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 3, 2001
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 1-79
THE MAY DEPARTMENT STORES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 43-1104396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
611 Olive Street, St. Louis, Missouri 63101
(Address of principal executive offices) (Zip Code)
(314) 342-6300
(Registrant's telephone number,
including area code)
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 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. 292,952,922 common stock,
$.50 par value, as of November 3, 2001.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions)
Nov. 3, Oct. 28, Feb. 3,
ASSETS 2001 2000 2001
Current assets:
Cash and cash equivalents $ 57 $ 56 $ 156
Accounts receivable, net 1,752 1,868 2,081
Merchandise inventories 3,721 3,582 2,938
Other current assets 119 100 95
Total current assets 5,649 5,606 5,270
Property and equipment, at cost 8,806 8,036 8,167
Accumulated depreciation (3,621) (3,157) (3,268)
Property and equipment, net 5,185 4,879 4,899
Goodwill and other assets 1,560 1,394 1,405
Total assets $ 12,394 $ 11,879 $ 11,574
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ 880 $ 478 $ -
Current maturities of
long-term debt 88 86 85
Accounts payable 1,317 1,437 965
Accrued expenses 927 968 871
Income taxes payable 97 24 293
Total current liabilities 3,309 2,993 2,214
Long-term debt 4,330 4,540 4,534
Deferred income taxes 617 568 586
Other liabilities 341 322 335
ESOP preference shares 289 303 299
Unearned compensation (204) (248) (249)
Shareowners' equity 3,712 3,401 3,855
Total liabilities and
shareowners' equity $ 12,394 $ 11,879 $ 11,574
The accompanying notes to condensed consolidated financial
statements are an integral part of this balance sheet.
2
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Millions, except per share) 13 Weeks Ended 39 Weeks Ended
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
2001 2000 2001 2000
Net retail sales $ 3,195 $ 3,315 $ 9,488 $ 9,448
Revenues $ 3,202 $ 3,326 $ 9,528 $ 9,507
Cost of sales 2,319 2,397 6,704 6,692
Selling, general, and
administrative expenses 707 697 2,113 2,005
Interest expense, net 87 91 262 244
Earnings before income taxes 89 141 449 566
Provision for income taxes 34 56 174 226
Net earnings before extraordinary
loss $ 55 $ 85 $ 275 $ 340
Extraordinary loss, net of tax (3) - (3) -
Net earnings $ 52 $ 85 $ 272 $ 340
Basic earnings per share:
Net earnings before extra-
ordinary loss $ 17 $ .28 $ .88 $ 1.06
Extraordinary loss (.01) - (.01) -
Net earnings $ 16 $ .28 $ .87 $ 1.06
Diluted earnings per share:
Net earnings before extra-
ordinary loss $ 17 $ .27 $ .86 $ 1.03
Extraordinary loss (.01) - (.01) -
Net earnings $ .16 $ .27 $ .85 $ 1.03
Dividends paid per
common share $.23-1/2 $.23-1/4 $.70-1/2 $.69-3/4
Weighted average shares
outstanding:
Basic 296.6 297.6 298.2 309.2
Diluted 317.6 318.3 319.9 330.6
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
3
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions) 39 Weeks Ended
Nov. 3, Oct. 28,
2001 2000
Operating activities:
Net earnings $ 272 $ 340
Depreciation and amortization 401 373
Working capital changes:
Accounts receivable, net 360 308
Merchandise inventories (746) (719)
Other current assets (30) (11)
Accounts payable 352 395
Accrued expenses 27 67
Income taxes payable (185) (215)
Other, net 43 28
494 566
Investing activities:
Net additions to property and equipment (578) (424)
Business combinations (304) (421)
(882) (845)
Financing activities:
Net issuances (repayments):
Notes payable 880 478
Long-term debt (167) 844
Net purchases of common stock (200) (797)
Dividend payments, net of tax benefit (224) (231)
289 294
(Decrease)/Increase in cash and cash equivalents (99) 15
Cash and cash equivalents,
beginning of period 156 41
Cash and cash equivalents,
end of period $ 57 $ 56
Cash paid during the period:
Interest $ 267 $ 241
Income taxes 339 377
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
4
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interim Results. These unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q of the
Securities and Exchange Commission and should be read in conjunction with the
Notes to Consolidated Financial Statements (pages 26-31) in the 2000 Annual
Report. In the opinion of management, this information is fairly presented
and all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the results for the interim periods have
been included; however, certain items are included in these statements based
on estimates for the entire year. Also, operating results of periods which
exclude the Christmas season may not be indicative of the operating results
that may be expected for the full fiscal year. The seasonality of David's
Bridal varies from department stores, with sales and operating results peaking
in the first half of the fiscal year. David's Bridal joined May in August
2000.
