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 May 2, 1998 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 or organization) Number) 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 May 2, 1998 106,837,936 CLASS B COMMON STOCK as of May 2, 1998 4,016,929 PART I FINANCIAL INFORMATION ITEM 1 Financial Statements CONSOLIDATED BALANCE SHEETS DILLARD'S, INC. (Unaudited) (Thousands) May 2 January 31 May 3 1998 1998 1997 ASSETS CURRENT ASSETS Cash and cash equivalents $81,495 $41,833 $72,246 Trade accounts receivable 1,073,626 1,158,682 1,046,856 Merchandise inventories 2,063,898 1,784,765 1,874,310 Other current assets 13,176 12,777 9,897 TOTAL CURRENT ASSETS 3,232,195 2,998,057 3,003,309 OTHER ASSETS 100,414 92,298 106,553 PROPERTY AND EQUIPMENT, NET 2,462,262 2,463,801 2,196,432 CONSTRUCTION IN PROGRESS 41,204 37,691 107,221 $5,836,075 $5,591,847 $5,413,515 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses $810,635 $530,034 $793,654 Commercial paper 288,429 419,136 194,653 Federal and state income taxes 50,548 40,761 58,751 Current portion of long-term debt 107,268 107,268 106,564 Current portion of capital lease obligations 1,624 1,651 1,559 TOTAL CURRENT LIABILITIES 1,258,504 1,098,850 1,155,181 LONG-TERM DEBT 1,463,968 1,365,716 1,271,409 CAPITAL LEASE OBLIGATIONS 11,872 12,205 13,330 DEFERRED INCOME TAXES 322,028 307,138 261,094 STOCKHOLDERS' EQUITY Preferred stock 440 440 440 Common stock 1,143 1,143 1,136 Additional paid-in capital 659,331 657,137 641,437 Retained earnings 2,373,513 2,314,709 2,127,980 Less treasury stock (254,724) (165,491) (58,492) 2,779,703 2,807,938 2,712,501 $5,836,075 $5,591,847 $5,413,515 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 Twelve Months Ended May 2 May 3 May 2 May 3 1998 1997 1998 1997 Net sales $1,682,216 $1,515,344 $6,798,624 $6,289,627 Service charges, interest and other 47,669 47,213 185,613 183,237 1,729,885 1,562,557 6,984,237 6,472,864 Cost and expenses: Cost of sales 1,117,221 995,203 4,515,309 4,164,171 Advertising, selling, administrative and general expenses 414,048 382,590 1,661,179 1,554,687 Depreciation and amortization 54,554 51,202 203,291 194,587 Rentals 10,291 10,630 54,347 55,238 Interest and debt expense 33,656 30,459 132,434 122,473 1,629,770 1,470,084 6,566,560 6,091,156 INCOME BEFORE INCOME TAXES 100,115 92,473 417,677 381,708 Income taxes 37,045 34,215 154,540 141,230 NET INCOME 63,070 58,258 263,137 240,478 RETAINED EARNINGS AT BEGINNING OF PERIOD 2,314,709 2,074,214 2,127,980 1,904,508 2,377,779 2,132,472 2,391,117 2,144,986 Cash dividends declared (4,266) (4,492) (17,604) (17,006) RETAINED EARNINGS AT END OF PERIOD $2,373,513 $2,127,980 $2,373,513 $2,127,980 BASIC EARNINGS PER COMMON SHARE $0.58 $0.52 $2.39 $2.12 DILUTED EARNINGS PER COMMON SHARE $0.58 $0.52 $2.37 $2.11 Cash dividends declared per common share $0.04 $0.04 $0.16 $0.15 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS DILLARD'S, INC. (Unaudited) (Thousands) Three Months Ended May 2 May 3 1998 1997 OPERATING ACTIVITITES Net income $63,070 $58,258 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 55,149 51,487 Changes in operating assets and liabilities: Decrease in trade accounts receivable 85,056 83,648 Increase in merchandise inventories and other current assets (279,532) (318,169) (Increase) Decrease in other assets (8,711) 319 Increase in trade accounts payable and accrued expenses and income taxes 309,732 274,044 NET CASH PROVIDED BY OPERATING ACTIVITIES 224,764 149,587 INVESTING ACTIVITIES Purchase of property and equipment (56,528) (162,922) NET CASH USED IN INVESTING ACTIVITIES (56,528) (162,922) FINANCING ACTIVITIES Net (decrease) increase in commercial paper (130,707) 65,915 Proceeds from long-term borrowings 100,000 100,000 Principal payments on long-term debt and capital lease obligations (2,108) (76,939) Dividends paid (8,720) (9,046) Common stock issued 2,194 49 Purchase of treasury stock (89,233) (58,492) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (128,574) 21,487 INCREASE IN CASH AND CASH EQUIVALENTS 39,662 8,152 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,833 64,094 CASH AND CASH EQUIVALENTS AT END OF PERIOD $81,495 $72,246 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 three month period ended May 2, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending January 30, 1999 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 January 31, 1998. 2. On February 24, 1998, the Company issued $100 million aggregate principal amount of its 6.3% notes due February 15, 2008. The notes were sold in an underwritten public offering. 3. 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 quarter ended May 2, 1998, a total of 2.5 million shares were purchased for a total of $89.2 million. 