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 November 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 1-6140 DILLARD'S, INC. (Exact name of registrant as specified in its charter) DELAWARE 71-0388071 (State or other (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 November 1, 1997 107,063,180 CLASS B COMMON STOCK as of November 1, 1997 4,016,929 PART I FINANCIAL INFORMATION ITEM 1 Financial Statements CONSOLIDATED BALANCE SHEETS DILLARD'S, INC. (Unaudited) (Thousands) November 1 February 1 November 2 1997 1997 1996 ASSETS CURRENT ASSETS Cash and cash equivalents $65,509 $64,094 $65,217 Trade accounts receivable 1,054,062 1,130,504 1,028,652 Merchandise inventories 2,255,564 1,556,958 2,046,085 Other current assets 35,017 9,080 22,982 TOTAL CURRENT ASSETS 3,410,152 2,760,636 3,162,936 INVESTMENTS AND OTHER ASSETS 103,125 107,157 102,129 PROPERTY AND EQUIPMENT, NET 2,428,734 2,131,843 2,110,737 CONSTRUCTION IN PROGRESS 20,792 55,024 32,743 BUILDINGS UNDER CAPITAL LEASES 4,338 5,066 5,411 $5,967,141 $5,059,726 $5,413,956 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses $1,002,641 $536,695 $950,033 Commercial paper 463,209 128,738 237,730 Federal and state income taxes 43,325 46,220 19,617 Current portion of long-term debt 106,564 181,564 131,088 Current portion of capital lease obligations 1,620 1,529 1,556 TOTAL CURRENT LIABILITIES 1,617,359 894,746 1,340,024 LONG-TERM DEBT 1,318,159 1,173,018 1,225,004 CAPITAL LEASE OBLIGATIONS 12,588 13,690 14,243 DEFERRED INCOME TAXES 261,094 261,094 226,689 STOCKHOLDERS' EQUITY Preferred stock 440 440 440 Common stock 1,143 1,136 1,136 Additional paid-in capital 649,758 641,388 638,728 Retained earnings 2,207,735 2,074,214 1,967,692 Less Treasury stock (101,135) 0 0 2,757,941 2,717,178 2,607,996 $5,967,141 $5,059,726 $5,413,956 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS DILLARD'S, INC. (Unaudited) (Thousands, except per share data) Three Months Ended Nine Months Ended Twelve Months Ended November 1 November 2 November 1 November 2 November 1 November 2 1997 1996 1997 1996 1997 1996 Net sales $1,592,118 $1,496,578 $4,560,615 $4,290,206 $6,497,994 $6,210,798 Service charges, interest, and other 47,217 46,689 140,617 141,643 183,449 182,428 1,639,335 1,543,267 4,701,232 4,431,849 6,681,443 6,393,226 Cost and expenses: Cost of sales 1,056,303 1,005,123 2,997,625 2,832,724 4,289,666 4,104,111 Advertising, selling, administrative and general expenses 415,031 394,606 1,184,812 1,121,876 1,601,386 1,540,158 Depreciation and amortization 53,901 52,539 156,429 153,116 197,032 193,255 Rentals 10,494 10,503 31,961 32,566 55,161 57,486 Interest and debt expense 33,219 30,308 97,158 89,117 128,640 122,191 Impairment charges 0 0 0 0 0 126,559 1,568,948 1,493,079 4,467,985 4,229,399 6,271,885 6,143,760 INCOME BEFORE INCOME TAXES 70,387 50,188 233,247 202,450 409,558 249,466 Federal and state income taxes 26,040 18,570 86,300 74,905 151,535 92,775 NET INCOME 44,347 31,618 146,947 127,545 258,023 156,691 Retained earnings at beginning of period 2,167,838 1,940,617 2,074,214 1,851,507 1,967,692 1,825,763 Cash dividends declared (4,450) (4,543) (13,426) (11,360) (17,980) (14,762) RETAINED EARNINGS AT END OF PERIOD $2,207,735 $1,967,692 $2,207,735 $1,967,692 $2,207,735 $1,967,692 Net income per common share $0.40 $0.28 $1.31 $1.12 $2.29 $1.38 Cash dividends declared per common share $0.04 $0.04 $0.12 $0.10 $0.16 $0.13 Average shares outstanding 112,115 114,005 112,260 114,053 112,644 113,830 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS DILLARD'S, INC. (Unaudited) (Thousands) Nine Months Ended November 1 November 2 1997 1996 OPERATING ACTIVITITES Net income $146,947 $127,545 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 157,552 154,224 Changes in operating assets and liabilities: Decrease in trade accounts receivable 76,442 74,923 Increase in merchandise inventories and other current assets (724,543) (572,859) Decrease (Increase) in investments and other asset 2,909 (18,465) Increase in trade accounts payable and accrued expenses and income taxes 463,639 332,993 NET CASH PROVIDED BY OPERATING ACTIVITIES 122,946 98,361 INVESTING ACTIVITIES Purchase of property and equipment (418,360) (266,469) NET CASH USED IN INVESTING ACTIVITIES (418,360) (266,469) FINANCING ACTIVITIES Net increase in commercial paper 334,471 112,420 Proceeds from long-term borrowings 200,000 200,000 Principal payments on long-term debt and capital lease obligations (130,870) (139,661) Dividends paid (14,014) (11,360) Proceeds from sale of common stock 8,377 13,484 Purchase of treasury stock (101,135) 0 NET CASH PROVIDED BY FINANCING ACTIVITIES 296,829 174,883 INCREASE IN CASH AND CASH EQUIVALENTS 1,415 6,775 Cash and cash equivalents at beginning of period 64,094 58,442 CASH AND CASH EQUIVALENTS AT END OF PERIOD $65,509 $65,217 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 nine month period ended November 1, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 1998 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 1, 1997. 