Revenues. Revenues include sales from all stores operating during the period,
finance charge revenues, and lease department income. Merchandise sales are
recognized at the time the sale is made to the customer and are net of
estimated returns and promotional coupons and exclude sales tax. Finance
charge revenues are recognized in accordance with the contractual provisions
of customer credit agreements. Lease department income is recognized based on
a percentage of lease department sales, net of estimated returns.
Net Retail Sales. Net retail sales represent sales of stores operating at the
end of the latest period and include lease department sales, but exclude sales
from closed and not replaced stores and finance charge revenues. Sales are
net of returns and promotional coupons and exclude sales tax. Lease
department activities are integral to our operations and are used in our
evaluation of operating performance. Store-for-store sales represent sales of
those stores open during both years. David's Bridal sales are included in
total sales since August 2000 and in store-for-store sales since August 2001.
Net retail sales differ from generally accepted accounting principles due to
the inclusion of lease department sales and the exclusion of sales from
closed and not replaced stores. Consequently, net retail sales may not be
comparable to similarly titled measures reported by other retailers and are
not an alternative to revenues as defined above.
Advertising Costs. Advertising and sales promotion costs are expensed at the
time the advertising takes place. These costs are net of co-operative
advertising reimbursements and are included in selling, general, and
administrative expenses.
Income Taxes. The effective income tax rate for the third quarter and first
nine months of 2001 was 38.8%, compared with 39.6% in the third quarter of
2000 and 39.9% in the first nine months of 2000, as a result of implementing
corporate structure changes which favorably impact the effective tax rate.
Accounts Receivable. Accounts receivable consists primarily of customer
receivables from credit sales under department store credit programs. We have
never sold or securitized these customer receivables.
Inventories. Merchandise inventories are stated on the LIFO (last-in, first-
out) cost basis. The LIFO provision for the third quarter was $4 million in
2001 and 2000. The year-to-date LIFO provision was $20 million in 2001 and
2000.
5
Property and Equipment. Property and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives.
Properties under capital leases and leasehold improvements are amortized over
the shorter of their useful lives or related lease terms. Software development
costs are amortized over the expected useful life. The estimated useful life
for each major class of long-lived asset is as follows:
Buildings and improvements 10 - 50 years
Furniture, fixtures, and equipment 3 - 15 years
Property under capital leases 16 - 50 years
Software development costs 2 - 7 years
Long-lived Assets. Long-lived assets and certain identifiable intangibles are
reviewed when events or circumstances indicate that the net book value may not
be recoverable. The estimated future undiscounted cash flows associated with
the asset are compared to the assets carrying amount to determine if a write-
down to market value or discounted cash flow is required. Impairment losses
resulting from these reviews have not been significant.
Business Combination. In March 2001, the company completed the purchase of
nine department store locations from Saks Incorporated, eight of which were
reopened during the first quarter. The cash purchase price included
approximately $237 million for the stores and approximately $67 million for
merchandise inventories and accounts receivable. This transaction was
accounted for as a purchase and did not have a material impact on the
company's financial statements.
Store Purchases. In April 2001, the company completed the purchase of 15
former Wards and Bradlees stores. Eight of the 15 stores are planned as new
stores and the other stores will generally provide expansion in existing
malls, with most locations opening in 2002. Store purchases are included in
net additions to property and equipment in the accompanying condensed
consolidated statement of cash flows.
Common Stock Repurchase Program. During the third quarter of 2001, May's
board of directors authorized a common stock repurchase program of up to $400
million. The company is making the purchases through open-market transactions
based on market conditions. As of November 3, 2001, the company had
repurchased $190 million or 6.0 million shares of May common stock at an
average price of $32 per share. Between November 4, 2001 and December 11,
2001, the Company repurchased $117 million or 3.3 million shares of May common
stock.
During the first half of 2000, the company purchased $789 million or 28.4
million shares of May common stock. These repurchases completed the remaining
$139 million of stock repurchases related to the 1999 stock repurchase program
and the $650 million common stock repurchase program authorized by May's board
of directors in 2000.
Extraordinary Item. During the third quarter of 2001, the company recorded an
after-tax extraordinary loss of $3 million ($5 million pretax), or $.01 per
share, due to the call of $100 million of 9.875% debentures due in 2021. The
debentures were called effective October 9, 2001.
Reclassifications. Certain prior period amounts have been reclassified to
conform with current year presentation.
