of the property.
Useful Lives of Depreciable Assets. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.
Recoverability of Long-Lived Assets. In accordance with ASC 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.
Store Closing Reserves. The Company reduces the carrying value of property and equipment to fair value for owned locations or recognizes a reserve for future obligations for leased facilities at the time the Company ceases using property and/or equipment. The reserve includes future minimum lease payments and common area maintenance and taxes for which the Company is obligated under operating lease agreements. Additionally, the Company makes certain
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assumptions related to potential subleases and lease terminations. These assumptions are based on management’s knowledge of the market and other relevant experience. However, significant changes in the real estate market and the inability to enter into the subleases or obtain lease terminations within the estimated time frame may result in increases or decreases to these reserves.
Customer Loyalty Programs. The Company utilizes a customer loyalty program that issues certificates for discounts on future purchases to proprietary charge card customers based on their spending levels. The certificates are classified as a reduction to revenue as they are earned by the customers. The Company maintains a reserve liability for the estimated future redemptions of the certificates. The estimated impact on revenues of a 10% change in program utilization would be $2.6 million.
Pension and Postretirement Obligations. The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate and investment earnings. The Company calculates the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.
The Company selected an investment earnings assumption of 7.25% to determine its fiscal year 2013 expense. The Company believes that this assumption was appropriate given the composition of its plan assets and expected market returns thereon. The estimated effect of a 0.25% increase or decrease in the investment earnings assumption would decrease or increase pension expense by approximately $1.0 million. The Company has selected an investment earnings assumption of 6.75% for fiscal year 2014.
The Company selected a discount rate assumption of 4.375% to determine its fiscal year 2013 expense. The Company believes that this assumption is appropriate given the composition of its plan obligations and the interest rate environment as of the measurement date. The estimated effect of a 0.25% increase or decrease in the discount rate assumption would have decreased or increased fiscal year 2013 pension expense by approximately $0.1 million. The Company has decreased its discount rate assumption to 4.125% for fiscal year 2014.
The Company expects to contribute sufficient amounts to the pension plan so that the PPA guidelines are exceeded, and over the next five years, the pension plan becomes fully funded if interest rate and asset return assumptions are realized. The Company elected to contribute $18.0 million and $59.0 million to its Pension Plan in fiscal years 2013 and 2012, respectively. The Company expects to contribute $1.2 million to its non-qualified defined benefit Supplemental Executive Retirement Plan in fiscal year 2014, and contributed $1.4 million and $1.3 million in fiscal years 2013 and 2012, respectively. The Company expects to contribute $2.1 million to its postretirement plan in fiscal year 2014, and contributed $2.1 million and $2.6 million in fiscal years 2013 and 2012, respectively.
Self Insurance Reserves. The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. Management believes that the Company’s loss reserves are adequate but actual losses may differ from the amounts provided.
The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with industry accepted loss analysis standards are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided.
Income Taxes. Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. In accordance with ASC 740, “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.
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Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).
Derivative Financial Instruments. The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt. The difference between the fixed rate leg and the variable rate leg of each swap, to be paid or received, was accrued and recognized as an adjustment to interest expense. Additionally, the change in the fair value of a swap designated as a cash flow hedge was marked to market through accumulated other comprehensive income. Swaps that were not designated as hedges were marked to market through gain (loss) on investments.
Stock Based Compensation. The Company accounts for stock based compensation under the guidelines of ASC 718, “Compensation — Stock Compensation.” ASC 718 requires the Company to account for stock based compensation by using the grant date fair value of share awards and the estimated number of shares that will ultimately be issued in conjunction with each award.
Finance Income. In connection with the program agreement (“Program Agreement”) signed with GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance, in fiscal year 2006, the Company is paid a percentage of net private label credit card account sales. These payments under the 10-year credit card Program Agreement between Belk and GE, are recorded as an offset to SG&A expenses in the consolidated statements of income. This Program Agreement sets forth among other things the terms and conditions under which GE will issue credit cards to Belk’s customers. Under the Program Agreement, the Company will be paid a percentage of net credit sales for future credit card sales, for which Belk is required to perform certain duties and receive fees. In March 2013, the Program Agreement was amended, extending the expiration date from June 30, 2016 to December 31, 2017.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Company was exposed to market risk from changes in interest rates on its variable rate debt. The Company used interest rate swaps to manage the interest rate risk associated with its borrowings and to manage the Company’s allocation of fixed and variable rate debt. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged derivative instruments. The Company’s net exposure to interest rate risk is based on the difference between the outstanding variable rate debt and the notional amount of its designated interest rate swaps. On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note, which had an associated interest rate swap with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments. At February 2, 2013, the Company had no variable rate debt or interest rate swaps.
A discussion of the Company’s accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements.
26
| Item 8. | Financial Statements and Supplementary Data |
27
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Belk, Inc.:
We have audited the accompanying consolidated balance sheets of Belk, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended February 2, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belk, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended February 2, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Belk, Inc.’s internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 17, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
|
/s/ KPMG LLP |
|
Charlotte, North Carolina |
|
April 17, 2013 |
28
BELK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
Revenues | | $ | 3,956,866 | | | $ | 3,699,592 | | | $ | 3,513,275 | |
Cost of goods sold (including occupancy, distribution and buying expenses) | | | 2,636,140 | | | | 2,461,515 | | | | 2,353,536 | |
Selling, general and administrative expenses | | | 985,225 | | | | 938,008 | | | | 914,078 | |
Gain on sale of property and equipment | | | 4,168 | | | | 3,143 | | | | 6,416 | |
Asset impairment and exit costs | | | (268 | ) | | | 2,302 | | | | 6,096 | |
| | | | | | | | | | | | |
Operating income | | | 339,937 | | | | 300,910 | | | | 245,981 | |
Interest expense | | | (49,481 | ) | | | (50,218 | ) | | | (50,679 | ) |
Interest income | | | 175 | | | | 328 | | | | 569 | |
Loss on extinguishment of debt | | | (127 | ) | | | (922 | ) | | | — | |
| | | | | | | | | | | | |
Income before income taxes | | | 290,504 | | | | 250,098 | | | | 195,871 | |
Income tax expense | | | 102,134 | | | | 66,950 | | | | 68,243 | |
| | | | | | | | | | | | |
Net income | | $ | 188,370 | | | $ | 183,148 | | | $ | 127,628 | |
| | | | | | | | | | | | |
| | | |
Basic net income per share | | $ | 4.34 | | | $ | 4.04 | | | $ | 2.72 | |
| | | | | | | | | | | | |
Diluted net income per share | | $ | 4.31 | | | $ | 4.02 | | | $ | 2.71 | |
| | | | | | | | | | | | |
| | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | | 43,435,314 | | | | 45,355,941 | | | | 46,921,875 | |
Diluted | | | 43,712,263 | | | | 45,579,987 | | | | 47,011,533 | |
See accompanying notes to consolidated financial statements.
29
BELK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | |
Net income | | $ | 188,370 | | | $ | 183,148 | | | $ | 127,628 | |
Other comprehensive income: | | | | | | | | | | | | |
Unrealized gain on interest rate swap, net of $740, $1,379 and $669 income taxes for the fiscal years ended February 2, 2013, January 28, 2012 and January 29, 2011, respectively | | | 945 | | | | 2,323 | | | | 1,346 | |
Defined benefit plan adjustments, net of $3,794, $20,952 and $7,370 income taxes for the fiscal years ended February 2, 2013, January 28, 2012 and January 29, 2011, respectively | | | 6,391 | | | | (35,296 | ) | | | 13,738 | |
| | | | | | | | | | | | |
Total other comprehensive income | | | 7,336 | | | | (32,973 | ) | | | 15,084 | |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 195,706 | | | $ | 150,175 | | | $ | 142,712 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
30
BELK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 269,177 | | | $ | 456,272 | |
Accounts receivable, net | | | 36,315 | | | | 39,431 | |
Merchandise inventory | | | 1,009,687 | | | | 887,029 | |
Prepaid income taxes, expenses and other current assets | | | 29,209 | | | | 22,362 | |
| | | | | | | | |
Total current assets | | | 1,344,388 | | | | 1,405,094 | |
Property and equipment, net | | | 1,055,944 | | | | 993,122 | |
Deferred income taxes | | | 43,292 | | | | 83,034 | |
Other assets | | | 38,739 | | | | 32,966 | |
| | | | | | | | |
Total assets | | $ | 2,482,363 | | | $ | 2,514,216 | |
| | | | | | | | |
| | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 259,500 | | | $ | 216,438 | |
Accrued liabilities | | | 227,510 | | | | 186,820 | |
Accrued income taxes | | | 22,334 | | | | 20,684 | |
Deferred income taxes | | | 36,710 | | | | 27,570 | |
Current installments of long-term debt and capital lease obligations | | | 9,714 | | | | 108,164 | |
| | | | | | | | |
Total current liabilities | | | 555,768 | | | | 559,676 | |
Long-term debt and capital lease obligations, excluding current installments | | | 390,110 | | | | 415,515 | |
Retirement obligations and other noncurrent liabilities | | | 273,864 | | | | 302,795 | |
| | | | | | | | |
Total liabilities | | | 1,219,742 | | | | 1,277,986 | |
| | | | | | | | |
| | |
Stockholders’ equity: | | | | | | | | |
Preferred stock | | | — | | | | — | |
Common stock, 400 million shares authorized and 42.7 and 44.9 million shares issued and outstanding as of February 2, 2013 and January 28, 2012, respectively | | | 427 | | | | 449 | |
Paid-in capital | | | 271,913 | | | | 364,590 | |
Retained earnings | | | 1,157,263 | | | | 1,045,509 | |
Accumulated other comprehensive loss | | | (166,982 | ) | | | (174,318 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 1,262,621 | | | | 1,236,230 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,482,363 | | | $ | 2,514,216 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
31
BELK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Paid-in
Capital | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Total | |
| | | Shares | | | Amount | | | | | |
| | | | | | |
Balance at January 30, 2010 | | | 48,286 | | | $ | 483 | | | $ | 451,278 | | | $ | 798,963 | | | $ | (156,429 | ) | | $ | 1,094,295 | |
Net income | | | — | | | | — | | | | — | | | | 127,628 | | | | — | | | | 127,628 | |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 15,084 | | | | 15,084 | |
Cash dividends | | | — | | | | — | | | | — | | | | (38,638 | ) | | | — | | | | (38,638 | ) |
Issuance of stock-based compensation | | | — | | | | — | | | | (43 | ) | | | — | | | | — | | | | (43 | ) |
Stock-based compensation expense | | | — | | | | — | | | | 8,823 | | | | — | | | | — | | | | 8,823 | |
Common stock issued | | | 36 | | | | — | | | | 539 | | | | — | | | | — | | | | 539 | |
Repurchase and retirement of common stock | | | (1,978 | ) | | | (20 | ) | | | (51,396 | ) | | | — | | | | — | | | | (51,416 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 29, 2011 | | | 46,344 | | | | 463 | | | | 409,201 | | | | 887,953 | | | | (141,345 | ) | | | 1,156,272 | |