4. On May 16, 1998 the Board of Directors approved a definitive agreement under which Dillard's, Inc. will acquire Mercantile Stores Company, Inc. ("Mercantile") for $80.00 per share or approximately $2.9 billion in cash. Mercantile operates 103 predominately fashion apparel stores and 16 home fashion stores in 17 states. Pursuant to the agreement, a cash tender offer ("the Offer")commenced on May 21, 1998 by MSC Acquisitions, Inc, a subsidiary of the Company. The Offer, for all outstanding common shares of Mercantile is conditioned upon, among other things, (i) there being validly tendered and not properly withdrawn prior to the expiration of the Offer a number of Shares which, together with any Shares owned, directly or indirectly, Dillard's or its subsidiaries, constitutes more than 50% of the voting power (determined on a fully diluted basis) of all the securities of Mercantile entitled to vote generally in the election of directors or in a merger and (ii) the expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Offer and withdrawal rights are set to expire at 12:00 Midnight, EDT, on Friday, June 19, 1998, unless the tender offer is extended. The Company has financing commitments in place with commercial banks sufficient to fund the purchase price. 5. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share. (thousands, except per share data) Three Months Ended Twelve Months Ended May 2 May 3 May 2 May 3 1998 1997 1998 1997 Basic: Net Income $ 63,070 $ 58,258 $263,137 $240,478 Average shares outstanding 108,323 112,795 110,185 113,376 Earnings per shares - basic $.58 $.52 $2.39 $2.12 Diluted: Net Income $ 63,070 $ 58,258 $263,137 $240,478 Preferred stock dividends (6) (6) (22) (22) Net earnings available for per-share calculations 63,064 58,252 $263,115 $240,456 Average shares outstanding 108,323 112,795 110,185 113,376 Stock options 628 201 797 413 Total average equivalent shares 108,951 112,996 110,982 113,789 Earnings per share - diluted $.58 $ .52 $2.37 $ 2.11 Options to purchase 2,599,406 and 4,380,120 shares of Class A common stock at prices ranging from $31.25 to $45.13 per share were outstanding at May 2, 1998 and May 3, 1997, respectively, but were not included in the computation of diluted earnings per share because they would have been antidilutive. 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 Twelve Months Ended May 2 May 3 May 2 May 3 1998 1997 1998 1997 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 66.4 65.7 66.4 66.2 Gross profit 33.6 34.3 33.6 33.8 Advertising, selling, administrative and general expenses 24.6 25.2 24.4 24.7 Depreciation and amortization 3.3 3.4 3.0 3.1 Rentals 0.6 0.7 0.8 0.9 Interest and debt expense 2.0 2.0 2.0 1.9 Total operating expenses 30.5 31.3 30.2 30.6 Service charges, interest and other 2.8 3.1 2.7 2.9 Income before income taxes 5.9 6.1 6.1 6.1 Income taxes 2.2 2.3 2.2 2.3 Net income 3.7 3.8 3.9 3.8 Net sales for the first quarter of 1998 were $1,682.2 million as compared to $1,515.3 million for the first quarter of 1997. This is an increase of 11%. The net sales in comparable stores increased 7% for the period versus last year. The twelve month sales increase for 1998 over 1997 was 8%; for comparable stores the increase was 4%. The majority of the increase in sales was attributable to an increase in the volume of goods sold rather than an increase in the price of goods. Cost of sales increased from 65.7% of net sales for the first quarter of 1997 to 66.4% for the first quarter of 1998. For the twelve months ended May 2, 1998 and May 3, 1997, the cost of sales increased from 66.2% to 66.4% of net sales. This increase was due to a higher level of markdowns in the current periods than in the prior periods. Advertising, selling, administrative and general expenses decreased from 25.2% of net sales for the first quarter of 1997 to 24.6% of net sales for the first quarter of 1998. For the twelve months ended May 2, 1998 and May 3, 1997 these expenses decreased from 24.7% to 24.4% of net sales. Bad debt expense and payroll expense in the selling area decreased as a percentage of sales. Depreciation and amortization expense decreased slightly as a percentage of sales for the three months ended May 2, 1998 compared to the three months ended May 3, 1997 and decreased slightly as a percentage of sales from 1997 in the twelve month period ended May 2, 1998. Rental expense decreased slightly from .7% of net sales for the first quarter of 1997 to .6% for the first quarter of 1998. For the twelve months ended May 2, 1998 and May 3, 1997 the decrease was from .9% to .8% of net sales. This was due to a higher proportion of the Company's properties being owned rather than leased. Interest and debt expense remained constant at 2.0% of net sales for the first quarter of 1998 and 1997. For the twelve months ended May 2, 1998 and May 3, 1997 it increased from 1.9% to 2.0% of net sales. Service charges, interest and other income decreased from 3.1% of net sales for the first quarter of 1997 to 2.8% of net sales for the first quarter of 1998. For the twelve months ended May 2, 1998 and May 3, 1997 the decrease was from 2.9% to 2.7% of net sales. 