6
Preference Stock. The company is authorized to issue up to 25 million shares
of $0.50 par value preference stock. Each Employee Stock Ownership Plan
("ESOP") preference share is convertible into shares of May common stock, at a
conversion rate of 33.78747 shares of May common stock for each ESOP
preference share. Each ESOP preference share carries the number of votes
equal to the number of shares of May common stock into which the ESOP
preference share could be converted. Dividends are cumulative and are paid
semi-annually at a rate of $38.025 per share per annum. ESOP preference
shares have a liquidation preference of $507 per share plus accumulated and
unpaid dividends. ESOP preference shares may be redeemed, in whole or in
part, at the option of May or an ESOP preference shareowner, at a redemption
price of $507 per share, plus accumulated and unpaid dividends. The
redemption price may be satisfied in cash or May common stock or a combination
of both.
The ESOP preference shares are shown outside of shareowners' equity in the
consolidated balance sheet because the shares are redeemable by the holder or
by the company in certain situations.
Earnings per Share. All ESOP preference shares were issued in 1989 and
earnings per share ("EPS") is computed in accordance with the provisions of
Statement of Position 76-3, "Accounting Practices for Certain Employee Stock
Ownership Plans," and Emerging Issues Task Force 89-12,
"Earnings Per Share Issues Related to Convertible Preferred Stock Held by an
Employee Stock Ownership Plan.". For basic EPS purposes, the ESOP preference
shares dividend, net of income tax benefit, is deducted from net income to
arrive at net income available for common shareowners. Diluted EPS is
computed by use of the "if converted" method, which assumes all ESOP
preference shares were converted as of the beginning of the year. Net earnings
are adjusted to add back the ESOP preference dividend deducted in computing
basic EPS less the amount of additional ESOP contribution required to fund
ESOP debt service in excess of the current common stock dividend attributable
to the ESOP preference shares.
The following tables reconcile net earnings and weighted average shares
outstanding to amounts used to calculate basic and diluted EPS for the periods
shown (millions, except per share).
13 Weeks Ended
November 3, 2001 October 28, 2000
Earnings Shares EPS Earnings Shares EPS
Net earnings* $ 55 $ 85
ESOP preference
shares' dividends (5) (4)
Basic EPS* 50 296.6 $ 0.17 81 297.6 $ 0.28
ESOP preference
shares 4 19.4 4 20.4
Assumed exercise of
options (treasury
stock method) - 1.6 - 0.3
Diluted EPS* $ 54 317.6 $ 0.17 $ 85 318.3 $ 0.27
7
39 Weeks Ended
November 3, 2001 October 28, 2000
Earnings Shares EPS Earnings Shares EPS
Net earnings* $ 275 $ 340
ESOP preference
shares' dividends (14) (14)
Basic EPS* 261 298.2 $ 0.88 326 309.2 $ 1.06
ESOP preference
shares 13 19.6 13 20.7
Assumed exercise of
options (treasury
stock method) - 2.1 - 0.7
Diluted EPS* $ 274 319.9 $ 0.86 $ 339 330.6 $ 1.03
*Before after-tax extraordinary loss of $3 million ($5 million pretax), or
$.01 per share for the 13 and 39 weeks ended November 3, 2001.
Condensed Consolidating Financial Information. The May Department Stores
Company, Delaware ("Parent") has fully and unconditionally guaranteed certain
long-term debt obligations of its wholly-owned subsidiary, The May Department
Stores Company, New York ("Subsidiary Issuer"). Other subsidiaries of the
Parent include May Department Stores International, Inc. ("MDSI"), Leadville
Insurance Company, Snowdin Insurance Company, and David's Bridal, Inc. and
subsidiaries.
Subsidiary Issuer financial statements have been restated for all periods
presented to reflect a February 3, 2001 reorganization of MDSI as a direct
wholly-owned subsidiary of Parent, rather than of the Subsidiary Issuer.
Prior to fiscal year-end 2000, Parent was required to provide only summarized
financial information for Subsidiary Issuer, which owned 100% of MDSI's common
stock before the reorganization. Below is a restatement of Subsidiary
Issuer's summarized financial position as of October 28, 2000, and summarized
operating results for the thirteen week and thirty-nine week periods ending
October 28, 2000, as if the reorganization had occurred on February 1, 1998.
The "As Reported" information was previously reported in Parent's Form 10-Q
filed December 5, 2000.
(Millions) October 28, 2000
As Reported Adjustments As Restated
Financial Position
Current assets $ 5,589 $ (80) $ 5,509
Noncurrent assets 7,181 (212) 6,969
Current liabilities 3,002 (94) 2,908
Noncurrent liabilities 9,074 (3) 9,071
13 weeks ended October 28, 2000
As Reported Adjustments As Restated
Operating Results
Revenues $ 3,326 $ (50) $ 3,276
Net earnings 33 (26) 7
39 weeks ended October 28, 2000
As Reported Adjustments As Restated
Operating Results
Revenues $ 9,507 $ (50) $ 9,457
Net earnings 184 (52) 132
8
Condensed consolidating balance sheets as of November 3, 2001, October 28, 2000,
and February 3, 2001, the related condensed consolidating statements of earnings
for the thirteen week and thirty-nine week periods ended November 3, 2001 and
October 28, 2000, and the related condensed consolidating statement of cash
flows for the thirty-nine week periods ended November 3, 2001 and October 28,
2000, are presented below.