Net income | | | — | | | | — | | | | — | | | | 183,148 | | | | — | | | | 183,148 | |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | (32,973 | ) | | | (32,973 | ) |
Cash dividends | | | — | | | | — | | | | — | | | | (25,592 | ) | | | — | | | | (25,592 | ) |
Issuance of stock-based compensation | | | — | | | | — | | | | (2,212 | ) | | | — | | | | — | | | | (2,212 | ) |
Stock-based compensation expense | | | — | | | | — | | | | 11,981 | | | | — | | | | — | | | | 11,981 | |
Common stock issued | | | 204 | | | | 2 | | | | 600 | | | | — | | | | — | | | | 602 | |
Repurchase and retirement of common stock | | | (1,632 | ) | | | (16 | ) | | | (54,980 | ) | | | — | | | | — | | | | (54,996 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 28, 2012 | | | 44,916 | | | | 449 | | | | 364,590 | | | | 1,045,509 | | | | (174,318 | ) | | | 1,236,230 | |
Net income | | | — | | | | — | | | | — | | | | 188,370 | | | | — | | | | 188,370 | |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 7,336 | | | | 7,336 | |
Cash dividends | | | — | | | | — | | | | — | | | | (76,616 | ) | | | — | | | | (76,616 | ) |
Issuance of stock-based compensation | | | — | | | | — | | | | (4,352 | ) | | | — | | | | — | | | | (4,352 | ) |
Stock-based compensation expense | | | — | | | | — | | | | 12,827 | | | | — | | | | — | | | | 12,827 | |
Common stock issued | | | 303 | | | | 3 | | | | 870 | | | | — | | | | — | | | | 873 | |
Repurchase and retirement of common stock | | | (2,501 | ) | | | (25 | ) | | | (102,022 | ) | | | — | | | | — | | | | (102,047 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at February 2, 2013 | | | 42,718 | | | $ | 427 | | | $ | 271,913 | | | $ | 1,157,263 | | | $ | (166,982 | ) | | $ | 1,262,621 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
32
BELK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 188,370 | | | $ | 183,148 | | | $ | 127,628 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Asset impairment and exit costs | | | (268 | ) | | | 2,302 | | | | 6,096 | |
Deferred income tax expense | | | 40,479 | | | | 30,458 | | | | 33,453 | |
Depreciation and amortization expense | | | 122,622 | | | | 122,761 | | | | 140,239 | |
Stock-based compensation expense | | | 17,572 | | | | 16,849 | | | | 10,466 | |
Gain on sale of property and equipment | | | (1,539 | ) | | | (514 | ) | | | (3,787 | ) |
Amortization of deferred gain on sale and leaseback | | | (2,629 | ) | | | (2,629 | ) | | | (2,629 | ) |
Amortization of deferred debt issuance costs | | | 833 | | | | 1,025 | | | | 1,559 | |
(Increase) decrease in: | | | | | | | | | | | | |
Accounts receivable, net | | | 3,116 | | | | (8,245 | ) | | | (7,981 | ) |
Merchandise inventory | | | (122,658 | ) | | | (78,526 | ) | | | (33,161 | ) |
Prepaid income taxes, expenses and other assets | | | (16,193 | ) | | | (3,062 | ) | | | 4,789 | |
Increase (decrease) in: | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 77,402 | | | | 39,620 | | | | (11,984 | ) |
Accrued income taxes | | | 1,650 | | | | 9,758 | | | | (24,849 | ) |
Retirement obligations and other liabilities | | | (8,700 | ) | | | (61,013 | ) | | | (50,598 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 300,057 | | | | 251,932 | | | | 189,241 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of property and equipment | | | (182,773 | ) | | | (143,844 | ) | | | (82,409 | ) |
Proceeds from sales of property and equipment | | | 4,441 | | | | 2,780 | | | | 5,448 | |
Proceeds from sales of short-term investments | | | — | | | | 6,150 | | | | 3,200 | |
| | | | | | | | | | | | |
Net cash used by investing activities | | | (178,332 | ) | | | (134,914 | ) | | | (73,761 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from issuance of long-term debt | | | — | | | | 100,000 | | | | 50,000 | |
Principal payments on long-term debt and capital lease obligations | | | (126,105 | ) | | | (130,817 | ) | | | (204,605 | ) |
Dividends paid | | | (76,616 | ) | | | (25,592 | ) | | | (38,638 | ) |
Repurchase and retirement of common stock | | | (102,047 | ) | | | (54,996 | ) | | | (51,416 | ) |
Stock compensation tax benefit | | | 1,858 | | | | 816 | | | | 41 | |
Cash paid for withholding taxes in lieu of stock-based compensation shares | | | (6,210 | ) | | | (3,301 | ) | | | (84 | ) |
Deferred financing costs | | | — | | | | (509 | ) | | | (3,305 | ) |
Proceeds from financing costs | | | 300 | | | | 250 | | | | — | |
| | | | | | | | | | | | |
Net cash used by financing activities | | | (308,820 | ) | | | (114,149 | ) | | | (248,007 | ) |
| | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (187,095 | ) | | | 2,869 | | | | (132,527 | ) |
Cash and cash equivalents at beginning of period | | | 456,272 | | | | 453,403 | | | | 585,930 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 269,177 | | | $ | 456,272 | | | $ | 453,403 | |
| | | | | | | | | | | | |
| | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Income taxes paid | | $ | 59,536 | | | $ | 26,476 | | | $ | 60,232 | |
Interest paid, net of capitalized interest | | | 30,458 | | | | 30,453 | | | | 30,791 | |
Supplemental schedule of noncash investing and financing activities: | | | | | | | | | | | | |
Increase in property and equipment through accrued purchases | | | 2,589 | | | | 5,205 | | | | 1,379 | |
Decrease in investment securities through short-term investments | | | — | | | | — | | | | (6,850 | ) |
Increase in property and equipment through assumption of capital leases | | | 2,249 | | | | 14,321 | | | | 4,990 | |
See accompanying notes to consolidated financial statements.
33
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (1) | Summary of Significant Accounting Policies |
Description of Business and Basis of Presentation
Belk, Inc. and its subsidiaries (collectively, the “Company” or “Belk”) operate retail department stores in 16 states primarily in the southern United States. All intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31. Fiscal year 2014 will contain 52 weeks and will end on February 1, 2014. Fiscal year 2013 contained 53 weeks and ended on February 2, 2013, while fiscal years 2012 and 2011 contained 52 weeks and ended on January 28, 2012 and January 29, 2011, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are required as part of determining stock-based compensation, depreciation, amortization and recoverability of long-lived and intangible assets, valuation of inventory, establishing store closing and other reserves, self-insurance reserves and calculating retirement obligations and expense.
Revenues
The Company’s store and eCommerce operations have been aggregated into one reporting segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.
The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.
| | | | | | | | | | | | |
Merchandise Areas | | Fiscal Year 2013 | | | Fiscal Year 2012 | | | Fiscal Year 2011 | |
Women’s | | | 33 | % | | | 34 | % | | | 35 | % |
Cosmetics, Shoes and Accessories | | | 34 | % | | | 34 | % | | | 33 | % |
Men’s | | | 17 | % | | | 17 | % | | | 17 | % |
Home | | | 10 | % | | | 9 | % | | | 9 | % |
Children’s | | | 6 | % | | | 6 | % | | | 6 | % |
| | | | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
Revenues include sales of merchandise and the net revenue received from leased departments of $2.2 million for fiscal year 2013, and $2.3 million each for fiscal years 2012 and 2011. Sales from retail operations are recorded at the time of delivery and reported net of sales taxes and merchandise returns. The reserve for returns is calculated as a percentage of sales based on historical return percentages.
The Company utilizes a customer loyalty program that issues certificates for discounts on future purchases to proprietary charge card customers based on their spending levels. The certificates are classified as a reduction to revenue as they are earned by the customers. The Company maintains a reserve liability for the estimated future redemptions of the certificates.
Cost of Goods Sold
Cost of goods sold is comprised principally of the cost of merchandise as well as occupancy, distribution and buying expenses. Occupancy expenses include rent, utilities and real estate taxes. Distribution expenses include all costs associated with distribution facilities and eCommerce fulfillment centers. Buying expenses include payroll and travel expenses associated with the merchandise buying function.
34
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses are comprised principally of payroll and benefits for retail and corporate employees, depreciation, advertising and other administrative expenses. SG&A expenses are reduced by proceeds from the 10-year credit card program agreement (“Program Agreement) between Belk and GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance. In March 2013, the Program Agreement was amended, extending the expiration date from June 30, 2016 to December 31, 2017. This Program Agreement sets forth among other things the terms and conditions under which GE will issue credit cards to Belk’s customers. The Company is paid a percentage of net credit sales, as defined by the Program Agreement. Belk is required to perform certain duties, including receiving and remitting in-store payments on behalf of GE and receiving fees for these activities. These amounts totaled $85.9 million, $78.8 million and $71.1 million in fiscal years 2013, 2012 and 2011, respectively.
Gift Cards
The Company issues gift cards which do not contain provisions for expiration or inactivity fees. At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the gift card. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise. The estimated values of gift cards expected to go unused are recognized as a reduction to SG&A expenses in proportion to actual gift card redemptions as the remaining gift card values are redeemed, when there is no requirement for remitting balances to government agencies under unclaimed property laws.
Advertising
Advertising costs, net of co-op recoveries from merchandise vendors, are expensed in the period in which the advertising event takes place and amounted to $164.1 million, $152.0 million and $143.2 million in fiscal years 2013, 2012 and 2011, respectively.
Recoverability of Long-Lived Assets
In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.
Cash Equivalents
Cash equivalents include liquid investments with an original maturity of 90 days or less.
Short-term Investments
Short-term investments consist of investments whose original maturity is greater than 90 days. At January 29, 2011, the Company held an auction rate security (“ARS”) of $6.2 million in short-term investments, which represents the amount called at par by the issuer during the first quarter of fiscal year 2012.
Merchandise Inventory
Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a 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. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of
35
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate markdowns can result in an overstatement of inventory under the lower of cost or market principle.
Property and Equipment, Net
Property and equipment owned by the Company are stated at historical cost less accumulated depreciation and amortization. Property and equipment leased by the Company under capital leases are stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are recorded utilizing straight-line and in certain circumstances accelerated methods, typically over the shorter of estimated asset lives or related lease terms. The Company amortizes leasehold improvements over the shorter of the estimated asset life or expected lease term that would include cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the date the assets are placed in service, to be reasonably assured. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.
Intangibles
Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.” Leasehold intangibles, which represent the excess of fair value over the carrying value (assets) or the excess of carrying value over fair value (liabilities) of acquired leases, are amortized on a straight-line basis over the remaining terms of the lease agreements. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears to be reasonably assured. The lease intangibles are included in other current assets and accrued liabilities for the current portions and other assets and other noncurrent liabilities for the noncurrent portions. Customer relationships, which represent the value of customer relationships obtained in acquisitions or purchased, are amortized on a straight-line basis over their estimated useful life and are included in other assets. The carrying value of intangible assets is reviewed by the Company’s management to assess the recoverability of the assets when facts and circumstances indicate that the carrying value may not be recoverable.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Developer incentives are recognized as a reduction to occupancy costs over the lease term. The lease term commences on the date when the Company gains control of the property.
