SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 3, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 1-6140 DILLARD DEPARTMENT STORES, INC. (Exact name of registrant as specified in its charter) DELAWARE 71-0388071 (State or other (IRS Employer jurisdiction of incorporation Identification Number) or organization) 1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201 (Address of principal executive offices) (Zip Code) (501) 376-5200 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS A COMMON STOCK as of August 3, 1996 109,555,437 CLASS B COMMON STOCK as of August 3, 1996 4,016,929 PART I FINANCIAL INFORMATION ITEM 1 Financial Statements CONSOLIDATED BALANCE SHEETS DILLARD DEPARTMENT STORES, INC. (Unaudited) (Thousands) August 3 February 3 July 29 1996 1996 1995 ASSETS CURRENT ASSETS Cash and cash equivalents $68,768 $58,442 $48,564 Trade accounts receivable 1,008,554 1,103,575 996,252 Merchandise inventories 1,618,252 1,486,045 1,458,574 Other current assets 13,415 10,163 10,439 TOTAL CURRENT ASSETS 2,708,989 2,658,225 2,513,829 INVESTMENTS AND OTHER ASSETS 88,903 84,772 73,783 PROPERTY AND EQUIPMENT, NET 2,025,875 1,980,790 1,973,515 CONSTRUCTION IN PROGRESS 77,053 43,552 54,528 BUILDINGS UNDER CAPITAL LEASES 5,766 11,196 22,152 $4,906,586 $4,778,535 $4,637,807 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses $589,538 $559,011 $572,831 Commercial paper 129,952 125,310 51,588 Federal and state income taxes 2,429 51,832 7,259 Current portion of long-term debt 81,089 131,378 130,768 Current portion of capital lease obligations 1,596 2,149 2,160 TOTAL CURRENT LIABILITIES 804,604 869,680 764,606 LONG-TERM DEBT 1,279,648 1,157,864 1,153,732 CAPITAL LEASE OBLIGATIONS 14,789 20,161 21,234 DEFERRED INCOME TAXES 226,689 252,503 294,450 STOCKHOLDERS' EQUITY Preferred Stock 440 440 440 Common Stock 1,136 1,131 1,130 Additional paid-in capital 638,663 625,249 624,086 Retained earnings 1,940,617 1,851,507 1,778,129 2,580,856 2,478,327 2,403,785 $4,906,586 $4,778,535 $4,637,807 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS DILLARD DEPARTMENT STORES, INC. (Unaudited) (Thousands, except per share data) Three Months Ended Six Months Ended Twelve Months Ended August 3 July 29 August 3 July 29 August 3 July 29 1996 1995 1996 1995 1996 1995 Net sales $1,340,326 $1,265,066 $2,793,628 $2,591,820 $6,119,846 $5,669,366 Service charges, interest, and other 46,503 44,826 94,954 92,348 181,706 181,563 1,386,829 1,309,892 2,888,582 2,684,168 6,301,552 5,850,929 Cost and expenses: Cost of sales 871,804 824,946 1,827,601 1,706,874 4,014,513 3,693,625 Advertising, selling, administrative and general expenses 360,917 330,961 727,270 658,421 1,505,295 1,365,737 Depreciation and amortization 50,243 50,354 100,577 98,170 194,212 196,740 Rentals 10,905 11,185 22,063 22,814 58,084 61,723 Interest and debt expense 30,224 30,133 58,809 57,547 121,316 119,008 Impairment charges 0 0 0 0 126,559 0 1,324,093 1,247,579 2,736,320 2,543,826 6,019,979 5,436,833 INCOME BEFORE INCOME TAXES 62,736 62,313 152,262 140,342 281,573 414,096 Income taxes 23,210 23,680 56,335 53,330 105,475 157,355 NET INCOME 39,526 38,633 95,927 87,012 176,098 256,741 Retained earnings at beginning of period 1,904,508 1,742,899 1,851,507 1,697,911 1,778,129 1,534,973 1,944,034 1,781,532 1,947,434 1,784,923 1,954,227 1,791,714 Cash dividends declared (3,417) (3,403) (6,817) (6,794) (13,610) (13,585) RETAINED EARNINGS AT END OF PERIOD $1,940,617 $1,778,129 $1,940,617 $1,778,129 $1,940,617 $1,778,129 Net income per common share $0.35 $0.34 $0.84 $0.77 $1.55 $2.27 Cash dividends declared per common share $0.03 $0.03 $0.06 $0.06 $0.12 $0.12 Average shares outstanding 114,361 113,106 114,077 113,076 113,645 113,041 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS DILLARD DEPARTMENT STORES, INC. (Unaudited) (Thousands) Six Months Ended August 3 July 29 1996 1995 OPERATING ACTIVITITES Net income $95,927 $87,012 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 101,326 98,910 Changes in operating assets and liabilities: Decrease in trade accounts receivable 95,021 105,852 Increase in merchandise inventories and other current assets (135,459) (97,410) Increase in investments and other assets (4,880) (5,713) Decrease in trade accounts payable and accrued expenses and income taxes (44,690) (30,887) NET CASH PROVIDED BY OPERATING ACTIVITIES 107,245 157,764 INVESTING ACTIVITIES Purchase of property and equipment (173,733) (164,220) NET CASH USED IN INVESTING ACTIVITIES (173,733) (164,220) FINANCING ACTIVITIES Net increase (decrease) in commercial paper 4,642 (38,318) Proceeds from long-term borrowings 200,000 109,150 Principal payments on long-term debt and capital lease obligations (134,430) (60,114) Dividends paid (6,817) (6,793) Common stock sold 13,419 0 NET CASH PROVIDED BY FINANCING ACTIVITES 76,814 3,925 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,326 (2,531) Cash and cash equivalents at beginning of period 58,442 51,095 CASH AND CASH EQUIVALENTS AT END OF PERIOD $68,768 $48,564 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended August 3, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 1997 due to the seasonal nature of the business. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended February 3, 1996. 2. The retail last-in, first-out (LIFO) inventory method is used to value merchandise inventories. Under this method, at August 3, 1996 the LIFO cost of merchandise inventories was approximately equal to the first-in, first-out (FIFO) cost. At July 29, 1995, the LIFO cost of merchandise inventories was approximately $1 million less than the first-in, first- out (FIFO) cost. At each of February 3, 1996 and January 28, 1995, the LIFO costs of merchandise inventories were approximately equal to FIFO costs. 3. Net sales include leased department sales of $7.8 million and $8.6 million for the quarters ended August 3, 1996 and July 29, 1995, respectively. Leased department sales for the six months ended August 3, 1996 and July 29, 1995 were $14.8 million and $15.9 million, respectively. Leased department sales for the twelve months ended August 3, 1996 and July 29, 1995 were $37.4 million and $43.2 million, respectively. 4. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company beginning February 4, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share. 5. On June 7, 1996, the Company issued $100 million aggregate principal amount of its 7.375% notes due June 1, 2006. On July 17, 1996, the Company issued $100 million aggregate principal amount of its 7.75% notes due July 15, 2026. The notes were sold in underwritten public offerings. ITEM 2 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Results of Operations The following table sets forth operating results expressed as a percentage of net sales for the periods indicated: Three Months Ended Six Months Ended Twelve Months Ended August 3 July 29 August 3 July 29 August 3 July 29 1996 1995 1996 1995 1996 1995 Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 65.0% 65.2% 65.5% 65.9% 65.6% 65.1% Gross profit 35.0% 34.8% 34.5% 34.1% 34.4% 34.9% Advertising, selling, administrative and general expenses 26.9% 26.1% 26.0% 25.4% 24.6% 24.1% Depreciation and amortization 3.8% 4.0% 3.6% 3.8% 3.2% 3.5% Rentals 0.8% 0.9% 0.8% 0.9% 0.9% 1.1% Interest and debt expense 2.3% 2.4% 2.1% 2.2% 2.0% 2.1% Impairment charges 0.0% 0.0% 0.0% 0.0% 2.1% 0.0% Total operating expenses 33.8% 33.4% 32.5% 32.3% 32.8% 30.8% Other income 3.5% 3.5% 3.4% 3.6% 3.0% 3.2% Income before income taxes 4.7% 4.9% 5.4% 5.4% 4.6% 7.3% Income taxes 1.7% 1.9% 2.0% 2.0% 1.7% 2.8% Net income 3.0% 3.0% 3.4% 3.4% 2.9% 4.5% Sales for the second quarter of 1996 were $1,340.3 million as compared to $1,265.1 million for the second quarter of 1995. This was an increase of 6%. The sales increase for comparable stores was 2%. The six month sales increase for 1996 over 1995 was 8%; for comparable stores the increase was 4%. The twelve month sales increase for 1996 over 1995 was 8%; for comparable stores the increase was 3%. The majority of the increase in sales on a comparable store basis was attributable to an increase in the volume of goods sold rather than an increase in the price of goods. Cost of sales decreased from 65.2% of net sales for the second quarter of 1995 to 65.0% for the second quarter of 1996. For the six months ended August 3, 1996 the decrease was from 65.9% to 65.5% of net sales. This decrease was due to a lower level of markdowns in the first half of 1996 than in the first half of 1995. For the twelve months ended August 3, 1996 and July 29, 1995, the cost of sales increased from 65.1% to 65.6% of net sales. This increase was due to a slightly higher level of markdowns than in the prior year. Advertising, selling, administrative and general expenses increased from 26.2% of net sales for the second quarter of 1995 to 26.9% for the second quarter of 1996. For the six months ended August 3, 1996 and July 29, 1995, these expenses increased from 25.4% to 26.0% of net sales. For the twelve months ended August 3, 1996 and July 29, 1995, these expenses increased from 24.1% to 24.6% of net sales. The Company expensed the preopening costs associated with eight new stores opened in the first six months of 1996. In prior years the Company expensed all preopening costs for the year in the fourth quarter. Additionally, the bad debt expense increased as a percent of sales for the first six months of 1996 as compared to the first six months of 1995. Also, payroll expense in the selling area was higher as a percentage of sales in 1996 compared to 1995. Depreciation and amortization expense decreased slightly as a percentage of sales from 1995 in the three, six and twelve month periods ended August 3, 1996. This decrease was due to the write down of certain impaired assets in the fourth quarter of 1995, somewhat offset by the fact that a higher proportion of the Company's properties are owned rather than leased. Rental expense decreased slightly from .9% of net sales for the three and six months ended July 29, 