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 October 31, 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 1-79
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 May (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.
223,615,619 shares of common stock, $0.50 par value, as of October
31, 1998.
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Millions)
Oct. 31, Nov. 1, Jan. 31,
ASSETS 1998 1997 1998
Current Assets:
Cash and cash equivalents $ 32 $ 23 $ 199
Accounts receivable, net 1,856 1,957 2,164
Merchandise inventories 3,300 3,102 2,433
Other current assets 99 135 82
Total Current Assets 5,287 5,217 4,878
Property and Equipment, at cost 7,125 6,720 6,787
Accumulated Depreciation (2,646) (2,495) (2,563)
Net Property and Equipment 4,479 4,225 4,224
Goodwill and other assets 1,054 839 828
Total Assets $ 10,820 $ 10,281 $ 9,930
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 451 $ 560 $ 233
Accounts payable 1,458 1,323 842
Accrued expenses 786 689 640
Income taxes 5 14 151
Total Current Liabilities 2,700 2,586 1,866
Long-term Debt 3,868 3,517 3,512
Deferred Income Taxes 471 425 449
Other Liabilities 290 273 277
ESOP Preference Shares 330 341 337
Unearned Compensation (302) (319) (320)
Shareowners' Equity 3,463 3,458 3,809
Total Liabilities and
Shareowners' Equity $ 10,820 $ 10,281 $ 9,930
The accompanying notes to condensed consolidated financial
statements are an integral part of this balance sheet.
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THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Millions, except per share) 13 Weeks Ended 39 Weeks Ended
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997 1998 1997
Net Retail Sales $ 3,020 $ 2,889 $ 8,570 $ 8,124
Revenues $ 3,089 $ 2,969 $ 8,795 $ 8,393
Cost of sales 2,180 2,097 6,182 5,899
Selling, general and
administrative expenses 625 599 1,796 1,713
Interest expense, net 69 74 201 226
Earnings before income taxes 215 199 616 555
Provision for income taxes 85 79 245 221
Net earnings before
extraordinary loss 130 120 371 334
Extraordinary loss related to
early extinguishment
of debt - - - (4)
Net Earnings $ 130 $ 120 $ 371 $ 330
Basic earnings per share:
Net earnings before
extraordinary loss .55 .50 1.55 1.37
Extraordinary loss - - - (.01)
Net Earnings $ .55 $ .50 $ 1.55 $ 1.36
Diluted earnings per share:
Net earnings before
extraordinary loss .52 .48 1.49 1.32
Extraordinary loss - - - (.01)
Net Earnings $ .52 $ .48 $ 1.49 $ 1.31
Dividends Paid per
Common Share $ .31-3/4 $ .30 $ .95-1/4 $ .90
Weighted average shares
outstanding:
Basic 227.8 231.3 230.1 232.7
Diluted 244.1 248.3 246.7 249.4
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
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THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions) 39 Weeks Ended
Oct. 31, Nov. 1,
1998 1997
Operating Activities:
Net earnings and depreciation/amortization $ 691 $ 634
Decrease in working capital (excluding
cash, cash equivalents and short-term
debt) 40 142
Other assets and liabilities, net 31 30
762 806
Investing Activities:
Net additions to property and equipment (557) (349)
Net additions to goodwill and other assets (248) -
(805) (349)
Financing Activities:
Net issuances of notes payable 381 327
Net issuances (repayments) of long-term debt 219 (334)
Net acquisitions of treasury stock (491) (305)
Dividend payments, net of tax benefit (233) (224)
(124) (536)
Increase (Decrease) in Cash and Cash
Equivalents $ (167) $ (79)
Cash paid during the period:
Interest $ 220 $ 240
Income Taxes 351 356
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
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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 21-27) in the 1997 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.
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 1998 and 1997. The year-to-date LIFO
provision was $20 million in 1998 and 1997.
Long-term Debt. During the third quarter of 1998, May issued a
total of $350 million in new debt: $200 million of 6.70% debentures
due September 15, 2028, and $150 million of 5.95% notes due
November 1, 2008. The net proceeds from the issuances were
primarily used for repayment of a portion of May's short-term
indebtedness, store acquisitions and stock repurchases.
Acquisition. In September 1998, May completed the purchase of 11
former Mercantile stores from Dillard's. The transaction, which
was accounted for as a purchase, did not have a material impact on
May's financial statements.
Common Stock Repurchase Program. In August 1998, May reduced its
$650 million common stock repurchase program, announced in February
1998, to $500 million. The company completed the repurchase during
the third quarter, totalling 8.4 million shares at an average price
of $60 per share.
Extraordinary Item. During the first quarter of 1997, May recorded
an extraordinary aftertax loss of $4 million ($5 million pretax),
or $.01 per share, as it retired $100 million of 9.875% debentures
due to mature June 1, 2017.
Summarized Financial Information - The May Department Stores
Company, New York. Summarized financial information of The May
Department Stores Company, New York, is set forth below (millions).