Vendor Allowances
The Company receives allowances from its vendors through a variety of programs and arrangements, including markdown reimbursement programs. These vendor allowances are generally intended to offset the Company’s costs of selling the vendors’ products in our stores. Allowances are recognized in the period in which the Company completes its obligations under the vendor agreements. Most incentives are deducted from amounts owed to the vendor at the time the Company completes its obligations to the vendor or shortly thereafter.
The following summarizes the types of vendor incentives and the Company’s applicable accounting policies:
| | • | | Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to SG&A expenses in the period that the advertising expense is incurred. |
| | • | | Markdown allowances — Represents reimbursement for the cost of markdowns to the selling price of the vendor’s merchandise. Amounts are recognized as a reduction to cost of goods sold in the later of the period that the merchandise is marked down or the reimbursement is negotiated. Amounts received prior to recognizing the markdowns are recorded as a reduction to the cost of inventory. |
| | • | | Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expenses in the period that the payroll cost is incurred. |
36
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension and Postretirement Obligations
The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate and investment earnings. The Company calculates the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.
Stock Based Compensation
The Company accounts for stock based compensation under the guidelines of ASC 718, “Compensation — Stock Compensation.” ASC 718 requires the Company to account for stock based compensation by using the grant date fair value of share awards and the estimated number of shares that will ultimately be issued in conjunction with each award.
Self Insurance Reserves
The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. Management believes that the Company’s loss reserves are adequate but actual losses may differ from the amounts provided.
The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with industry accepted loss analysis standards are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided.
Income Taxes
Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. In accordance with ASC 740, “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).
Derivative Financial Instruments
The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements were used to reduce the potential impact of increases in interest rates on
37
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
variable rate debt. The difference between the fixed rate leg and the variable rate leg of each swap, to be paid or received, was accrued and recognized as an adjustment to interest expense. Additionally, the change in the fair value of a swap designated as a cash flow hedge was marked to market through accumulated other comprehensive income. Swaps that were not designated as hedges were marked to market through gain (loss) on investments.
On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note, which had an associated interest rate swap with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments.
New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance beginning in the first quarter of fiscal year 2013 when it was required. The adoption of this update did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. The total of comprehensive income, the components of net income, and the components of other comprehensive income must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be retrospectively applied to all reporting periods presented. The Company adopted this guidance beginning in the first quarter of fiscal year 2013 when it was required. As this update only relates to financial statement presentation, the adoption did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.
Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.”
Amortizing intangibles are comprised of the following:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
Amortizing intangible assets: | | | | | | | | |
Favorable lease intangibles | | $ | 9,960 | | | $ | 9,960 | |
Accumulated amortization - favorable lease intangibles | | | (4,743 | ) | | | (4,056 | ) |
Credit card and customer list intangibles | | | 18,746 | | | | 18,746 | |
Accumulated amortization - credit card and customer list intangibles | | | (15,246 | ) | | | (14,080 | ) |
Other intangibles | | | 5,652 | | | | 5,652 | |
Accumulated amortization - other intangibles | | | (4,722 | ) | | | (4,332 | ) |
| | | | | | | | |
Net amortizing intangible assets | | $ | 9,647 | | | $ | 11,890 | |
| | | | | | | | |
| | |
Amortizing intangible liabilities: | | | | | | | | |
Unfavorable lease intangibles | | $ | (25,558 | ) | | $ | (26,347 | ) |
Accumulated amortization - unfavorable lease intangibles | | | 9,928 | | | | 8,332 | |
| | | | | | | | |
Net amortizing intangible liabilities | | $ | (15,630 | ) | | $ | (18,015 | ) |
| | | | | | | | |
The Company recorded net amortization expense related to amortizing intangibles of $0.3 million in fiscal years 2013 and 2012, respectively, and $1.6 million in fiscal year 2011.
38
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (3) | Asset Impairment and Exit Costs |
In fiscal year 2013, the Company recorded a $0.7 million rent adjustment due to space reductions at two stores. These adjustments were partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book value to fair value, and a $0.2 million charge for exit costs primarily associated with the closing of two stores. The Company determines fair value of its retail locations primarily based on the present value of future cash flows.
In fiscal year 2012, the Company recorded a $3.5 million net charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date.
In fiscal year 2011, the Company recorded $5.9 million in asset impairment charges primarily to adjust two retail locations’ net book value to fair value. The Company also recorded a $3.5 million net charge for exit costs associated with the closing of one store, offset by a $3.5 million revision to a previously estimated lease termination reserve.
As of February 2, 2013 and January 28, 2012, the remaining reserve balance for post-closing real estate lease obligations was $1.4 million and $2.5 million, respectively. These balances are presented within accrued liabilities and other noncurrent liabilities on the consolidated balance sheets. The Company does not anticipate incurring significant additional exit costs in connection with the store closings. The following is a summary of post-closing real estate lease obligations activity:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Balance, beginning of year | | $ | 2,458 | | | $ | 8,895 | |
Charges and adjustments | | | (11 | ) | | | (1,189 | ) |
Utilization / payments | | | (1,025 | ) | | | (5,248 | ) |
| | | | | | | | |
Balance, end of year | | $ | 1,422 | | | $ | 2,458 | |
| | | | | | | | |
| (4) | Accumulated Other Comprehensive Loss |
The following table sets forth the components of accumulated other comprehensive loss:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Unrealized loss on interest rate swap, net of $740 of income taxes as of January 28, 2012 | | $ | — | | | $ | (945 | ) |
Defined benefit plans, net of $100,506 and $104,300 of income taxes as of February 2, 2013 and January 28, 2012, respectively | | | (166,982 | ) | | | (173,373 | ) |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (166,982 | ) | | $ | (174,318 | ) |
| | | | | | | | |
39
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (5) | Accounts Receivable, Net |
Accounts receivable, net consists of:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Accounts receivable from vendors | | $ | 18,902 | | | $ | 17,871 | |
Credit card accounts receivable | | | 14,357 | | | | 17,734 | |
Other receivables | | | 3,056 | | | | 3,826 | |
| | | | | | | | |
Accounts receivable, net | | $ | 36,315 | | | $ | 39,431 | |
| | | | | | | | |
| (6) | Property and Equipment, net |
Details of property and equipment, net are as follows:
| | | | | | | | | | |
| | | Estimated
Lives | | February 2,
2013 | | | January 28,
2012 | |
| | | (in years) | | (in thousands) | |
| | | |
Land | | | | $ | 46,688 | | | $ | 45,706 | |
Buildings | | primarily 15-31.5 | | | 1,150,959 | | | | 1,115,919 | |
Furniture, fixtures and equipment | | 3-20 | | | 1,162,660 | | | | 1,195,695 | |
Property under capital leases | | 5-20 | | | 76,236 | | | | 78,150 | |
Construction in progress | | | | | 38,278 | | | | 25,895 | |
| | | | | | | | | | |
| | | | | 2,474,821 | | | | 2,461,365 | |
Less accumulated depreciation and amortization | | | | | (1,418,877 | ) | | | (1,468,243 | ) |
| | | | | | | | | | |
Property and equipment, net | | | | $ | 1,055,944 | | | $ | 993,122 | |
| | | | | | | | | | |
The Company recorded depreciation and amortization related to property and equipment of $122.3 million, $122.5 million and $138.6 million in fiscal years 2013, 2012 and 2011, respectively. Accumulated amortization of assets under capital lease was $52.9 million and $48.0 million as of February 2, 2013 and January 28, 2012, respectively.
| (7) | Gain on Property and Equipment |
During fiscal year 2013, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods.
During fiscal year 2012 the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as a $1.2 million gain on the nonmonetary exchange of a retail location.
During fiscal year 2011, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as $2.3 million in gains on the sale of three former retail locations.
40
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities are comprised of the following:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Salaries, wages and employee benefits | | $ | 54,785 | | | $ | 44,817 | |
Gift card liability | | | 38,524 | | | | 34,592 | |
Accrued capital expenditures | | | 11,332 | | | | 12,039 | |
Taxes, other than income | | | 26,177 | | | | 18,381 | |
Belk Reward Card Loyalty Program | | | 4,660 | | | | 3,886 | |
Information Technology | | | 3,366 | | | | 2,379 | |
Rent | | | 8,034 | | | | 7,721 | |
Sales returns allowance | | | 24,274 | | | | 12,826 | |
Interest | | | 7,430 | | | | 7,524 | |
Store closing reserves | | | 1,086 | | | | 1,041 | |
Self insurance reserves | | | 6,899 | | | | 7,576 | |
Advertising | | | 14,249 | | | | 13,935 | |
Other | | | 26,694 | | | | 20,103 | |
| | | | | | | | |
Accrued Liabilities | | $ | 227,510 | | | $ | 186,820 | |
| | | | | | | | |
Long-term debt and capital lease obligations consist of the following:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Senior notes | | $ | 375,000 | | | $ | 475,000 | |
Capital lease agreements through August 2020 | | | 24,824 | | | | 30,899 | |
State bond facility | | | — | | | | 17,780 | |
| | | | | | | | |
| | | 399,824 | | | | 523,679 | |
Less current installments | | | (9,714 | ) | | | (108,164 | ) |
| | | | | | | | |
Long-term debt and capital lease obligations, excluding current installments | | $ | 390,110 | | | $ | 415,515 | |
| | | | | | | | |
As of February 2, 2013, the annual maturities of long-term debt and capital lease obligations over the next five years are $9.7 million, $6.7 million, $104.6 million, $1.4 million, and $126.1 million, respectively. The Company made interest payments of $30.5 million, $30.5 million and $30.8 million, net of $1.7 million, $0.6 million and $0.2 million which was capitalized into property and equipment during fiscal years 2013, 2012 and 2011, respectively.
The Company’s borrowings consist primarily of a $350.0 million credit facility and $375.0 million in senior notes.
The credit facility, which matures in November 2015, allows for up to $250.0 million of outstanding letters of credit. The credit facility charges interest based upon certain Company financial ratios and the interest spread was calculated at February 2, 2013 using LIBOR plus 125 basis points, or 1.45%. The credit facility contains restrictive covenants including leverage and fixed charge coverage ratios. The Company’s calculated leverage ratio dictates the LIBOR spread that will be charged on outstanding borrowings in the
41
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsequent quarter. The leverage ratio is calculated by dividing adjusted debt, which is the sum of the Company’s outstanding debt and last four quarters of rent expense multiplied by a factor of eight, by the last four quarters of pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. At February 2, 2013, the maximum leverage ratio allowed under the credit facility was 4.0, and the calculated leverage ratio was 1.78. The Company was in compliance with all covenants as of February 2, 2013 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future. As of February 2, 2013, the Company had $13.1 million of standby letters of credit outstanding under the credit facility, and availability under the credit facility was $336.9 million.