Condensed Consolidating Balance Sheet
As of November 3, 2001
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ - $ 39 $ 18 $ - $ 57
Accounts receivable, net - 1,747 42 (37) 1,752
Merchandise inventories - 3,650 71 - 3,721
Other current assets - 106 13 - 119
Total current assets - 5,542 144 (37) 5,649
Property and equipment, at cost - 8,713 93 - 8,806
Accumulated depreciation - (3,601) (20) - (3,621)
Property and equipment, net - 5,112 73 - 5,185
Goodwill and other assets - 1,223 337 - 1,560
Intercompany (payable)/
receivable (940) 632 308 - -
Investment in subsidiaries 4,751 - - (4,751) -
Total assets $ 3,811 $12,509 $ 862 $ (4,788) $12,394
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ - $ 880 $ - $ - $ 880
Current maturities of long-
term debt - 88 - - 88
Accounts payable - 1,248 69 - 1,317
Accrued expenses 14 890 60 (37) 927
Income taxes payable - 88 9 - 97
Total current liabilities 14 3,194 138 (37) 3,309
Long-term debt - 4,329 1 - 4,330
Intercompany note payable/
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 614 3 - 617
Other liabilities - 799 - (458) 341
ESOP preference shares 289 - - - 289
Unearned compensation (204) (204) - 204 (204)
Shareowners' equity 3,712 577 3,920 (4,497) 3,712
Total liabilities and
shareowners' equity $ 3,811 $12,509 $ 862 $ (4,788) $12,394
9
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended November 3, 2001
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 3,132 $ 559 $ (489) $ 3,202
Cost of sales - 2,305 467 (453) 2,319
Selling, general, and
administrative expenses - 710 39 (42) 707
Interest expense (income), net:
External - 88 (1) - 87
Intercompany - 71 (71) - -
Equity in earnings of subsidiaries 55 - - (55) -
Earnings before income taxes 55 (42) 125 (49) 89
Provision for income taxes - (13) 47 - 34
Net earnings before extra-
ordinary loss $ 55 $ (29) $ 78 $ (49) $ 55
Extraordinary loss, net of tax (3) (3) - 3 (3)
Net earnings $ 52 $ (32) $ 78 $ (46) $ 52
Condensed Consolidating Statement of Earnings
For the Thirty-nine Weeks Ended November 3, 2001
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 9,286 $ 1,309 $ (1,067) $ 9,528
Cost of sales - 6,622 1,072 (990) 6,704
Selling, general, and
administrative expenses - 2,094 112 (93) 2,113
Interest expense (income), net:
External - 263 (1) - 262
Intercompany - 213 (213) - -
Equity in earnings of subsidiaries 275 - - (275) -
Earnings before income taxes 275 94 339 (259) 449
Provision for income taxes - 49 125 - 174
Net earnings before extra-
ordinary loss $ 275 $ 45 $ 214 $ (259) $ 275
Extraordinary loss, net of tax (3) (3) - 3 (3)
Net earnings $ 272 $ 42 $ 214 $ (256) $ 272
10
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Cash Flows
For the Thirty-nine Weeks Ended November 3, 2001
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 272 $ 42 $ 214 $ (256) $ 272
Equity in earnings of subsidiaries (275) - - 275 -
Depreciation and amortization - 386 15 - 401
Increase (Decrease) in
working capital 7 (271) 42 - (222)
Other, net 295 (121) (112) (19) 43
299 36 159 - 494
Investing activities:
Net additions to property and
equipment - (559) (19) - (578)
Business combination - (304) - - (304)
- (863) (19) - (882)
Financing activities:
Net issuances of notes payable - 880 - - 880
Net repayments of long-term
debt - (165) (2) - (167)
Net (purchases) issuances of
common stock (211) 11 - - (200)
Dividend payments, net of
tax benefit (227) 3 - - (224)
Intercompany activity, net 139 - (139) - -
(299) 729 (141) - 289
Decrease in cash and
cash equivalents - (98) (1) - (99)
Cash and cash equivalents,
beginning of period - 137 19 - 156
Cash and cash equivalents,
end of period $ - $ 39 $ 18 $ - $ 57
11
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Balance Sheet
As of October 28, 2000
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 42 $ 14 $ - $ 56
Accounts receivable, net - 1,863 41 (36) 1,868
Merchandise inventories - 3,525 57 - 3,582
Other current assets - 79 21 - 100
Total current assets - 5,509 133 (36) 5,606
Property and equipment, at cost - 7,971 65 - 8,036
Accumulated depreciation - (3,145) (12) - (3,157)
Property and equipment, net - 4,826 53 - 4,879
Goodwill and other assets - 1,045 349 - 1,394
Intercompany (payable)/
receivable (1,336) 1,098 238 - -
Investment in subsidiaries 4,806 - - (4,806) -
Total assets $ 3,470 $12,478 $ 773 $ (4,842) $ 11,879