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 first quarter of 1998 and 1997. Financial Condition Net cash flows from operations were $225 million for the first quarter of 1998. In addition to the cash flows from operations, the Company borrowed $100 million by issuing notes in an underwritten public offering. These notes mature on February 15, 2008. The Company also reduced its commercial paper borrowings by $131 million during the quarter. The Company invested $56.5 million in capital expenditures for the three months ended May 2, 1998 as compared to $162.9 million for the three months ended May 3, 1997. In the first quarter of 1998 the Company opened two new stores. During 1998, the Company plans to build six additional stores (two of which will be replacement stores). During 1997, the Company built twelve new stores, expanded and remodeled four stores, acquired eleven stores and closed three. 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 first quarter of 1998, a total of 2.5 million shares were purchased for a total of $89.2 million. Merchandise inventories increased by 10% from $1.87 million at May 3, 1997 to $2.06 million at May 2, 1998. The Company operated 17 more stores at May 2, 1998 versus May 3, 1997. This was the primary reason for the increase in inventory. On a comparable store basis, the rate of increase in merchandise inventories was 4 1/2%. The Company's Registration Statement registering an additional $300 million in debt securities went effective on June 10, 1998. The Company has outstanding shelf registration for debt securities in the amount of $500 million. Fluctuations in certain other balance sheet accounts between January 31, 1998 and May 2, 1998 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. On May 16, 1998 the Board of Directors approved a definitive agreement under which Dillard's, Inc. will acquire Mercantile Stores Company, Inc. ("Mercantile") for $80.00 per share or approximately $2.9 billion in cash. Mercantile operates 103 predominately fashion apparel stores and 16 home fashion stores in 17 states. Pursuant to the agreement, a cash tender offer ("the Offer") commenced on May 21, 1998 by MSC Acquisitions, Inc, a subsidiary of the Company. The Offer, for all outstanding common shares of Mercantile is conditioned upon, among other things, (i) there being validly tendered and not properly withdrawn prior to the expiration of the Offer a number of Shares which, together with any Shares owned, directly or indirectly, Dillard's or its subsidiaries, constitutes more than 50% of the voting power (determined on a fully diluted basis) of all the securities of Mercantile entitled to vote generally in the election of directors or in a merger and (ii) the expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Offer and withdrawal rights are set to expire at 12:00 Midnight, EDT, on Friday, June 19, 1998, unless the tender offer is extended. The Company has financing commitments in place with commercial banks sufficient to fund the purchase price. Forward-Looking Information The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this quarterly report on Form 10-Q or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. The following factors, among others, could affect the Company's financial performance and could cause actual results for 1998 and beyond to differ materially from those expressed or implied in any such forward-looking statements: economic and weather conditions in the regions in which the Company's stores are located and their effect on the buying patterns of the Company's customers, changes in consumer spending patterns and debt levels, trends in personal bankruptcies and the impact of competitive market factors. Item 3. Quantitative and Qualitative Disclosure About Market Risk. During the three months ended May 30, 1998, the Company issued $100 million of Notes in an underwritten public offering. These Notes mature in ten years and have an interest rate of 6.3%. The only other activity during the quarter in the Company's debt obligations was the scheduled payments of $2.1 million on the Company's mortgage notes. 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: Three Months Ended Fiscal Year Ended May 2 May 3 January 31 February 1 February 3 January 28 January 29 1998 1997 1998 1997 1996 * 1995 1994 3.61 3.63 3.69 3.61 2.86 3.72 3.57 * 53 Weeks ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibit (12): Statement re: Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K filed during the first quarter: The Company filed a report on February 19, 1998 relating to the issue of $100 million aggregate principal amount of 6.3% Notes maturing on February 15, 2008. 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: June 16, 1998 /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 12 Statement re: Computation of Ratio of Earnings to Fixed Charges