On January 25, 2012, the Company made a $125.0 million discretionary payment to extinguish the term loan outstanding under the credit facility, utilizing $25.0 million of cash on hand, and $100.0 million from 5.21% fixed rate, 10-year notes issued by the Company on January 25, 2012. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.9 million related to the term loan and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income.
The senior notes have restrictive covenants that are similar to the Company’s credit facility, and had the following terms as of February 2, 2013:
| | | | | | | | | | | | |
Amount
(in millions) | | | Type of Rate | | Rate | | | Maturity Date | |
| $ | 100.0 | | | Fixed | | | 5.31 | % | | | July 2015 | |
| | 125.0 | | | Fixed | | | 6.20 | % | | | August 2017 | |
| | 50.0 | | | Fixed | | | 5.70 | % | | | November 2020 | |
| | 100.0 | | | Fixed | | | 5.21 | % | | | January 2022 | |
| | | | | | | | | | | | |
| $ | 375.0 | | | | | | | | | | | |
| | | | | | | | | | | | |
On January 30, 2013, the Company paid the $17.8 million, 20-year variable rate, 0.20% at January 30, 2013, state bond facility which would have matured in October 2025. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.1 million related to the state bond facility and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income. Associated with this bond was an $18.0 million standby letter of credit outstanding under the credit facility, which was canceled upon payment of the $17.8 million state bond facility.
On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note and $20.0 million of its 5.05% fixed rate senior note. The $80.0 million floating rate senior note had an associated interest rate swap, with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments.
The debt facilities place certain restrictions on mergers, consolidations, acquisitions, sales of assets, indebtedness, transactions with affiliates, leases, liens, investments, dividends and distributions, exchange and issuance of capital stock and guarantees, and require maintenance of minimum financial ratios, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. These ratios are calculated exclusive of non-cash charges, such as fixed asset, goodwill and other intangible asset impairments.
The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. As of February 2, 2013, the Company does not have any interest rate swaps outstanding. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. These swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt. The difference between the fixed rate leg and the variable rate leg of the swap, to be paid or received, was accrued and recognized as an adjustment to interest expense. Additionally, the change in the fair value of a swap designated as a cash flow hedge was marked to market through accumulated other comprehensive income.
42
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (10) | Retirement Obligations and Other Noncurrent Liabilities |
Retirement obligations and other noncurrent liabilities are comprised of the following:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Pension liability | | $ | 76,078 | | | $ | 96,343 | |
Deferred compensation plans | | | 33,606 | | | | 32,297 | |
Post-retirement benefits | | | 21,270 | | | | 22,806 | |
Supplemental executive retirement plans | | | 26,311 | | | | 25,941 | |
Deferred gain on sale/leaseback | | | 18,183 | | | | 20,811 | |
Unfavorable lease liability | | | 13,958 | | | | 16,078 | |
Deferred rent | | | 30,691 | | | | 29,751 | |
Self-insurance reserves | | | 13,950 | | | | 12,363 | |
Developer incentive liability | | | 9,584 | | | | 9,615 | |
Income tax reserves | | | 17,384 | | | | 22,017 | |
Other noncurrent liabilities | | | 12,849 | | | | 14,773 | |
| | | | | | | | |
Retirement obligations and other noncurrent liabilities | | $ | 273,864 | | | $ | 302,795 | |
| | | | | | | | |
The Company leases some of its stores, warehouse facilities and equipment. The majority of these leases will expire over the next 15 years. The leases usually contain renewal options at the lessee’s discretion and provide for payment by the lessee of real estate taxes and other expenses and, in certain instances, contingent rentals determined on the basis of a percentage of sales in excess of stipulated minimums.
Future minimum lease payments under non-cancelable leases, net of future minimum sublease rental income under non-cancelable subleases, as of February 2, 2013 were as follows:
| | | | | | | | |
Fiscal Year | | Capital | | | Operating | |
| | | (in thousands) | |
| | |
2014 | | $ | 10,864 | | | $ | 74,830 | |
2015 | | | 7,430 | | | | 70,434 | |
2016 | | | 5,031 | | | | 60,896 | |
2017 | | | 1,605 | | | | 52,280 | |
2018 | | | 1,289 | | | | 47,152 | |
After 2018 | | | 1,340 | | | | 244,437 | |
| | | | | | | | |
Total | | | 27,559 | | | | 550,029 | |
Less sublease rental income | | | — | | | | (7,551 | ) |
| | | | | | | | |
Net rentals | | | 27,559 | | | $ | 542,478 | |
| | | | | | | | |
Less imputed interest | | | (2,735 | ) | | | | |
| | | | | | | | |
Present value of minimum lease payments | | | 24,824 | | | | | |
Less current portion | | | (9,714 | ) | | | | |
| | | | | | | | |
Noncurrent portion of the present value of minimum lease payments | | $ | 15,110 | | | | | |
| | | | | | | | |
43
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sublease rental income primarily relates to the portion of the Company’s headquarters building located in Charlotte, NC that was sold and leased back by the Company during fiscal year 2008, a portion of which was subsequently subleased by the Company to other third parties.
Net rental expense for all operating leases consists of the following:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | (in thousands) | |
| | | |
Buildings: | | | | | | | | | | | | |
Minimum rentals | | $ | 73,940 | | | $ | 73,102 | | | $ | 74,141 | |
Contingent rentals | | | 4,598 | | | | 3,844 | | | | 3,239 | |
Sublease rental income | | | (2,121 | ) | | | (2,144 | ) | | | (2,326 | ) |
Equipment | | | 1,768 | | | | 1,773 | | | | 1,988 | |
| | | | | | | | | | | | |
Total net rental expense | | $ | 78,185 | | | $ | 76,575 | | | $ | 77,042 | |
| | | | | | | | | | | | |
Federal and state income tax expense (benefit) was as follows:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | (in thousands) | |
| | | |
Current: | | | | | | | | | | | | |
Federal | | $ | 59,152 | | | $ | 28,413 | | | $ | 32,758 | |
State | | | 2,503 | | | | 8,079 | | | | 2,032 | |
| | | | | | | | | | | | |
| | | 61,655 | | | | 36,492 | | | | 34,790 | |
| | | | | | | | | | | | |
| | | |
Deferred: | | | | | | | | | | | | |
Federal | | | 35,045 | | | | 58,274 | | | | 29,792 | |
State | | | 5,824 | | | | (7,584 | ) | | | 3,661 | |
Valuation allowance release | | | (390 | ) | | | (20,232 | ) | | | — | |
| | | | | | | | | | | | |
| | | 40,479 | | | | 30,458 | | | | 33,453 | |
| | | | | | | | | | | | |
Income taxes | | $ | 102,134 | | | $ | 66,950 | | | $ | 68,243 | |
| | | | | | | | | | | | |
A reconciliation between income taxes and income tax expense computed using the federal statutory income tax rate of 35% is as follows:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | (in thousands) | |
| | | |
Income tax at the statutory federal rate | | $ | 101,677 | | | $ | 87,534 | | | $ | 68,555 | |
State income taxes, net of federal | | | 5,261 | | | | 3,195 | | | | 3,930 | |
Increase in cash surrender value of officers’ life insurance | | | (4,552 | ) | | | (4,624 | ) | | | (4,178 | ) |
Net increase (decrease) in uncertain tax positions | | | 1,206 | | | | 1,285 | | | | (485 | ) |
Change in valuation allowances for prior years | | | (390 | ) | | | (20,232 | ) | | | — | |
Other | | | (1,068 | ) | | | (208 | ) | | | 421 | |
| | | | | | | | | | | | |
Income taxes | | $ | 102,134 | | | $ | 66,950 | | | $ | 68,243 | |
| | | | | | | | | | | | |
44
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consist of:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | |
Deferred tax assets: | | | | | | | | |
Prepaid pension costs | | $ | 16,922 | | | $ | 34,372 | |
Benefit plan costs | | | 33,744 | | | | 33,862 | |
Store closing and other reserves | | | 27,462 | | | | 22,696 | |
Inventory capitalization | | | 7,850 | | | | 6,669 | |
Tax carryovers | | | 14,744 | | | | 15,129 | |
Interest rate swaps | | | — | | | | 628 | |
Prepaid rent | | | 11,882 | | | | 11,304 | |
Goodwill | | | 42,528 | | | | 49,515 | |
Intangibles | | | 5,795 | | | | 6,684 | |
Other | | | 12,721 | | | | 10,732 | |
| | | | | | | | |
Gross deferred tax assets | | | 173,648 | | | | 191,591 | |
Less valuation allowance | | | — | | | | (390 | ) |
| | | | | | | | |
Deferred tax assets, net of valuation allowance | | | 173,648 | | | | 191,201 | |
| | | | | | | | |
| | |
Deferred tax liabilities | | | | | | | | |
Property and equipment | | | 96,930 | | | | 75,523 | |
Intangibles | | | 3,655 | | | | 4,615 | |
Inventory | | | 66,481 | | | | 53,571 | |
Other | | | — | | | | 2,028 | |
| | | | | | | | |
Gross deferred tax liabilities | | | 167,066 | | | | 135,737 | |
| | | | | | | | |
Net deferred tax assets | | $ | 6,582 | | | $ | 55,464 | |
| | | | | | | | |
Due to economic conditions prior to fiscal year 2012, the Company believed that it was more likely than not that the benefit from state net operating loss and credit carryforwards, and net deferred tax assets for state income tax purposes, would not be realized, and established a valuation allowance on these deferred tax assets in fiscal year 2009. Based upon operating results over recent years, as well as an assessment of expected future results of operations during the quarter ended January 28, 2012, it was determined that it is more likely than not that certain deferred tax assets would be utilized. As a result, the majority of our valuation allowance was released during fiscal year 2012, recognizing a tax benefit of $20.2 million. During the quarter ended February 2, 2013, it was determined that the remaining valuation allowance would also be realized, and as a result recognized a benefit of $0.4 million. The release of the valuation allowance was determined in accordance with the provisions of ASC 740, “Income Taxes,” which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable.
The analysis performed to assess the realizability of the state deferred tax asset included an evaluation, as of February 2, 2013, of the level of historical pre-tax income for the affected subsidiaries, after adjustment for non-recurring items, in recent years; the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable state laws; and the amount and timing of future taxable income. This analysis indicated it is more likely than not that the deferred tax asset recorded will be realized.
45
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance was $21.0 million at January 29, 2011. The $21.0 million beginning of year balance was reduced by the release of $20.2 million, with the remaining $0.4 million relating to expired net operating losses and other items recorded as a reduction of income tax expense.
As of February 2, 2013, the Company has net operating loss carryforwards for state income tax purposes of $316.2 million. The state carryforwards expire at various intervals through fiscal year 2033 but primarily in fiscal years 2024 through 2028. The Company also has state job credits of $1.1 million, which are available to offset future taxable income, in the applicable states, if any. These credits expire between fiscal years 2016 and 2023. In addition, the Company has alternative minimum tax net operating loss carryforwards of $0.9 million which are available to reduce future alternative minimum taxable income, and are not subject to expiration.