October 31, January 31,
1998 1998
Financial Position
Current assets $ 5,287 $ 4,878
Noncurrent assets 6,135 5,048
Current liabilities 2,723 1,894
Noncurrent liabilities 7,828 7,437
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October 31, 1998 November 1, 1997
13 Weeks 39 Weeks 13 Weeks 39 Weeks
Ended Ended Ended Ended
Operating Results
Revenues $ 3,089 $ 8,795 $ 2,969 $ 8,393
Cost of sales 2,180 6,182 2,097 5,899
Net earnings before
extraordinary loss 83 230 74 193
Net earnings 83 230 74 189
Earnings per Share. The following tables reconcile net earnings
and weighted average shares outstanding to amounts used to
calculate basic and diluted earnings per share ("EPS") for the
periods shown (millions, except per share).
13 Weeks Ended
October 31, 1998 November 1, 1997
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 130 $ 120
ESOP preference
shares' dividends (5) (5)
Basic EPS 125 227.8 $ 0.55 115 231.3 $ 0.50
ESOP preference
shares 4 14.7 4 15.2
Assumed exercise of
options (treasury
stock method) - 1.6 - 1.8
Diluted EPS $ 129 244.1 $ 0.52 $ 119 248.3 $ 0.48
39 Weeks Ended
October 31, 1998 November 1, 1997
Earnings Shares EPS Earnings Shares EPS
Net earnings $ 371 $ 334
ESOP preference
shares' dividends (14) (14)
Basic EPS 357 230.1 $ 1.55 320 232.7 $ 1.37
ESOP preference
shares 11 14.8 11 15.3
Assumed exercise of
options (treasury
stock method) - 1.8 - 1.4
Diluted EPS $ 368 246.7 $ 1.49 $ 331 249.4 $ 1.32
Reclassifications. Certain prior period amounts have been
reclassified to conform with current year presentation.
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Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Key financial ratios for the periods indicated are as follows:
Oct. 31, Nov. 1, Jan. 31,
1998 1997 1998
Current Ratio 2.0 2.0 2.6
Debt-Capitalization Ratio 50% 49 44%
Fixed Charge Coverage* 4.4x 3.9x 4.1x
* Fixed charge coverage, which is presented for the trailing 52
weeks ended October 31, 1998, January 31, 1998, and November 1,
1997, 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.
May's October 31, 1998 current ratio, which was the same as
November 1, 1997, decreased compared with year-end 1997 due mainly
to seasonal working capital changes.
The October 31, 1998 debt-capitalization ratio increased from
January 31, 1998 due to seasonal borrowings to finance working
capital needs; net increases in long-term debt used to finance
capital expenditures, store acquisitions and common stock
repurchases; and a decrease in shareowners' equity resulting from
the $500 million common stock repurchase program.
May's fixed charge coverage ratio for the 52 weeks ended October
31, 1998 increased as compared with the 52 week periods ended
November 1, 1997 and January 31, 1998 due primarily to decreased
net interest expense. The decrease in net interest expense for the
52 weeks ended October 31, 1998 was a result of lower average debt
balances and higher cash equivalent balances.
Results of Operations
Net retail sales represent the sales of stores operating at the end
of the latest period. They exclude finance charge revenue and the
sales of stores which have been closed and not replaced. Sales
percent increases are as follows:
Third Quarter First Nine Months
Store-for- Store-for-
Total Store Total Store
4.5% 2.2% 5.5% 3.6%
Store-for-store sales represent sales of those stores open during
both periods.
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The following table presents the components of costs and expenses,
as a percent of revenues. Revenues include finance charge revenues
and all sales from all stores operating during the period.
Third Quarter First Nine Months
1998 1997 1998 1997
Cost of sales 70.6% 70.6% 70.3% 70.3%
Selling, general and
administrative expenses 20.2 20.2 20.4 20.4
Interest expense, net 2.3 2.5 2.3 2.7
Earnings before income taxes 6.9 6.7 7.0 6.6
Provision for income taxes 39.6* 39.6* 39.9* 39.9*
Net Earnings 4.2% 4.0% 4.2% 4.0%
* - Percent represents effective income tax rate.
Cost of sales was $2,180 million in the 1998 third quarter, up 4.0%
from $2,097 million in the 1997 third quarter. For the first nine
months of 1998, cost of sales was $6,182 million, a 4.8% increase
from $5,899 million in the 1997 period. The overall increases are
primarily related to higher sales. As a percent of revenues, cost
of sales remained constant in comparison to both the third quarter
and first nine months of 1997. A small deterioration in gross
margin, resulting from the impact of a decrease in the finance
charge component of revenues, was offset by an improvement in
buying and occupancy expenses. The finance charge component of
revenues decreased 7.9% for the third quarter and 7.8% for the
first nine months with no corresponding decrease in cost of sales.
For the third quarter and first nine months of each year, the LIFO
charge was $4 million and $20 million, respectively.
Selling, general and administrative expenses were $625 million in
the 1998 third quarter, compared with $599 million in the 1997
third quarter, a 4.4% increase. For the first nine months of 1998,
selling, general and administrative expenses were $1,796 million
compared with $1,713 million in the 1997 period, a 4.9% increase.
