10-Q 1 dds-08012015x10q.htm 10-Q 10-Q
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 1, 2015
 
or
 
o        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 jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
 
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 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 (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. 
x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
o Yes  x No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
CLASS A COMMON STOCK as of August 29, 2015     34,761,650
CLASS B COMMON STOCK as of August 29, 2015       4,010,401

 
 
 
 
 



Index
 
DILLARD’S, INC.
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of August 1, 2015, January 31, 2015 and August 2, 2014
 
 
 
 
Condensed Consolidated Statements of Income and Retained Earnings for the Three and Six Months Ended August 1, 2015 and August 2, 2014
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended August 1, 2015 and August 2, 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 1, 2015 and August 2, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 


2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
DILLARD’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
 
 
August 1,
2015
 
January 31,
2015
 
August 2,
2014
Assets
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
175,137

 
$
403,752

 
$
235,331

Restricted cash
 
—

 
7,346

 
—

Accounts receivable
 
48,783

 
56,510

 
19,331

Merchandise inventories
 
1,477,241

 
1,374,481

 
1,429,220

Other current assets
 
47,825

 
46,353

 
50,053

 
 
 
 
 
 
 
Total current assets
 
1,748,986

 
1,888,442

 
1,733,935

 
 
 
 
 
 
 
Property and equipment (net of accumulated depreciation and amortization of $2,461,417, $2,341,948 and $2,379,919)
 
1,998,875

 
2,029,171

 
2,081,577

Other assets
 
254,470

 
252,458

 
254,615

 
 
 
 
 
 
 
Total assets
 
$
4,002,331

 
$
4,170,071

 
$
4,070,127

 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Trade accounts payable and accrued expenses
 
$
730,338

 
$
730,422

 
$
658,239

Current portion of capital lease obligations
 
7,701

 
840

 
813

Federal and state income taxes including current deferred taxes
 
76,986

 
154,061

 
86,309

 
 
 
 
 
 
 
Total current liabilities
 
815,025

 
885,323

 
745,361

 
 
 
 
 
 
 
Long-term debt
 
614,785

 
614,785

 
614,785

Capital lease obligations
 
7,740

 
5,919

 
6,348

Other liabilities
 
251,969

 
250,455

 
231,709

Deferred income taxes
 
164,756

 
194,319

 
203,000

Subordinated debentures
 
200,000

 
200,000

 
200,000

Commitments and contingencies
 


 


 


Stockholders’ equity:
 
 

 
 

 
 

Common stock
 
1,238

 
1,237

 
1,237

Additional paid-in capital
 
938,922

 
937,993

 
936,106

Accumulated other comprehensive loss
 
(29,886
)
 
(31,029
)
 
(23,253
)
Retained earnings
 
3,869,549

 
3,734,891

 
3,554,170

Less treasury stock, at cost
 
(2,831,767
)
 
(2,623,822
)
 
(2,399,336
)
 
 
 
 
 
 
 
Total stockholders’ equity
 
1,948,056

 
2,019,270

 
2,068,924

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
4,002,331

 
$
4,170,071

 
$
4,070,127

 
See notes to condensed consolidated financial statements.


3

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except Per Share Data)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net sales
 
$
1,513,778

 
$
1,474,484

 
$
3,087,271

 
$
3,025,798

Service charges and other income
 
37,066

 
38,404

 
76,991

 
75,631

 
 
 
 
 
 
 
 
 
 
 
1,550,844

 
1,512,888

 
3,164,262

 
3,101,429

 
 
 
 
 
 
 
 
 
Cost of sales
 
1,020,331

 
976,269

 
1,980,750

 
1,915,493

Selling, general and administrative expenses
 
404,278

 
400,459

 
807,838

 
794,110

Depreciation and amortization
 
60,500

 
62,058

 
121,653

 
124,017

Rentals
 
5,719

 
5,860

 
11,476

 
11,675

Interest and debt expense, net
 
14,765

 
15,203

 
29,992

 
31,044

Gain on disposal of assets
 
(52
)
 
(50
)
 
(95
)
 
(439
)
 
 


 
 
 
 
 
 
Income before income taxes and income on and equity in earnings of joint ventures
 
45,303

 
53,089

 
212,648

 
225,529

Income taxes
 
15,650

 
18,890

 
73,690

 
79,850

Income on and equity in earnings of joint ventures
 
297

 
250

 
563

 
453

 
 
 
 
 
 
 
 
 
Net income
 
29,950

 
34,449

 
139,521

 
146,132

 
 
 
 
 
 
 
 
 
Retained earnings at beginning of period
 
3,841,990

 
3,522,314

 
3,734,891

 
3,413,240

Cash dividends declared
 
(2,391
)
 
(2,593
)
 
(4,863
)
 
(5,202
)
 
 
 
 
 
 
 
 
 
Retained earnings at end of period
 
$
3,869,549

 
$
3,554,170

 
$
3,869,549

 
$
3,554,170

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic and diluted
 
$
0.75

 
$
0.80

 
$
3.43

 
$
3.36

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.06

 
$
0.06

 
$
0.12

 
$
0.12

 
See notes to condensed consolidated financial statements.