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ - $ 478 $ - $ - $ 478
Current maturities of long-
term debt - 86 - - 86
Accounts payable - 1,381 56 - 1,437
Accrued expenses 14 943 47 (36) 968
Income taxes payable - 20 4 - 24
Total current liabilities 14 2,908 107 (36) 2,993
Long-term debt - 4,537 3 - 4,540
Intercompany note payable/
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 568 - - 568
Other liabilities - 766 - (444) 322
ESOP preference shares 303 - - - 303
Unearned compensation (248) (248) - 248 (248)
Shareowners' equity 3,401 747 3,863 (4,610) 3,401
Total liabilities and
shareowners' equity $ 3,470 $12,478 $ 773 $ (4,842) $ 11,879
12
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Earnings
For the Thirteen Weeks Ended October 28, 2000
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 3,276 $ 446 $ (396) $ 3,326
Cost of sales - 2,383 383 (369) 2,397
Selling, general, and
administrative expenses - 707 23 (33) 697
Interest expense (income), net:
External - 91 - - 91
Intercompany - 71 (71) - -
Equity in earnings of subsidiaries 85 - - (85) -
Earnings before income taxes 85 24 111 (79) 141
Provision for income taxes - 17 39 - 56
Net earnings $ 85 $ 7 $ 72 $ (79) $ 85
Condensed Consolidating Statement of Earnings
For the Thirty-nine Weeks Ended October 28, 2000
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Revenues $ - $ 9,457 $ 965 $ (915) $ 9,507
Cost of sales - 6,690 852 (850) 6,692
Selling, general, and
administrative expenses - 2,055 31 (81) 2,005
Interest expense (income), net:
External - 244 - - 244
Intercompany - 214 (214) - -
Equity in earnings of subsidiaries 340 - - (340) -
Earnings before income taxes 340 254 296 (324) 566
Provision for income taxes - 122 104 - 226
Net earnings $ 340 $ 132 $ 192 $ (324) $ 340
13
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Statement of Cash Flows
For the Thirty-nine Weeks Ended October 28, 2000
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
Operating activities:
Net earnings $ 340 $ 132 $ 192 $ (324) $ 340
Equity in earnings of subsidiaries (340) - - 340 -
Depreciation and amortization - 368 5 - 373
Decrease in working capital - (172) (3) - (175)
Other, net 1,335 (1,208) (83) (16) 28
1,335 (880) 111 - 566
Investing activities:
Net additions to property and
equipment - (419) (5) - (424)
Business combinations (428) - 7 - (421)
(428) (419) 2 - (845)
Financing activities:
Net issuances of notes payable - 478 - - 478
Net repayments of long-term
debt - 844 - - 844
Net (purchases) issuances of
common stock (813) 16 - - (797)
Dividend payments, net of
tax benefit (234) 3 - - (231)
Intercompany activity, net 140 (31) (109) - -
(907) 1,310 (109) - 294
Increase in cash and
cash equivalents - 11 4 - 15
Cash and cash equivalents,
beginning of period - 31 10 - 41
Cash and cash equivalents,
end of period $ - $ 42 $ 14 $ - $ 56
14
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) -
Condensed Consolidating Balance Sheet
As of February 3, 2001
(Millions)
Subsidiary Other
Parent Issuer Subsidiaries Eliminations Consolidated
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 137 $ 19 $ - $ 156
Accounts receivable, net - 2,076 43 (38) 2,081
Merchandise inventories - 2,877 61 - 2,938
Other current assets - 86 10 (1) 95
Total current assets - 5,176 133 (39) 5,270
Property and equipment, at cost - 8,093 74 - 8,167
Accumulated depreciation - (3,254) (14) - (3,268)
Property and equipment, net - 4,839 60 - 4,899
Goodwill and other assets - 1,062 343 - 1,405
Intercompany (payable)/
receivable (648) 449 199 - -
Investment in subsidiaries 4,559 - - (4,559) -
Total assets $ 3,911 $11,526 $ 735 $ (4,598) $ 11,574
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Current maturities of long-
term debt $ - $ 85 $ - $ - $ 85
Accounts payable - 922 43 - 965
Accrued expenses 6 857 47 (39) 871
Income taxes payable/
(receivable) - 299 (6) - 293
Total current liabilities 6 2,163 84 (39) 2,214
Long-term debt - 4,531 3 - 4,534
Intercompany note payable/
(receivable) - 3,200 (3,200) - -
Deferred income taxes - 583 3 - 586
Other liabilities - 777 - (442) 335
ESOP preference shares 299 - - - 299
Unearned compensation (249) (249) - 249 (249)
Shareowners' equity 3,855 521 3,845 (4,366) 3,855
Total liabilities and
shareowners' equity $ 3,911 $11,526 $ 735 $ (4,598) $ 11,574
15