2. On May 19, 1997, the Company amended its Certificate of Incorporation in order to change its name to Dillard's, Inc. 3. On February 4, 1997, the Company issued $100 million aggregate principal amount of its 7.15% notes due February 1, 2007. On May 15, 1997, the Company issued $100 million aggregate principal amount of its 7.75% notes due May 15, 2027. The notes were sold in underwritten public offerings. 4. On February 21, 1997, the Board of Directors authorized the implementation of a Class A common stock repurchase program of up to $300 million. For the nine months ended November 1, 1997, a total of 3.2 million shares were purchased for a total of $101.1 million. 5. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which will be effective for financial statements for fiscal years beginning after December 15, 1997. SFAS No. 131 redefines how operating segments are determined and requires expanded quantitative and qualitative disclosures relating to a company's operating segments. The Company is in the process of evaluating the impact, if any, that SFAS No. 131 will have on its financial statements. 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 Nine Months Ended Twelve Months Ended November 1 November 2 November 1 November 2 November 1 November 2 1997 1996 1997 1996 1997 1996 Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 66.3 67.2 65.7 66.0 66.0 66.1 Gross profit 33.7 32.8 34.3 34.0 34.0 33.9 Advertising, selling, administrative and general expenses 26.1 26.4 26.0 26.1 24.6 24.8 Depreciation and amortization 3.4 3.5 3.4 3.6 3.0 3.1 Rentals 0.7 0.7 0.7 0.8 0.9 0.9 Interest and debt expense 2.1 2.0 2.2 2.1 2.0 2.0 Impairment charges 0.0 0.0 0.0 0.0 0.0 2.0 Total operating expenses 32.3 32.6 32.3 32.6 30.5 32.8 Other income 3.0 3.1 3.1 3.3 2.8 2.9 Income before income taxes 4.4 3.3 5.1 4.7 6.3 4.0 Federal and state income taxes 1.6 1.2 1.9 1.7 2.3 1.5 Net income 2.8 2.1 3.2 3.0 4.0 2.5 Sales for the third quarter of 1997 were $1,592.1 million as compared to $1,496.6 million for the third quarter of 1996. This was an increase of 6%. The sales increase for comparable stores was 3%. For the nine month period ended November 1, 1997 sales increased 6% over the first nine months of 1996. The comparable stores increase for this period was 2%. For the twelve month period ended November 1, 1997 sales increased 5% over the same period in 1996. The comparable stores increase for this period was 2%. The majority of the increase in sales on a comparable store basis was attributable to an increase in the volume of goods rather than an increase in the price of goods. Cost of sales decreased from 67.2% of net sales for the third quarter of 1996 to 66.3% for the third quarter of 1997. For the nine months ended November 1, 1997 and November 2, 1996 cost of sales decreased from 66.0% of net sales in 1996 to 65.7% of net sales in 1997. The decrease for the three and nine month periods was caused by a lower level of markdowns in 1997 versus 1996. For the twelve months ended November 1, 1997 and November 2, 1996, the cost of sales decreased slightly from 66.1% to 66.0% of net sales. Advertising, selling, administrative and general (SG&A) expenses decreased to 26.1% of net sales for the third quarter of 1997 compared to 26.4% for the third quarter of 1996. The decline in this expense ratio was caused by an improvement in bad debt expense. This was partially offset by an increase selling payroll expense. The Company is investing more in selling payroll to enhance customer service and sales. For the nine months ended November 1, 1997 and November 2, 1996, SG&A expenses decreased slightly from 26.1% of net sales in 1996 to 26.0% of net sales in 1997. For the twelve months ended November 1, 1997 and November 2, 1996, SG&A expenses decreased from 24.8% of net sales in 1996 to 24.6% of net sales in 1997. Depreciation and amortization expense decreased slightly as a