4

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net income
 
$
29,950

 
$
34,449

 
$
139,521

 
$
146,132

Other comprehensive income:
 
 

 
 

 
 

 
 

Amortization of retirement plan and other retiree benefit adjustments (net of tax of $353, $254, $705 and $509)
 
571

 
411

 
1,143

 
821

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
30,521

 
$
34,860

 
$
140,664

 
$
146,953

 
See notes to condensed consolidated financial statements.


5

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 
 
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
Operating activities:
 
 

 
 

Net income
 
$
139,521

 
$
146,132

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization of property and other deferred cost
 
122,697

 
124,791

Gain on disposal of assets
 
(95
)
 
(439
)
Changes in operating assets and liabilities:
 
 

 
 

Decrease in accounts receivable
 
7,727

 
11,509

Increase in merchandise inventories
 
(102,760
)
 
(83,899
)
Increase in other current assets
 
(543
)
 
(2,294
)
(Increase) decrease in other assets
 
(102
)
 
1,049

Increase in trade accounts payable and accrued expenses and other liabilities
 
2,167

 
15,117

Decrease in income taxes payable
 
(106,638
)
 
(78,130
)
 
 
 
 
 
Net cash provided by operating activities
 
61,974

 
133,836

 
 
 
 
 
Investing activities:
 
 

 
 

Purchases of property and equipment
 
(87,032
)
 
(68,818
)
Proceeds from disposal of assets
 
234

 
4,728

Decrease in restricted cash
 
7,346

 
—

 
 
 
 
 
Net cash used in investing activities
 
(79,452
)
 
(64,090
)
 
 
 
 
 
Financing activities:
 
 

 
 

Principal payments on long-term debt and capital lease obligations
 
(411
)
 
(382
)
Issuance cost of line of credit
 
(2,863
)
 
—

Cash dividends paid
 
(4,949
)
 
(5,245
)
Purchase of treasury stock
 
(202,914
)
 
(65,922
)
 
 
 
 
 
Net cash used in financing activities
 
(211,137
)
 
(71,549
)
 
 
 
 
 
Decrease in cash and cash equivalents
 
(228,615
)
 
(1,803
)
Cash and cash equivalents, beginning of period
 
403,752

 
237,134

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
175,137

 
$
235,331

 
 
 
 
 
Non-cash transactions:
 
 

 
 

Accrued capital expenditures
 
$
7,512

 
$
16,695

Stock awards
 
929

 
898

Capital lease transactions
 
9,093

 
—

 
See notes to condensed consolidated financial statements.

6

DILLARD’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.         Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) 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 and six months ended August 1, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending January 30, 2016 due to, among other things, the seasonal nature of the business.
 
These unaudited interim condensed consolidated financial statements should be read in conjunction with 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, 2015 filed with the SEC on March 25, 2015.

Note 2.  Business Segments
 
The Company operates in two reportable segments:  the operation of retail department stores (“retail operations”) and a general contracting construction company (“construction”).
 
For the Company’s retail operations, the Company determined its operating segments on a store by store basis.  Each store’s operating performance has been aggregated into one reportable segment.  The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics, class of consumer, nature of products and distribution methods. Revenues from external customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue. Across all stores, the Company operates one store format under the Dillard’s name where each store offers the same general mix of merchandise with similar categories and similar customers.  The Company believes that disaggregating its operating segments would not provide meaningful additional information.


7

The following tables summarize certain segment information, including the reconciliation of those items to the Company’s consolidated operations: 
(in thousands of dollars)

Retail
Operations

Construction

Consolidated
Three Months Ended August 1, 2015:
 
 

 
 


 

Net sales from external customers
 
$
1,467,709

 
$
46,069


$
1,513,778

Gross profit
 
491,645

 
1,802


493,447

Depreciation and amortization
 
60,415

 
85


60,500

Interest and debt expense (income), net
 
14,780

 
(15
)

14,765

Income before income taxes and income on and equity in earnings of joint ventures
 
44,810

 
493


45,303

Income on and equity in earnings of joint ventures
 
297

 
—


297

Total assets
 
3,946,770

 
55,561


4,002,331

 
 
 
 
 
 
 
Three Months Ended August 2, 2014:
 
 
 
 



Net sales from external customers
 
$
1,461,134

 
$
13,350


$
1,474,484

Gross profit
 
497,319

 
896


498,215

Depreciation and amortization
 
61,983

 
75


62,058

Interest and debt expense (income), net
 
15,212

 
(9
)

15,203

Income (loss) before income taxes and income on and equity in earnings of joint ventures
 
53,752

 
(663
)

53,089

Income on and equity in earnings of joint ventures
 
250

 
—


250

Total assets
 
4,045,457

 
24,670


4,070,127

 
 