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net retail sales percent increases (decreases) in 2001 are as follows:
Third Quarter First Nine Months
Store-for- Store-for-
Total Store Total Store
(3.6)% (6.1)% 0.4% (3.5)%
The $120 million decrease in net retail sales for the third quarter of 2001
compared to the third quarter of 2000 was due to a $201 million decrease in
store-for-store sales offset by a $81 million increase in new store sales
including David's Bridal. The $40 million increase in net retail sales for the
first nine months of 2001 compared to the first nine months of 2000 was due to
a $370 million increase in new store sales, including David's Bridal, offset
by a $330 million decrease in store-for-store sales.
Net retail sales represent sales of stores operating at the end of the latest
period and include lease department sales, but exclude sales from closed and
not replaced stores and finance charge revenues. Sales are net of returns and
promotional coupons and exclude sales tax. Lease department activities are
integral to our operations and are used in our evaluation of operating
performance. Store-for-store sales represent sales of those stores open during
both years. David's Bridal sales are included in total sales since August
2000 and in store-for-store sales since August 2001. Net retail sales differ
from generally accepted accounting principles due to the inclusion of lease
department sales and the exclusion of sales from closed and not replaced
stores. Consequently, net retail sales may not be comparable to similarly
titled measures reported by other retailers and are not an alternative to
revenues.
The following table presents the components of costs and expenses, as a
percent of revenues.
Third Quarter First Nine Months
2001 2000 2001 2000
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 72.4 72.1 70.4 70.4
Selling, general, and
administrative expenses 22.1 21.0 22.2 21.1
Interest expense, net 2.7 2.7 2.7 2.6
Earnings before income taxes 2.8 4.2 4.7 5.9
Provision for income taxes 38.8* 39.6* 38.8* 39.9*
Net earnings before extraordinary
loss 1.7 2.6 2.9 3.6
Extraordinary loss, net of tax 0.1 - - -
Net earnings 1.6% 2.6% 2.9% 3.6%
* - Percent represents effective income tax rate.
16
Revenues include sales from all stores operating during the period, finance
charge revenues, and leased department income. The fluctuation in revenues for
the third quarter of 2001 and the first nine months of 2001 is primarily due
to the change in net retail sales that is discussed above.
Cost of sales was $2,319 million in the 2001 third quarter, down 3.3% from
$2,397 million in the 2000 third quarter. For the first nine months of 2001,
cost of sales was $6,704 million, a 0.2% increase from $6,692 million in the
2000 period.
As a percent of revenues, cost of sales for the third quarter of 2001
increased 0.3% primarily due to buying and occupancy costs growing 0.9% as
revenues declined, partially offset by a 0.6% increase in the merchandise
gross margin rate due to a decrease in markdowns. In the 2000 third quarter,
the company recorded a $63 million charge to clear excess spring and summer
merchandise. For the first nine months of 2001, cost of sales as a percent of
revenues was equal to last year because a 0.7% increase in buying and
occupancy costs offset a 0.4% increase in the merchandise gross margin rate
and a 0.3% decrease due to the addition of David's Bridal.
Selling, general, and administrative expenses were $707 million in the 2001
third quarter, compared with $697 million in the 2000 third quarter, a 1.3%
increase. For the first nine months of 2001, selling, general, and
administrative expenses were $2,113 million compared with $2,005 million in
the 2000 period, a 5.4% increase.
Selling, general, and administrative expenses for the third quarter of 2001
increased by 1.1% as a percent of revenues primarily due to a 0.6% increase in
department store payroll, a 0.4% increase in employee benefit expenses, and a
0.1% increase in advertising. For the first nine months of 2001, selling,
general and administrative expenses increased by 1.1% as a percent of revenues
primarily due to a 0.4% increase in department store payroll, a 0.2% increase
in employee benefit expenses, a 0.2% increase in credit, a 0.1% increase in
advertising, and a 0.2% increase due to the addition of David's Bridal.