The state net operating loss carryforwards from filed returns included uncertain tax positions taken in prior years. State net operating loss carryforwards as shown on the Company’s tax returns are larger than the state net operating losses for which a deferred tax asset is recognized for financial statement purposes.
As of February 2, 2013, the total gross unrecognized tax benefit was $17.8 million. Of this total, $6.0 million represents the amount of unrecognized tax benefits (net of the federal benefit on state issues) that, if recognized, would favorably affect the effective income tax rate in a future period. A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
| | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
Balance, beginning of year | | $ | 22,756 | | | $ | 23,575 | |
Additions for tax positions from prior years | | | 898 | | | | 364 | |
Reductions for tax positions from prior years | | | (7,165 | ) | | | (4,637 | ) |
Additions for tax positions related to the current year | | | 1,857 | | | | 3,454 | |
Settlements | | | (585 | ) | | | — | |
| | | | | | | | |
Balance, end of year | | $ | 17,761 | | | $ | 22,756 | |
| | | | | | | | |
The Company reports interest related to unrecognized tax benefits in interest expense, and penalties related to unrecognized tax benefits in income tax expense. Total accrued interest and penalties for unrecognized tax benefits (net of tax benefit) as of February 2, 2013 was $1.4 million, after recognition of a $0.2 million benefit during fiscal year 2013.
The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax matters with the IRS for tax years through 2007 and is currently under audit for tax years 2008 and 2009. All material state and local income tax matters have been concluded for tax years through 2007.
At this time, the Company does not expect a material change to its gross unrecognized tax benefit over the next 12 months.
| (13) | Pension, SERP and Postretirement Benefits |
The Company has a defined benefit pension plan, the Belk Pension Plan, which prior to fiscal year 2010 had been partially frozen and closed to new participants. Pension benefits were suspended for fiscal year 2010, and effective December 31, 2009, the Pension Plan was frozen for those remaining participants whose benefits were not previously frozen.
The Company has a non-qualified defined benefit Supplemental Executive Retirement Plan, (“Old SERP”), which provides retirement and death benefits to certain qualified executives. Old SERP has been closed to new executives and has been replaced by the 2004 Supplemental Executive Retirement Plan (“2004 SERP”), a non-qualified defined contribution plan.
The Company also provides postretirement medical and life insurance benefits to certain employees, and was closed to new participants in 2002. The Company accounts for postretirement benefits by recognizing the cost of these benefits over an employee’s estimated term of service with the Company, in accordance with ASC 715, “Compensation — Retirement Benefits.”
46
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in the projected benefit obligation, change in plan assets, funded status, amounts recognized and unrecognized, net periodic benefit cost and actuarial assumptions are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Old SERP Benefits | | | Postretirement Benefits | |
| | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
Change in projected benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 549,431 | | | $ | 477,167 | | | $ | 13,189 | | | $ | 11,805 | | | $ | 25,628 | | | $ | 23,035 | |
Service cost | | | — | | | | — | | | | 153 | | | | 103 | | | | 116 | | | | 106 | |
Interest cost | | | 23,418 | | | | 25,492 | | | | 557 | | | | 620 | | | | 1,064 | | | | 1,201 | |
Actuarial (gains) losses | | | 22,636 | | | | 74,827 | | | | 411 | | | | 1,986 | | | | (1,405 | ) | | | 3,934 | |
Benefits paid | | | (29,057 | ) | | | (28,055 | ) | | | (1,420 | ) | | | (1,325 | ) | | | (2,124 | ) | | | (2,648 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | | 566,428 | | | | 549,431 | | | | 12,890 | | | | 13,189 | | | | 23,279 | | | | 25,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | | 453,088 | | | | 377,824 | | | | — | | | | — | | | | — | | | | — | |
Actual return on plan assets | | | 48,319 | | | | 44,319 | | | | — | | | | — | | | | — | | | | — | |
Contributions to plan | | | 18,000 | | | | 59,000 | | | | 1,420 | | | | 1,325 | | | | 2,124 | | | | 2,648 | |
Benefits paid | | | (29,057 | ) | | | (28,055 | ) | | | (1,420 | ) | | | (1,325 | ) | | | (2,124 | ) | | | (2,648 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at end of year | | | 490,350 | | | | 453,088 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Funded Status | | | (76,078 | ) | | | (96,343 | ) | | | (12,890 | ) | | | (13,189 | ) | | | (23,279 | ) | | | (25,628 | ) |
Unrecognized net transition obligation | | | — | | | | — | | | | — | | | | — | | | | — | | | | 196 | |
Unrecognized net loss | | | 261,292 | | | | 269,377 | | | | 4,225 | | | | 4,290 | | | | 1,973 | | | | 3,807 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net prepaid (accrued) | | $ | 185,214 | | | $ | 173,034 | | | $ | (8,665 | ) | | $ | (8,899 | ) | | $ | (21,306 | ) | | $ | (21,625 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees. Due to the pension plan freeze in the third quarter of fiscal year 2010, the Company began using the average remaining life of the participants in the pension plan rather than the average remaining service life of the Company’s active employees.
Amounts recognized in the consolidated balance sheets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Old SERP Benefits | | | Postretirement Benefits | |
| | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | | | | | |
Accrued liabilities | | $ | — | | | $ | — | | | $ | 1,146 | | | $ | 1,268 | | | $ | 2,009 | | | $ | 2,825 | |
Deferred income tax assets | | | 98,220 | | | | 101,231 | | | | 1,499 | | | | 1,522 | | | | 790 | | | | 1,547 | |
Retirement obligations and other noncurrent liabilities | | | 76,078 | | | | 96,343 | | | | 11,745 | | | | 11,921 | | | | 21,270 | | | | 22,806 | |
Accumulated other comprehensive loss | | | (163,072 | ) | | | (168,146 | ) | | | (2,727 | ) | | | (2,768 | ) | | | (1,183 | ) | | | (2,459 | ) |
Obligation and funded status are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Old SERP Plan | | | Postretirement Benefits | |
| | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | | | | | |
Projected benefit obligation | | $ | 566,428 | | | $ | 549,431 | | | $ | 12,890 | | | $ | 13,189 | | | $ | 23,279 | | | $ | 25,628 | |
Accumulated benefit obligation | | | 566,428 | | | | 549,431 | | | | 11,856 | | | | 11,969 | | | | N/A | | | | N/A | |
Fair value of plan assets | | | 490,350 | | | | 453,088 | | | | — | | | | — | | | | — | | | | — | |
47
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in accumulated other comprehensive loss consist of:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Old SERP Benefits | | | Postretirement Benefits | |
| | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | | | | | |
Net actuarial loss | | $ | (163,072 | ) | | $ | (168,146 | ) | | $ | (2,727 | ) | | $ | (2,768 | ) | | $ | (1,183 | ) | | $ | (2,351 | ) |
Transition obligation | | | — | | | | — | | | | — | | | | — | | | | — | | | | (108 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | (163,072 | ) | | $ | (168,146 | ) | | $ | (2,727 | ) | | $ | (2,768 | ) | | $ | (1,183 | ) | | $ | (2,459 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Activity related to plan assets and benefit obligations recognized in accumulated other comprehensive loss are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Old SERP Benefits | | | Postretirement Benefits | |
| | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | |
| | | (in thousands) | |
| | | | | | |
Adjustment to minimum liability | | $ | (2,058 | ) | | $ | (36,755 | ) | | $ | (258 | ) | | $ | (1,242 | ) | | $ | 883 | | | $ | (2,474 | ) |
| | | | | | |
Amortization of unrecognized items: | | | | | | | | | | | | | | | | | | | | | | | | |
Net transition obligation | | | — | | | | — | | | | — | | | | — | | | | 123 | | | | 164 | |
Net gain/(loss) | | | 7,132 | | | | 4,937 | | | | 299 | | | | 161 | | | | 270 | | | | (87 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 5,074 | | | $ | (31,818 | ) | | $ | 41 | | | $ | (1,081 | ) | | $ | 1,276 | | | $ | (2,397 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The weighted-average assumptions used to determine benefit obligations at the February 2, 2013 and January 28, 2012 measurement dates were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Plan | | | Old SERP Plan | | | Postretirement Plan | |
| | | Measurement Date | | | Measurement Date | | | Measurement Date | |
| | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | | | February 2,
2013 | | | January 28,
2012 | |
| | | | | | |
Discount rates | | | 4.125 | % | | | 4.375 | % | | | 4.125 | % | | | 4.375 | % | | | 4.125 | % | | | 4.375 | % |
Rates of compensation increase | | | N/A | | | | N/A | | | | 4.0 | | | | 4.0 | | | | N/A | | | | N/A | |
The following weighted-average assumptions were used to determine net periodic benefit cost for the fiscal years shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Plan | | | Old SERP Plan | | | Postretirement Plan | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | | | | | | | |
Discount rates | | | 4.375 | % | | | 5.500 | % | | | 5.750 | % | | | 4.375 | % | | | 5.500 | % | | | 5.750 | % | | | 4.375 | % | | | 5.500 | % | | | 5.750 | % |
Rates of compensation increase | | | N/A | | | | N/A | | | | N/A | | | | 4.0 | | | | 4.0 | | | | 4.0 | | | | N/A | | | | N/A | | | | N/A | |
Return on plan assets | | | 7.25 | % | | | 7.50 | % | | | 8.00 | % | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
The Company developed the discount rate by matching the projected future cash flows of the plan to a modeled yield curve consisting of over 500 Aa-graded, noncallable bonds. Based on this analysis, management selected a 4.375% discount rate, which represented the calculated yield curve rate rounded up to the nearest quarter point. The pension plan’s expected return assumption is based on the weighted average aggregate long-term expected returns of various actively managed asset classes corresponding to the plan’s asset allocation. The pension plan assets are allocated approximately 40% to mutual funds, 30% to fixed income securities, and 25% to equity securities, with the remaining assets allocated to private equity investments and cash.
48
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for fiscal year 2013; the rate was assumed to decrease to 5.0% gradually over the next six years and remain at that level for fiscal years thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing or decreasing the assumed health care cost trend rates by one percentage point would increase or decrease the accumulated postretirement benefit obligation as of February 2, 2013 by $0.5 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended February 2, 2013 by less than $0.1 million.
The Company maintains policies for investment of pension plan assets. The policies set forth stated objectives and a structure for managing assets, which includes various asset classes and investment management styles that, in the aggregate, are expected to produce a sufficient level of diversification and investment return over time and provide for the availability of funds for benefits as they become due. The policies also provide guidelines for each investment portfolio that control the level of risk assumed in the portfolio and ensure that assets are managed in accordance with stated objectives. The policies set forth criteria to monitor and evaluate the performance results achieved by the investment managers. In addition, managing the relationship between plan assets and benefit obligations within the policy objectives is achieved through periodic asset and liability studies required by the policies.