percentage of sales from 1996 in the three, nine and twelve month periods ended November 1, 1997. Rental expense remained constant at .7% of net sales for the three months ended November 1, 1997 and November 2, 1996. For the nine months ended November 1, 1997 and November 2, 1996 rental expense decreased from .8% of net sales in 1996 to .7% in 1997. For the twelve months ended November 1, 1997 and November 2, 1996 rental expense remained constant at .9% of net sales. Interest and debt expense increased slightly from 2.0% of net sales for the third quarter of 1996 to 2.1% of net sales for the third quarter of 1997. For the nine months ended November 1, 1997 and November 2, 1996 interest and debt expense as a percentage of net sales increased slightly from 2.1% in 1996 to 2.2% in 1997. This was caused by a relatively higher level of debt in 1997 compared to 1996. For the twelve months ended November 1, 1997 and November 2, 1996 interest and debt expense was 2.0% of net sales. Service charges, interest and other income decreased from 3.1% of net sales for the third quarter in 1996 to 3.0% of net sales in the third quarter of 1997. For the nine months ended November 1, 1997 and November 2, 1996 the decrease was from 3.3% of net sales in 1996 to 3.1% of net sales in 1997. For the twelve months ended November 1, 1997 and November 2, 1996 the decrease was from 2.9% of net sales in 1997 to 2.8% of net sales in 1996. 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 third quarter of 1997 and 1996. Financial Condition The Company's working capital was $1.8 billion at November 1, 1997, $1.9 billion at February 1, 1997, and $1.8 billion at November 2, 1996. The current ratio for each of these periods was 2.1, 3.1 and 2.4, respectively. The changes in the current ratio were caused by a higher level of inventory and an increase in trade accounts payable and commercial paper at November 1, 1997 compared to February 1, 1997 and November 2, 1996. The ratio of long-term debt to capitalization was 32.6%, 30.4% and 32.2% at November 1, 1997, February 1, 1997, and November 2, 1996, respectively. The ratio of long-term debt to capitalization is calculated by dividing the total amount of long-term debt and capital 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 as well as the repurchase of $101.1 million of the Company's Class A common stock during 1997. On February 4, 1997, the Company issued $100 million 7.15% notes due February 1, 2007. On May 15, 1997, the Company issued $100 million 7.75% notes due May 15, 2027. The proceeds were used to reduce commercial paper borrowings. The Company invested $418 million in capital expenditures for the nine months ended November 1, 1997 as compared to $266 million for the nine months ended November 2, 1996. In the first nine months of 1997, the Company opened eleven new stores, acquired seven stores from Proffitt's, Inc. in Virginia, acquired ten Mervyn's stores in Florida and acquired three Macy's stores in Houston. Additionally , the Company expanded and remodeled four stores and closed two stores. For the balance of the year the Company plans to open one new store. In 1996, the Company opened sixteen new stores (one of which was a replacement store), and expanded six stores and closed three stores. Merchandise inventories increased by 10% from $2.0 billion at November 2, 1996 to $2.3 billion at November 1, 1997. This increase is caused primarily by the merchandise inventory for new stores. The merchandise inventory in comparable stores increased by 3% from November 2, 1996 to November 1, 1997. At November 1, 1997, the Company had an outstanding shelf registration for unsecured notes in the amount of $400 million. Fluctuations in certain other balance sheet accounts between February 1, 1997 and November 1, 1997 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. ITEM 3 Quantitative and Qualitative Disclosure About Market Risk Interim information is not required until after the first fiscal year end in which this item is applicable. 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: Nine Months Ended Fiscal Year Ended November 1 November 2 February 1 February 3 January 28 January 29 January 30 1997 1996 1997 1996 1995 1994 1993 3.08 2.92 3.61 2.86 3.72 3.57 3.59 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 third quarter: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DILLARD'S, INC. (Registrant) DATE: December 12, 1997 /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