Components of net interest expense for the third quarter and first nine months
of 2001 and 2000 were as follows (millions):
Third Quarter First Nine Months
2001 2000 2001 2000
Interest expense $ 95 $ 97 $285 $266
Interest income (1) (2) (6) (9)
Capitalized interest (7) (4) (17) (13)
Net interest expense $ 87 $ 91 $262 $244
Interest expense principally relates to long-term debt. In 2000, we issued
$1.1 billion in new debt. In the first quarter of 2001, we financed the
previously described business combination and store purchases principally
through short-term borrowings and cash and cash equivalents.
17
Short-term borrowings for the third quarter and first nine months were
(dollars in millions):
Third Quarter First Nine Months
2001 2000 2001 2000
Average balance outstanding $408 $474 $297 $206
Average interest rate on
average balance 3.0% 6.6% 3.6% 6.6%
The effective income tax rate for the third quarter and first nine months of
2001 was 38.8%, compared with 39.6% in the third quarter of 2001 and 39.9% in
the first nine months of 2000, as a result of implementing corporate structure
changes which favorably impact our effective tax rate.
During the third quarter of 2001, the company recorded an after-tax
extraordinary loss of $3 million ($5 million pretax) or $.01 per share, due to
the call of $100 million of 9.875% debentures due in 2021. The debentures were
called effective October 9, 2001.
Operating results before extraordinary loss for the trailing years were as
follows (millions, except per share):
52 Weeks Ended
Nov. 3, Oct. 28,
2001 2000
Net retail sales $ 14,557 $ 14,141
Revenues 14,532 14,141
Net earnings 793 853
Diluted earnings per share 2.45 2.48
Financial Condition
Cash Flows. Cash flows from operations were $494 million and $566 million in
the first nine months of 2001 and 2000, respectively. The decrease in current
year cash flows is primarily due to lower net earnings.
Available Credit. We can borrow up to $1.03 billion under our credit
agreements. As of November 3, 2001, $880 million in notes payable were
outstanding under our credit agreements. In addition, we have filed with the
Securities and Exchange Commission shelf registration statements that enable
us to issue up to $775 million of debt securities. We primarily used the 2001
short-term borrowings for common stock repurchases, business combinations,
store purchases and seasonal working requirements.
Financial Ratios. Key financial ratios for the periods indicated are as
follows:
Nov. 3, Oct. 28, Feb. 3,
2001 2000 2001
Current Ratio 1.7 1.9 2.4
Debt-Capitalization Ratio 55% 55% 50%
Fixed Charge Coverage* 3.5x 4.2x 4.0x
The current ratio is lower as of November 3, 2001 primarily due to higher
levels of short-term borrowings as explained above. The fixed charge coverage
ratio for the 52 weeks ended November 3, 2001 declined from the 52 weeks ended
October 28, 2000 due to lower operating earnings and higher interest expense.
18
* Fixed charge coverage, which is presented for the 52 weeks ended
November 3, 2001, October 28, 2000, and February 3, 2001, is defined
as earnings before gross interest expense, the expense portion of
interest on the ESOP debt, rent expense, and income taxes divided by
gross interest expense, interest expense on the ESOP debt, and total rent
expense.
Recent Sales Results
Sales for the four-week period ending December 1, 2001 were $1.38 billion, a
2.5% increase over $1.35 billion in the similar period last year. Store-for-
store sales decreased 0.6%. Sales for the first ten months of fiscal 2001 were
$10.87 billion, a 0.7% increase, compared with $10.79 billion during the first
ten months of fiscal 2000. Store-for-store sales decreased 3.1%.
Impact of New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations be
accounted for using the purchase method of accounting and requires separate
recognition of intangible assets that meet certain criteria. This statement
applies to all business combinations after June 30, 2001.
SFAS No. 142 requires that goodwill and other intangible assets that are
acquired shall be initially recognized and measured based on their fair value.
This statement also provides that goodwill should not be amortized, but shall
be tested for impairment annually, or more frequently if circumstances
indicate potential impairment. SFAS No. 142 is effective for fiscal 2002 which
commences on February 3, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment and disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal
2002 which commences on February 3, 2002.
Our evaluation of the impact of these new standards indicates that adoption of
these standards in fiscal 2002 will not have a material impact on the
company's annual operating results or financial position.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk primarily arises from changes in interest rates on
short-term borrowings. Short-term borrowings have generally been used to
finance seasonal working capital needs resulting in minimal exposure to
interest rate fluctuations. Long-term debt is at fixed interest rates. Our
merchandise purchases are denominated in United States dollars. Operating
expenses of MDSI offices located outside the United States are generally paid
in local currency and are not material. The effects of changes in interest
rates and foreign currency fluctuations on earnings have not been significant.