The increases are primarily related to higher sales. Selling,
general and administrative expenses, as a percent of revenues,
remained constant for both the third quarter and first nine months
of 1998 as compared with 1997. A decrease in bad debt expense
related to lower delinquency and charge-off rates combined with
decreased use of May's proprietary credit cards was offset by
increases in advertising expense and retirement and profit sharing
expense.
Net interest expense for the third quarter and first nine months of
1998 and 1997 was as follows (millions):
Third Quarter First Nine Months
1998 1997 1998 1997
Interest expense $ 79 $ 79 $ 228 $ 244
Interest income (5) (2) (16) (8)
Capitalized interest (5) (3) (11) (10)
Net Interest Expense $ 69 $ 74 $ 201 $ 226
8
Net interest expense decreased in the 1998 third quarter and first
nine months due to decreased average debt balances and increased
average cash equivalent balances. As a percent of revenues, net
interest expense decreased 0.2% for the third quarter and 0.4% for
the first nine months.
Operating results for the trailing years were as follows (millions,
except per share):
52 Weeks Ended
Oct. 31, Nov. 1,
1998 1997
Net retail sales $ 12,776 $ 12,093
Revenues $ 13,087 $ 12,494
Net earnings $ 816 $ 757
Diluted earnings per share $ 3.28 $ 2.93
Year 2000 Readiness
In 1996, May began preparing its information systems,
communications networks, equipment and facilities for the year
2000. As of the end of the third quarter of 1998, May completed
its assessment of all critical information systems, communication
networks, equipment and facilities and substantially completed the
coding, testing and installation of necessary modifications. May
will test certain interfaces with some merchandise and service
vendors for year 2000 compliance through the spring of 1999.
Since May is substantially complete with its modifications, May
does not expect any material disruption of business. Through
participation in a National Retail Federation sponsored survey and
other means, May is receiving assurances from its primary
merchandise vendors and service providers regarding their year 2000
readiness.
May developed, and maintains, most of its application systems
internally. Over the past twelve months May utilized approximately
15% of it's information systems resources to address companywide
year 2000 issues. May's use of outside consultants and
contractors to address year 2000 compliance has not been
significant. Through the third quarter of 1998, the cumulative
cost of May's year 2000 effort approximates $6 million, which May
expensed as incurred.
Under the most reasonably likely worst case scenario, May does not
anticipate more than isolated, temporary disruptions of its
operations caused by year 2000 failures affecting either the
company or its primary merchandise and service vendors. May
expects that its technically trained personnel, working in
cooperation with key vendors and service providers, should be able
to address year 2000 system issues that may arise. To the extent
May's vendors are unable to deliver products and provide services
due to their own year 2000 issues, May believes it will generally
have alternative sources for comparable products and services and
does not expect to experience any material business disruptions.
Many risks, however, such as the failure to perform by public
utilities, telecommunications providers, and financial institutions
9
and the impact of the year 2000 issue on the economy as a whole,
are outside May's control and could adversely affect the company
and the conduct of its business. While May has made a significant
effort to address all anticipated risks within its control, this is
an event without precedent, consequently, there can be no assurance
that the year 2000 issue will not have a material adverse impact on
May's financial condition, operating results or business.
Forward-Looking Statements
The discussion of the year 2000 issue included in Management's
Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking" statements as defined in the
Private Securities Litigation Reform Act of 1995. While such
statements reflect all available information and management's
judgement and estimates of current and anticipated conditions and
circumstances, prepared with the assistance of specialists, within
and outside the company, many factors outside of May's control
exist that impact its operations. Such factors include, but are
not limited to, possible widespread inability to perform by
merchandise vendors, public utilities, telecommunications
providers, and financial institutions and the general economic
impact of the year 2000 issue. Because of these outside influences
that cannot be controlled by the company's management, actual
performance could differ materially from that described in the
forward-looking statements.
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
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
May 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 - None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(3) - By-laws of May, as amended
(12) - Computation of Ratio of Earnings to Fixed Charges
(27) - Financial Data Schedule
(b) Reports on Form 8-K
A report dated September 22, 1998 (Date of earliest event
reported - September 3, 1998) which contained a press
release announcing May's August 1998 and year-to-date sales
results.
10
A report dated September 29, 1998 (Date of earliest event
reported - September 28, 1998) which contained a copy of the
Underwriting Agreement, dated September 22, 1998, among May,
The May Department Stores Company - New York, Morgan Stanley
& Co. Incorporated, NationsBanc Montgomery Securities LLC
and Salomon Smith Barney Inc.; and a specimen of a global
certificate for the 6.70% debentures due September 15, 2028.
A report dated October 28, 1998 (Date of earliest event
reported - October 8, 1998) which contained a press release
announcing May's September 1998 and year-to-date sales
results.
A report dated October 30, 1998 which contained a copy of
the Underwriting Agreement, dated October 27, 1998 among
May, The May Department Stores Company - New York, Morgan
Stanley & Co. Incorporated, Chase Securities Inc., and
Salomon Smith Barney Inc.; and a specimen of a global
certificate for the 5.95% notes due November 1, 2008.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, May 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 8, 1998
\s\ John L. Dunham
John L. Dunham
Executive Vice President and
Chief Financial Officer
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