The asset allocation for the pension plan is as follows:
| | | | | | | | | | | | | | |
| | | | | Percentage of Plan Assets at Measurement Date | |
| | | Target Allocation | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | | |
Domestic equity securities | | 31-51% | | | 43 | % | | | 43 | % | | | 48 | % |
International equity securities | | 7-17% | | | 13 | % | | | 12 | % | | | 14 | % |
Fixed income | | 40-50% | | | 43 | % | | | 43 | % | | | 35 | % |
Private equity | | 0-5% | | | 1 | % | | | 1 | % | | | 2 | % |
Cash | | 0-5% | | | 0 | % | | | 1 | % | | | 1 | % |
| | | | | | | | | | | | | | |
Total | | 100% | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | |
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of February 2, 2013 and January 28, 2012, the pension plan assets were required to be measured at fair value. These assets included cash and cash equivalents, equity securities, fixed income securities, mutual funds, private equity funds and exchange traded limited partnership units. These categories can cross various asset allocation strategies as reflected in the preceding table.
Fair values of the pension plan assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurement at Reporting Date
Using | | | | | | Fair Value Measurement at Reporting Date
Using | |
Description | | February 2,
2013 | | | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Outputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | January 28,
2012 | | | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Outputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
| | | | | | (in thousands) | | | | | | (in thousands) | |
| | | | | | | | |
Cash and cash equivalents | | $ | 12,408 | | | $ | — | | | $ | 12,408 | | | $ | — | | | $ | 8,404 | | | $ | — | | | $ | 8,404 | | | $ | — | |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
International companies | | | 16,939 | | | | 16,939 | | | | — | | | | — | | | | 14,515 | | | | 14,515 | | | | — | | | | — | |
U.S. companies(a) | | | 105,203 | | | | 105,203 | | | | — | | | | — | | | | 98,320 | | | | 98,320 | | | | — | | | | — | |
Fixed income securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate bonds | | | 73,472 | | | | — | | | | 73,472 | | | | — | | | | 36,544 | | | | — | | | | 36,544 | | | | — | |
Government securities | | | 70,000 | | | | — | | | | 70,000 | | | | — | | | | 78,169 | | | | — | | | | 78,169 | | | | — | |
Mortgage backed securities | | | 13,016 | | | | — | | | | 13,016 | | | | — | | | | 17,231 | | | | — | | | | 17,231 | | | | — | |
Municipal bonds | | | 6,847 | | | | — | | | | 6,847 | | | | — | | | | 1,421 | | | | — | | | | 1,421 | | | | — | |
Mutual funds | | | 186,931 | | | | 63,451 | | | | 123,480 | | | | — | | | | 193,578 | | | | 53,126 | | | | 140,452 | | | | — | |
Private equity | | | 5,534 | | | | — | | | | — | | | | 5,534 | | | | 4,906 | | | | — | | | | — | | | | 4,906 | |
Exchange traded limited partnership units | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 490,350 | | | $ | 185,593 | | | $ | 299,223 | | | $ | 5,534 | | | $ | 453,088 | | | $ | 165,961 | | | $ | 282,221 | | | $ | 4,906 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
49
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | (a) | The U.S. equity securities consist of large cap companies, mid cap companies and small cap companies of $67.9 million, $17.6 million and $19.7 million, respectively, in fiscal year 2013, and $62.8 million, $16.9 million and $18.6 million, respectively, in fiscal year 2012. |
The pension plan cash equivalents, corporate bonds, government securities, mortgage backed securities, municipal bonds, and the majority of mutual funds in fiscal years 2013 and 2012, respectively, have been classified as Level 2:
Cash equivalents and mutual funds — fair values of cash equivalents and mutual funds are largely provided by independent pricing services. Where independent pricing services provide fair values, the Company has obtained an understanding of the methods, models and inputs used in pricing, and has procedures in place to validate that amounts provided represent current fair values.
Investments in corporate bonds, municipal bonds and government securities — fair values of corporate bonds, municipal bonds, and government securities are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instruments (maturity and coupon interest rate) and consider the counterparty credit rating.
Mortgage backed securities — fair values of mortgage backed securities are based on external broker bids, where available, or are determined by discounting estimated cash flows.
The private equity pension plan investments are considered Level 3 assets as there is not an active market for identical assets from which to determine fair value or current market information about similar assets to use as observable inputs. The fair value of private equity investments is determined using pricing models, which requires significant management judgment.
The following table provides a reconciliation of the fiscal year 2013 and 2012 beginning and ending balances of the pension plan’s private equity funds (Level 3):
| | | | |
| (in thousands) | | | |
Balance as of January 29, 2011 | | $ | 5,560 | |
Calls of private equity investments | | | 990 | |
Total gains realized/unrealized included in plan earnings | | | 36 | |
Distributions of private equity investments | | | (1,680 | ) |
| | | | |
Balance as of January 28, 2012 | | | 4,906 | |
| | | | |
Calls of private equity investments | | | 1,120 | |
Total gains realized/unrealized included in plan earnings | | | 349 | |
Distributions of private equity investments | | | (841 | ) |
| | | | |
Balance as of February 2, 2013 | | $ | 5,534 | |
| | | | |
The Company expects to have the following benefit payments related to its pension, Old SERP and postretirement plans in the coming years:
| | | | | | | | | | | | |
Fiscal Year | | Pension
Plan | | | Old SERP
Plan | | | Postretirement
Plan | |
| | | (in thousands) | |
| | | |
2014 | | $ | 29,541 | | | $ | 1,169 | | | $ | 2,050 | |
2015 | | | 29,485 | | | | 1,125 | | | | 2,409 | |
2016 | | | 29,447 | | | | 1,082 | | | | 2,248 | |
2017 | | | 29,464 | | | | 1,041 | | | | 2,155 | |
2018 | | | 29,637 | | | | 1,002 | | | | 2,071 | |
2019 - 2023 | | | 153,332 | | | | 6,727 | | | | 9,160 | |
The Company expects to contribute sufficient amounts to the pension plan so that the Pension Protection Act of 2006 guidelines are exceeded. The Company elected to contribute $18.0 million and $59.0 million to its Pension Plan in fiscal years 2013 and 2012, respectively. The Company expects to contribute $1.2 million to its non-qualified defined benefit Supplemental Executive Retirement Plan in fiscal year 2014, and contributed $1.4 million and $1.3 million in fiscal years 2013 and 2012, respectively. The Company expects to contribute $2.1 million to its postretirement plan in fiscal year 2014, and contributed $2.1 million and $2.6 million in fiscal years 2013 and 2012, respectively.
50
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic benefit expense are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | Pension Plan | | | Old SERP Plan | | | Postretirement Plan | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | (in thousands) | |
| | | | | | | | | |
Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | 153 | | | $ | 103 | | | $ | 73 | | | $ | 116 | | | $ | 106 | | | $ | 150 | |
Interest cost | | | 23,418 | | | | 25,492 | | | | 26,069 | | | | 557 | | | | 620 | | | | 618 | | | | 1,064 | | | | 1,201 | | | | 1,360 | |
Expected return on assets | | | (28,962 | ) | | | (28,066 | ) | | | (26,202 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Amortization of unrecognized items: | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net transition obligation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 196 | | | | 262 | | | | 262 | |
Prior service cost | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Net losses (gains) | | | 11,367 | | | | 7,867 | | | | 7,010 | | | | 477 | | | | 256 | | | | 144 | | | | 430 | | | | (138 | ) | | | (30 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Annual benefit expense | | $ | 5,823 | | | $ | 5,293 | | | $ | 6,877 | | | $ | 1,187 | | | $ | 979 | | | $ | 835 | | | $ | 1,806 | | | $ | 1,432 | | | $ | 1,742 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal year 2014 are as follows:
| | | | | | | | | | | | |
| | | Pension
Benefits | | | Old SERP
Plan | | | Postretirement
Benefits | |
| | | (in thousands) | |
| | | |
Amortization of actuarial loss | | $ | 12,493 | | | $ | 528 | | | $ | 123 | |
| | | | | | | | | | | | |
Total recognized from other comprehensive income | | $ | 12,493 | | | $ | 528 | | | $ | 123 | |
| | | | | | | | | | | | |
| (14) | Other Employee Benefits |
The Belk Employees’ Health Care Plan provides medical and dental benefits to substantially all full-time employees. This plan for medical and dental benefits is administered through a 501(c)(9)��Trust. The Group Life Insurance Plan and The Belk Employees Short Term Disability Insurance Plan provide insurance to substantially all full-time employees and are fully insured through contracts issued by insurance companies. Expense recognized by the Company under these plans amounted to $52.4 million, $48.6 million and $41.8 million in fiscal years 2013, 2012 and 2011, respectively.
The Belk 401(k) Savings Plan, a defined contribution plan, provides benefits for substantially all employees. The cost of the plan was $8.8 million, $8.2 million and $8.1 million in fiscal years 2013, 2012 and 2011, respectively. Employer match contributions are calculated at 100% of the first 4% of employees’ contributions, plus 50% on the next 2% of employees’ contributions, up to a total 5% employer match on eligible compensation.
The Company has a non-qualified 401(k) Restoration Plan for highly compensated employees, as defined by the Employee Retirement Income Security Act (“ERISA”). The cost of the plan to the Company in fiscal years 2013, 2012 and 2011 was $1.0 million, $0.2 million and $0.9 million, respectively. The plan provides a contribution equal to 5% of a participant’s compensation, except for those who are participants in the 2004 SERP plan, in excess of the limit set forth in Code section 401(a)(17), as adjusted. The Company accrues each participant’s return on investment based on an asset investment model of their choice.
The 2004 SERP Plan, a non-qualified defined contribution retirement benefit plan for certain qualified executives, provides a contribution equal to 5% of a participant’s compensation in excess of the limit set forth in Code section 401(a)(17), as adjusted. The contribution and interest costs charged to operations were $1.3 million, $1.3 million and $1.2 million in fiscal years 2013, 2012 and 2011, respectively.
51
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain eligible employees participate in a non-qualified Deferred Compensation Plan (“DCP”). Participants in the DCP have elected to defer a portion of their regular compensation subject to certain limitations proscribed by the DCP. The Company is required to pay interest on the employees’ deferred compensation at various rates that have historically been between 5% and 15%. Interest cost related to the plan and charged to interest expense was $3.9 million in fiscal year 2013, and $4.0 million each in fiscal years 2012 and 2011.
The Company has a Pension Restoration Plan, a non-qualified defined contribution plan. Expense of $0.1 million was incurred for fiscal year 2013, and $0.1 million each in fiscal years 2012 and 2011, to provide benefits under this plan. The plan provides benefits for certain officers, whose pension plan benefit accruals were frozen, that would have been otherwise grandfathered in their pension participation based on age and vesting. Effective January 1, 2009, the Company suspended accruals to this plan for one year and subsequently permanently froze future contributions as of December 31, 2009.
| (15) | Stock-Based Compensation |
Under the Belk, Inc. 2010 Incentive Stock Plan (the “2010 Incentive Plan”), the Company is authorized to award up to 2.5 million shares of class B common stock for various types of equity incentives to key executives of the Company. The Company recognized compensation expense, net of tax, under the 2010 and 2000 Incentive Plans of $11.0 million, $10.6 million and $6.7 million for fiscal years 2013, 2012 and 2011, respectively.