During fiscal 2000 and 2001, the company has not entered into any financial
derivative instruments.
19
Forward-looking Statements
Management's Discussion and Analysis contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. While such
statements reflect all available information and management's judgment and
estimates of current and anticipated conditions and circumstances and are
prepared with the assistance of specialists within and outside the company,
there are many factors outside of our control that have an impact on our
operations. Such factors include, but are not limited to: competitive changes,
general and regional economic conditions, consumer preferences and spending
patterns, availability of adequate locations for building or acquiring new
stores, and our ability to hire and retain qualified associates. Because of
these factors, actual performance could differ materially from that described
in the forward-looking statements.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which registrant or any
of its subsidiaries is a party or of which any of their property is the
subject.
Item 2 - Changes in Securities - None.
Item 3 - Defaults Upon Senior Securities - None.
Item 4 - Submission of Matters to a Vote of Security Holders - None.
Item 5 - Other Information
At the 2001 annual meeting of shareowners, owners of 40.9% of the
outstanding voting power of the company voted in favor of a shareowner
resolution to de-classify the board, owners of 36.3% of the outstanding
voting power voted against it or abstained.
The board of directors of the company considers the shareowner vote on the
classified board proposal at the 2001 annual meeting a significant
expression of shareowners' opinion worthy of careful consideration. The
board has reviewed the matter thoroughly with management, counsel and other
advisors. Following such review, the board concluded that the classified
board remains an important component of the company's system of governance
and continues to be in the best interests of the company and its
shareowners. Accordingly, the board has decided to take no further action
with respect to this matter at the present time, but has concluded that it
will be subject to review periodically.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(12) - Computation of Ratio of Earnings to Fixed Charges
(15) - Letter Re: Unaudited Interim Financial Information
(b) Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MAY DEPARTMENT STORES COMPANY
(Registrant)
Date: December 12, 2001
/s/ Thomas D. Fingleton
Thomas D. Fingleton
Executive Vice President and
Chief Financial Officer
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of
The May Department Stores Company:
We have reviewed the accompanying condensed consolidated balance sheet of The
May Department Stores Company (a Delaware corporation) and subsidiaries as of
November 3, 2001, and October 28, 2000, and the related condensed consolidated
statements of earnings for the thirteen week and thirty-nine week periods
ended November 3, 2001, and October 28, 2000, and the condensed consolidated
statement of cash flows for the thirty-nine week periods ended November 3,
2001, and October 28, 2000. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of The May
Department Stores Company as of February 3, 2001, (not presented separately
herein), and in our report dated February 14, 2001, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of February
3, 2001, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/Arthur Andersen LLP
St. Louis, Missouri
December 12, 2001
Exhibit 15
To the Board of Directors and Shareowners of
The May Department Stores Company:
We are aware that The May Department Stores Company has incorporated by
reference in its Registration Statements on Form S-3 (No. 333-42940 and 333-
42940-01) and Form S-8 (No. 33-21415, 33-58985, 333-59792 and 333-76227) its
Form 10-Q for the quarter ended November 3, 2001, which includes our report
dated December 12, 2001 covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933,
that report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act. It should be noted that we have not
performed any procedures subsequent to December 12, 2001.
/s/Arthur Andersen LLP
St. Louis, Missouri
December 12, 2001
22
Exhibit 12
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 3, 2001 AND FOR THE
THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
(Dollars in millions)
39 Weeks Ended Fiscal Year Ended
Nov. 3, Oct. 28, Feb. 3, Jan. 29, Jan. 30, Jan. 31, Feb. 1,
2001 2000 2001 2000 1999 1998 1997
Earnings Available for Fixed Charges:
Pretax earnings from continuing
operations $ 449 $ 566 $ 1,402 $ 1,523 $ 1,395 $ 1,279 $ 1,232
Fixed charges (excluding interest
capitalized and pretax preferred
stock dividend requirements) 306 287 406 346 344 363 346
Dividends on ESOP Preference Shares (16) (17) (23) (24) (25) (26) (26)
Capitalized interest amortization 6 6 8 7 7 6 6
745 842 1,793 1,852 1,721 1,622 1,558
Fixed Charges:
Gross interest expense (a) $ 299 $ 282 $ 395 $ 340 $ 339 $ 353 $ 341
Interest factor attributable to
rent expense 24 18 28 22 21 23 22
323 300 423 362 360 376 363
Ratio of Earnings to Fixed Charges 2.3 2.8 4.2 5.1 4.8 4.3 4.3
(a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt
discount and debt issue expense.