1995 to .8% for the three and six months ended August 3, 1996. For the twelve months ended August 3, 1996 and July 29, 1995, the decrease was from 1.1% to .9% of net sales. This was due to a higher proportion of the Company's properties being owned rather than leased. Interest and debt expense decreased from 2.4% of net sales for the second quarter of 1995 to 2.3% of net sales for the second quarter of 1996. For the six months ended August 3, 1996 and July 29, 1995, the decrease was from 2.2% to 2.1% of net sales. For the twelve months ended August 3, 1996 and July 29, 1995, the decrease was from 2.1% to 2.0% of net sales. Interest and debt expense declined as a percentage of net sales due to a lower level of debt relative to sales, partially offset by higher interest rates on short-term debt. Service charges, interest and other income remained constant at 3.5% of net sales for the second quarters of 1996 and 1995. For the six months ended August 3, 1996 and July 29, 1995 it decreased from 3.6% of net sales in 1995 to 3.4% in 1996. For the twelve months ended August 3, 1996 and July 29, 1995 this decrease was from 3.2% to 3.0%. The primary cause for this decrease was a decline in proprietary credit card sales as a percentage of total sales. The effective federal and state income tax rate was 37% for the second quarter of 1996 and 38% for the second quarter of 1995. Financial Condition The Company's working capital was $1,904,385,000 at August 3, 1996, $1,788,545,000 at February 3, 1996, and $1,749,223,000 at July 29, 1995. The current ratios for each of these periods were 3.4, 3.1 and 3.3, respectively. The changes in working capital and current ratio were caused by a higher level of inventory at August 3, 1996 compared to February 3, 1996 and July 29, 1995. The long-term debt to capitalization ratio was 33.4%, 32.2% and 32.8% at August 3, 1996, February 3, 1996, and July 29, 1995, respectively. The ratio of long- term debt to capitalization is calculated by dividing the total amount of long-term debt and capitalized lease obligations by the sum of the total amount of long-term debt and capitalized lease obligations plus total equity. This ratio has increased due to the issuance of long-term debt as described below. On June 7, 1996, the Company issued $100 million 7.375% notes due June 1, 2006. On July 17, 1996, the Company issued $100 million 7.75% notes due July 15, 2026. The proceeds were used to reduce commercial paper borrowings. The Company invested $173,733,000 in capital expenditures for the six months ended August 3, 1996 as compared to $164,220,000 for the six months ended July 29, 1995. In 1996, the Company plans to build sixteen new stores, one of which will be a replacement store, and to expand and remodel three existing stores. In 1995, the Company opened eleven new stores, two of which were replacement stores, and expanded six stores. Merchandise inventories increased by 11% from $1,458,574,000 at July 29, 1995 to $1,618,252,000 at August 3, 1996. The Company operated 14 more stores at August 3, 1996 versus July 29, 1995. This was the primary reason for the increase in inventory. On a comparable store basis, the rate of increase in merchandise inventories was 5%. Fluctuations in certain other balance sheet accounts between February 3, 1996 and August 3, 1996 reflect normal seasonal variations within the retail industry. The levels of merchandise inventories and accounts receivable fluctuate due to the seasonal nature of the retail business. Along with the fluctuations in these current assets, there is also a corresponding fluctuation in trade accounts payable and commercial paper. PART II OTHER INFORMATION ITEM 5 Other Information Ratio of Earnings to Fixed Charges The Company has calculated the ratio of earnings to fixed charges pursuant to Item 503 of Regulation S-K of the Securities and Exchange Commission as follows: Six Months Ended Fiscal Year Ended August 3 July 29 February 3 January 28 January 29 January 30 February 1 1996 1995 1996 1995 1994 1993 1992 3.20 3.05 2.86 3.72 3.57 3.59 3.41 ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibit (11): Statement re: Computation of Per Share Earnings Exhibit (12): Statement re: Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K filed during the second quarter: The Company filed a report dated June 4, 1996 relating to the issuance of $100 million aggregate principal amount of 7.375% Notes maturing on June 1, 2006. The Company filed a report dated July 2, 1996 relating to the issuance of $100 million aggregate principal amount of 7.75% Notes maturing on July 15, 2026. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DILLARD DEPARTMENT STORES, INC. (Registrant) DATE: September 13, 1996 /s/ James I. Freeman James I. Freeman Senior Vice President & Chief Financial Officer (Principal Financial & Accounting Officer) EXHIBIT INDEX Exhibits to Form 10-Q Exhibit Number Exhibit 11 Statement re: Computation of Per Share Earnings 12 Statement re: Computation of Ratio of Earnings to Fixed Charges