Performance Based Stock Award Programs
The Company has a performance based stock award program (the “Long Term Incentive Plan” or “LTI Plan”), which the Company grants, under its 2010 Incentive Plan, stock awards to certain key executives. Shares awarded under the LTI Plan vary based on Company results versus specified performance targets and generally vest at the end of the performance period. Beginning with fiscal year 2009, the LTI Plan began using a one-year performance period and a two-year service period. One-half of any shares earned during the performance period will be issued after the end of the performance period with the remaining shares issued at the end of the service period.
LTI Plan compensation costs are computed using the fair value of the Company’s stock on the grant date based on a third-party valuation and the estimated expected attainment of performance goals. The unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the LTI Plan was $4.9 million, $5.1 million and $4.9 million for fiscal years 2013, 2012 and 2011, respectively.
The weighted-average grant-date fair value of shares granted under the LTI Plans during fiscal years 2013, 2012 and 2011 was $40.80, $33.70 and $26.00, respectively. The total fair value of stock grants issued under the LTI Plans during fiscal year 2013 was $12.8 million. The fiscal year 2013 performance targets were met, however the plan does not vest until fiscal year 2014 and 2015. The fiscal year 2012 performance targets were met, and the plan vests in fiscal year 2013 and 2014. The fiscal year 2011 performance targets were met, and the plan vested in fiscal year 2012 and 2013.
Activity under the LTI Plan during the year ended February 2, 2013 is as follows:
| | | | | | | | |
| | | Shares
(in thousands) | | | Weighted-Average
Grant Date Fair
Value per Share | |
Non-vested at January 28, 2012 | | | 613 | | | $ | 30.58 | |
Granted | | | 289 | | | | 40.80 | |
Changes in Performance Estimates | | | 25 | | | | 38.94 | |
Vested | | | (435 | ) | | | 29.34 | |
Forfeited | | | (11 | ) | | | 38.90 | |
| | | | | | | | |
Non-vested at February 2, 2013 | | | 481 | | | $ | 38.11 | |
| | | | | | | | |
In fiscal year 2011, the Company established a performance-based long term incentive plan (the “Stretch Incentive Plan” or “SIP”), under its 2010 Incentive Plan, in which certain key executive officers are eligible to participate. The performance period began on the first day of the third quarter of fiscal year 2011 and ended on the last day of fiscal year 2013. The target award level for all eligible employees was set at one times target total cash compensation. Executives
52
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
could earn up to a maximum of 150% of the target award for achievement equal to or greater than 110% of the cumulative earnings before interest and taxes goal and 103% of the sales goal. The SIP award was denominated in cash and settled in shares of class B common stock. One-half of any SIP award earned will be granted after the end of the performance period; the balance of the award earned will be granted after the end of fiscal year 2014. The actual number of shares granted in fiscal year 2014 was determined based on the Company’s stock price on the date the shares will be granted. There were no SIP shares granted during fiscal year 2013. The SIP performance targets were met, however the plan does not vest until fiscal year 2014 and 2015. The unrecognized compensation cost related to non-vested compensation arrangements granted under the SIP Plan was $2.6 million and $7.1 million in fiscal years 2013 and 2012, respectively.
The Company granted service-based stock awards to certain associates in fiscal year 2013. The service-based awards granted 25,000 shares in fiscal year 2013; 12,500 will be issued in the second quarter of fiscal year 2018, and the remaining 12,500 will be issued at the end of the service period, fiscal year 2019. The Company granted a service-based stock award to an associate in fiscal year 2011. The service-based award granted 10,000 shares in fiscal year 2011; 5,000 were issued and vested in the second quarter of fiscal year 2011, and the remaining 5,000 will be issued at the end of the service period, fiscal year 2014. The weighted-average grant-date fair value of shares granted under the service-based plans during fiscal years 2013 and 2011 was $40.80 and $26.00, respectively. The total fair value of service-based stock grants vested during fiscal years 2011 was $0.3 million. The unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the service-based plan as of February 2, 2013 was $0.9 million.
In fiscal year 2007, the Company established a five-year performance-based incentive stock plan for the Chief Financial Officer (the “CFO Incentive Plan”). Up to 11,765 shares were awarded under the plan at the end of each fiscal year if an annual Company performance goal was met. Performance goals were established annually for each of the five one-year performance periods, which resulted in five separate grant dates. The participant had the option to receive 30% of the award in cash (liability portion) at the end of each of the five one-year periods. The annual cash award was based on the number of shares earned during the annual period times the fair value of the Company’s stock as of the fiscal year end. The amounts under the liability portion of the award vested ratably at the end of each fiscal year. The remaining 70% of the award (equity portion) was granted in the Company’s stock. Shares granted under the equity portion vested at the end of the five-year period. The award also included a cumulative five-year look-back feature whereby previously unearned one-year awards were earned based on cumulative performance. The shares that were awarded based on the fiscal year 2011 performance goal had a grant date fair value of $26.00. The total fair value of stock grants issued during fiscal year 2012 was $0.8 million. The CFO Incentive Plan resulted in compensation cost of $0.9 million in fiscal year 2011. The final share payout for the CFO Incentive Plan occurred in fiscal 2012.
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts.
The annual amount and due dates of purchase obligations as of February 2, 2013 are $94.9 million due within one year, $38.5 million due within one to three years, and $0.7 million due within three to five years.
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. The diluted EPS calculation includes the effect of contingently issuable stock-based compensation awards with performance vesting conditions as being outstanding at the beginning of the period in which all vesting conditions are met.
If all necessary conditions have not been satisfied by the end of the period, the contingently issuable shares included in diluted EPS are based on the number of dilutive shares that would be issuable at the end of the contingency period. Contingently-issuable non-vested share awards are included in the diluted EPS calculation as of the beginning of the period (or as of the date of the contingent share agreement, if later).
53
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of basic and diluted shares for fiscal years 2013, 2012, and 2011 is as follows:
| | | | | | | | | | | | |
| | | February 2,
2013 | | | January 28,
2012 | | | January 29,
2011 | |
| | | |
Basic Shares | | | 43,435,314 | | | | 45,355,941 | | | | 46,921,875 | |
Dilutive contingently-issuable non-vested share awards | | | 272,862 | | | | 192,125 | | | | 83,840 | |
Dilutive contingently-issuable vested share awards | | | 4,087 | | | | 31,921 | | | | 5,818 | |
| | | | | | | | | | | | |
Diluted Shares | | | 43,712,263 | | | | 45,579,987 | | | | 47,011,533 | |
| | | | | | | | | | | | |
| (18) | Fair Value Measurements |
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of February 2, 2013 and January 28, 2012, the Company held company-owned life insurance measured at fair value on a recurring basis that were considered Level 2. The Company has equity and fixed income investments related to its company-owned life insurance. The fair value of the investments is the estimated amount that the Company would receive if the policy was terminated, taking into consideration the current credit worthiness of the insurer. The fair value of the company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the change in the fair value of the company-owned life insurance is marked to market through income.
The Company has in the past entered into interest rate swap agreements with financial institutions to manage the exposure to changes in interest rates. When doing so, the fair value of interest rate swap agreements is the estimated amount that the Company would pay or receive to terminate the swap agreement, taking into account the current credit worthiness of the swap counterparties. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all periods presented. Additionally, the change in the fair value of a swap designated as a cash flow hedge is marked to market through accumulated other comprehensive income.
The Company’s assets and liabilities measured at fair value on a recurring basis at February 2, 2013 and January 28, 2012, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at February 2, 2013 | | | Fair Value at January 28, 2012 | |
Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | (in thousands) | |
| | | | | | | | |
Assets measured at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company-owned life insurance (a) | | $ | — | | | $ | 24,534 | | | $ | — | | | $ | 24,534 | | | $ | — | | | $ | 15,884 | | | $ | — | | | $ | 15,884 | |
| | | | | | | | |
Liabilities measured at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap liability (b) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,685 | | | $ | — | | | $ | 1,685 | |
| (a) | Amounts are presented net of loans that are secured by some of these policies of $147.4 million and $137.3 million at February 2, 2013 and January 28, 2012, respectively. |
| (b) | On July 12, 2012, the underlying $80.0 million floating rate senior note matured and was repaid using cash on hand. It became current as of July 2011, and the interest rate swap liability was reclassified to accrued liabilities in the current liabilities section as presented in the consolidated balance sheet. |
Certain long-lived assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The fair value measurements related to long-lived assets are determined using expected future cash flow analyses. The Company estimates future cash flows based on historical experience and its expectation of future performance. The analyses use discounted cash flows and take into consideration any anticipated salvage value or sales price for the store. The analyses also assume available option periods through 20 years unless there is a real estate related event which would either increase or decrease the time period. The Company classifies these measurements as Level 3.
54
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | | Property and Equipment | |
| | | (in thousands) | |
| |
Measured as of February 2, 2013: | | | | |
Carrying amount | | $ | 266 | |
Fair value measurement | | | — | |
| | | | |
Impairment charge recognized | | $ | (266 | ) |
| | | | |
| |
Measured as of January 28, 2012: | | | | |
Carrying amount | | $ | 1,537 | |
Fair value measurement | | | 1,178 | |
| | | | |
Impairment charge recognized | | $ | (359 | ) |
| | | | |
| |
Measured as of January 29, 2011: | | | | |
Carrying amount | | $ | 6,828 | |
Fair value measurement | | | 950 | |
| | | | |
Impairment charge recognized | | $ | (5,878 | ) |
| | | | |
The following table presents the carrying amounts and estimated fair values of financial instruments not recorded at fair value in the consolidated balance sheets. The Company classifies these measurements as Level 2. As of February 2, 2013, these included the Company’s fixed rate long-term debt, including the current portion.
| | | | | | | | | | | | | | | | |
| | | February 2, 2013 | | | January 28, 2012 | |
| | | Carrying
Value | | | Fair
Value | | | Carrying
Value | | | Fair
Value | |
| | | (in thousands) | |
| | | | |
Financial liabilities | | | | | | | | | | | | | | | | |
Long-term debt, including current portion (excluding capitalized leases) | | $ | 375,000 | | | $ | 397,889 | | | $ | 492,780 | | | $ | 527,735 | |
The fair value of the Company’s fixed rate long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities.
Authorized capital stock of Belk, Inc. includes 200 million shares of Class A common stock, 200 million shares of Class B common stock and 20 million shares of preferred stock, all with par value of $0.01 per share. At February 2, 2013, there were 41,813,861 shares of Class A common stock outstanding, 904,019 shares of Class B common stock outstanding, and no shares of preferred stock outstanding.
Class A shares are convertible into Class B shares on a 1 for 1 basis, in whole or in part, at any time at the option of the holder. Class A and Class B shares are identical in all respects, with the exception that Class A stockholders are entitled to 10 votes per share and Class B stockholders are entitled to one vote per share. There are restrictions on transfers of Class A shares to any person other than a Class A permitted holder. Each Class A share transferred to a non-Class A permitted holder automatically converts into one share of Class B.
On December 11, 2012, the Company declared a regular dividend of $0.75 and a special one-time additional dividend of $0.25 on each share of Class A and Class B Common Stock outstanding on that date. The $0.75 per share regular dividend represented an acceleration of the regular dividend normally paid in April following the end of the fiscal year. On March 28, 2012, the Company declared a regular dividend of $0.75, and on March 30, 2011, the Company declared a regular dividend of $0.55 on each share of the Class A and Class B Common Stock outstanding on those dates.
55
BELK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 27, 2013, the Company’s Board of Directors approved a self-tender offer to purchase up to 2,000,000 shares of common stock at a price of $50.00 per share. On March 28, 2012, the Company’s Board of Directors approved a self-tender offer to purchase up to 1,950,000 shares of Class A and 500,000 shares of Class B common stock at a price of $40.80 per share. The tender offer was initiated on April 23, 2012 and completed on May 22, 2012 when the Company accepted for purchase 2,235,009 shares of Class A and 266,136 shares of Class B common stock for $102.0 million. In accordance with the offer to purchase and SEC rules, the Company accepted for purchase 285,009 additional shares of Class A common stock that were tendered by stockholders, which is less than 2.0% of the outstanding shares of Class A stock that were subject to the offer.
| (20) | Selected Quarterly Financial Data (unaudited) |
The following table summarizes the Company’s unaudited quarterly results of operations for fiscal years 2013 and 2012:
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | February 2,
2013 | | | October 27,
2012 | | | July 28,
2012 | | | April 28,
2012 | |
| | | (in thousands, except per share amounts) | |
Revenues | | $ | 1,341,637 | | | $ | 837,487 | | | $ | 867,944 | | | $ | 909,798 | |
Gross profit(1) | | | 461,139 | | | | 263,276 | | | | 289,041 | | | | 307,270 | |
Net income | | | 109,564 | | | | 11,145 | | | | 27,371 | | | | 40,290 | |
Basic income per share | | | 2.56 | | | | 0.26 | | | | 0.63 | | | | 0.89 | |
Diluted income per share | | | 2.54 | | | | 0.26 | | | | 0.63 | | | | 0.89 | |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | January 28,
2012 | | | October 29,
2011 | | | July 30,
2011 | | | April 30,
2011 | |
| | | (in thousands, except per share amounts) | |
Revenues | | $ | 1,228,538 | | | $ | 790,690 | | | $ | 831,777 | | | $ | 848,587 | |
Gross profit(1) | | | 430,093 | | | | 245,117 | | | | 276,666 | | | | 286,201 | |
Net income | | | 125,670 | | | | 595 | | | | 25,015 | | | | 31,868 | |
Basic income per share | | | 2.80 | | | | 0.01 | | | | 0.55 | | | | 0.69 | |
Diluted income per share | | | 2.78 | | | | 0.01 | | | | 0.55 | | | | 0.68 | |
| (1) | Gross profit represents revenues less cost of goods sold (including occupancy, distribution and buying expenses). |
Per share amounts are computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding.
56
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company’s management conducted an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 2, 2013, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework.Based on that assessment, management concluded that, as of February 2, 2013, the Company’s internal control over financial reporting is effective based on the criteria established in theInternal Control-Integrated Framework.
Management’s assessment of the effectiveness of the Company’s internal controls over financial reporting as of February 2, 2013, has been audited by KPMG, LLP, an independent registered public accounting firm. Their attestation report is included herein on the effectiveness of the Company’s internal control over financial reporting as of February 2, 2013.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fourth fiscal quarter ended February 2, 2013 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
57
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Belk, Inc.:
We have audited Belk Inc. and subsidiaries’ internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Belk Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Belk, Inc. maintained, in all material respects, effective internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Belk, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended February 2, 2013, and our report dated April 17, 2013, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Charlotte, North Carolina
April 17, 2013
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| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information about the Company’s directors and executive officers is included in the sections entitled “Proposal One — Election of Directors,” “Belk Management — Directors” and “Belk Management — Executive Officers” of the Proxy Statement for the Annual Meeting of the Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
The information about the Company’s Audit Committee is included in the section entitled “Belk Management — Committees of the Board — Audit Committee” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
The information about the Company’s Nominating and Corporate Governance Committee is included in the section entitled “Belk Management — Committees of the Board — Nominating and Corporate Governance Committee” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
The information about the Company’s compliance with Section 16 of the Exchange Act of 1934, as amended, is included in the section entitled “Other Information for Stockholders — Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
In March 2004, the Company adopted a Code of Ethics for Senior Executive and Financial Officers (the “Code of Ethics”) that applies to the chief executive officer, chief financial officer and chief accounting officer and persons performing similar functions. The Code of Ethics was filed as an exhibit to its Annual Report on Form 10-K for the fiscal year ended January 31, 2004 and is available on the Company’s website atwww.belk.com.
| Item 11. | Executive Compensation |
The information about executive and director compensation is included in the sections entitled “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Belk Management — Compensation Committee Report” and “Belk Management — Compensation Committee Interlocks and Insider Participation” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information about security ownership is included in the section entitled “Common Stock Ownership of Management and Principal Stockholders” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
Information about the equity compensation plans is included in the section entitled “Equity Compensation Plan Information” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29 2013 and is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information about transactions with related persons is included in the section entitled “Belk Management-Related Person Transactions” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
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The information about director independence is included in the sections entitled “Belk Management — Corporate Governance — Independence of Directors” and “Belk Management — Committees of the Board” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2013 and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information set forth under the section entitled “Independent Registered Public Accountant — Summary of Fees to Independent Registered Public Accountant,” and “Independent Registered Public Accountant — Audit Committee Pre-Approval Policies and Procedures” of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 29, 2013, is incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a) 1. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income — Years ended February 2, 2013, January 28, 2012, and January 29, 2011.
Consolidated Statements of Comprehensive Income — Years ended February 2, 2013 and January 28, 2012.
Consolidated Balance Sheets — As of February 2, 2013 and January 28, 2012.
Consolidated Statements of Changes in Stockholders’ Equity — Years ended February 2, 2013, January 28, 2012, and January 29, 2011.
Consolidated Statements of Cash Flows — Years ended February 2, 2013, January 28, 2012, and January 29, 2011.
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
All schedules are omitted because the required information is shown in the financial statements or the notes thereto or considered to be immaterial.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the Commission and those incorporated by reference to other filings:
| | |
| 3.1 | | Form of Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to pages B-24 to B-33 of the Company’s Registration Statement on Form S-4, filed on March 5, 1998 (File No. 333-42935)), as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed on June 5, 2012). |
| |
| 3.2 | | Form of Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004), as amended by the First Amendment to the Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K, filed on June 5, 2012). |
| |
| 4.1 | | Articles Fourth, Fifth and Seventh of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to pages B-24 to B-33 of the Company’s Registration Statement on Form S-4, filed on March 5, 1998 (File No. 333-42935)), as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed on June 5, 2012). |
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| | |
4.2 | | Articles I and IV of the Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004). |
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| 10.1* | | Belk, Inc. 2010 Incentive Stock Plan (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement, filed on April 21, 2010). |
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| 10.2* | | Belk, Inc. Revised Executive Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on June 12, 2008). |
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| 10.3* | | Belk, Inc. 2011-2013 Stretch Incentive Plan (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on form 10-K, filed on April 12, 2011). |
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| 10.4* | | Belk, Inc. 2004 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004). |
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| 10.5* | | Belk, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K, filed on April 14, 2005). |
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| 10.6* | | Belk, Inc. Amended and Restated Annual Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on June 7, 2011). |
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| 10.7* | | Transition Agreement, dated as of June 23, 2009, by and between Belk, Inc. and H.W. McKay Belk (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on September 9, 2009). |
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| 10.8* | | Transition Agreement, dated as of November 1, 2012, by and between Belk, Inc. and Brian T. Marley. |
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| 10.9* | | Belk, Inc. 2014-2016 Stretch Incentive Plan |
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| 10.10 | | Note Purchase Agreement, dated as of August 31, 2007, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on September 7, 2007). |
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| 10.11 | | Note Purchase Agreement, dated as of July 12, 2005, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 18, 2005). |
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| 10.12 | | Third Amended and Restated Credit Agreement, dated November 23, 2010, as amended, by and among Wells Fargo Bank, National Association, Bank of America, N.A. and the other lenders referred to therein (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on December 8, 2010). |
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| 10.13 | | Note Purchase Agreement, dated as of November 23, 2010, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q, filed on December 8, 2010). |
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| 10.14 | | Note Purchase Agreement, dated as of December 14, 2011, by and among Belk, Inc. and certain subsidiaries of Belk, Inc., as obligors, and the purchasers referred to therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on December 14, 2011). |
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| 10.15 | | First Amendment to the Third Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, Bank of America, N.A. and the other lenders referred to therein (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed on December 14, 2011). |
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| 14.1 | | Belk, Inc. Code of Ethics for Senior Executive and Financial Officers (incorporated by reference to Exhibit 14.1 of the Company’s Annual Report on Form 10-K, filed on April 14, 2004). |
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| 21.1 | | Subsidiaries. |
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| 23.1 | | Consent of KPMG LLP. |
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| 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted under Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted under Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1 | | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 32.2 | | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Identifies each management contract or compensatory plan required to be filed. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 16th day of April, 2013.
| | |
BELK, INC. |
(Registrant) |
| |
By: | | /s/ THOMAS M. BELK, JR. |
| |
| | Thomas M. Belk, Jr. |
| | Chairman of the Board and Chief |
| | Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 16, 2013.
| | | | |
Signature | | | | Title |
| | |
/s/ THOMAS M. BELK, JR. Thomas M. Belk, Jr. | | | | Chairman of the Board, Chief Executive Officer (Principal Executive Officer) and Director |
| | |
/s/ JOHN R. BELK John R. Belk | | | | President, Chief Operating Officer and Director |
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/s/ H. W. MCKAY BELK H. W. McKay Belk | | | | Director |
| | |
/s/ ERSKINE B. BOWLES Erskine B. Bowles | | | | Director |
| | |
/s/ JERRI L. DEVARD Jerri L. DeVard | | | | Director |
| | |
/s/ ELIZABETH VALK LONG Elizabeth Valk Long | | | | Director |
| | |
/s/ THOMAS C. NELSON Thomas C. Nelson | | | | Director |
| | |
/s/ JOHN R. THOMPSON John R. Thompson | | | | Director |
| | |
/s/ JOHN L. TOWNSEND, III John L. Townsend, III | | | | Director |
| | |
/s/ BRIAN T. MARLEY Brian T. Marley | | | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
| | |
/s/ RODNEY F. SAMPLES Rodney F. Samples | | | | Vice President and Controller (Principal Accounting Officer) |
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