 
 
 
 
 
Six Months Ended August 1, 2015:
 
 
 
 



Net sales from external customers
 
$
2,986,069

 
$
101,202


$
3,087,271

Gross profit
 
1,102,639

 
3,882


1,106,521

Depreciation and amortization
 
121,477

 
176


121,653

Interest and debt expense (income), net
 
30,020

 
(28
)

29,992

Income before income taxes and income on and equity in earnings of joint ventures
 
211,201

 
1,447


212,648

Income on and equity in earnings of joint ventures
 
563

 
—


563

Total assets
 
3,946,770

 
55,561


4,002,331

 
 
 
 
 
 
 
Six Months Ended August 2, 2014:
 
 
 
 



Net sales from external customers
 
$
3,000,327

 
$
25,471


$
3,025,798

Gross profit
 
1,108,691

 
1,614


1,110,305

Depreciation and amortization
 
123,868

 
149


124,017

Interest and debt expense (income), net
 
31,066

 
(22
)

31,044

Income (loss) before income taxes and income on and equity in earnings of joint ventures
 
226,988

 
(1,459
)

225,529

Income on and equity in earnings of joint ventures
 
453

 
—


453

Total assets
 
4,045,457

 
24,670


4,070,127

 
Intersegment construction revenues of $19.7 million and $42.5 million for the three and six months ended August 1, 2015, respectively, and intersegment revenues of $29.1 million and $43.8 million for the three and six months ended August 2, 2014, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.
 






8

Note 3. Earnings Per Share Data
 
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data). 
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net income
 
$
29,950

 
$
34,449

 
$
139,521

 
$
146,132

 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
40,096

 
43,217

 
40,644

 
43,434

 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share
 
$
0.75

 
$
0.80

 
$
3.43

 
$
3.36

 
The Company maintains a capital structure in which common stock is the only security issued and outstanding, and no shares of preferred stock, stock options, other dilutive securities or potentially dilutive securities were issued or outstanding during the three or six months ended August 1, 2015 and August 2, 2014.
 
Note 4.  Commitments and Contingencies
 
Various legal proceedings, in the form of lawsuits and claims, which occur in the normal course of business, are pending against the Company and its subsidiaries.  In the opinion of management, disposition of these matters, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s financial position, cash flows or results of operations.
 
At August 1, 2015, letters of credit totaling $28.0 million were issued under the Company’s revolving credit facility.

Note 5.  Benefit Plans
 
The Company has an unfunded, nonqualified defined benefit plan (“Pension Plan”) for its officers.  The Pension Plan is noncontributory and provides benefits based on years of service and compensation during employment.  Pension expense is determined using an actuarial cost method to estimate the total benefits ultimately payable to officers and allocates this cost to service periods.  The actuarial assumptions used to calculate pension costs are reviewed annually.  The Company contributed $0.7 million and $1.5 million to the Pension Plan during the three and six months ended August 1, 2015, respectively, and expects to make additional contributions to the Pension Plan of approximately $3.1 million during the remainder of fiscal 2015.
 
The components of net periodic benefit costs are as follows (in thousands): 
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Components of net periodic benefit costs:
 
 

 
 

 
 

 
 

Service cost
 
$
983

 
$
1,099

 
$
1,966

 
$
2,198

Interest cost
 
1,684

 
1,911

 
3,368

 
3,822

Net actuarial loss
 
924

 
665

 
1,848

 
1,330

Net periodic benefit costs
 
$
3,591

 
$
3,675

 
$
7,182

 
$
7,350

 Net periodic benefit costs are included in selling, general and administrative expenses. 

Note 6.  Revolving Credit Agreement
 
In May 2015, the Company entered into a new $1.0 billion senior unsecured revolving credit facility ("credit agreement") replacing the Company's previous secured revolving credit facility. The new credit agreement matures on May 13, 2020 and is available to the Company for working capital needs and general corporate purposes. The Company pays a variable rate of interest on borrowings under the credit agreement and a commitment fee to the participating banks based on the Company's debt rating. To be in compliance with the financial covenants of the credit agreement, the Company's total leverage ratio cannot exceed 4.0 to 1.0 and the coverage ratio cannot be less than 2.5 to 1.0. At August 1, 2015, the Company was in compliance with all financial covenants related to the credit agreement.

9

At August 1, 2015, no borrowings were outstanding, and letters of credit totaling $28.0 million were issued under the credit agreement.
 
Note 7.  Stock Repurchase Programs
 
The Company’s Board of Directors has authorized the Company to repurchase the Company’s Class A Common Stock under open-ended stock plans.  These authorizations permit the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions.  The authorizations have no expiration date. The following is a summary of share repurchase activity for the periods indicated (in thousands, except per share data):
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Cost of shares repurchased
 
$
207,945

 
$
—

 
$
207,945

 
$
65,922

Number of shares repurchased
 
1,843

 
—

 
1,843

 
738

Average price per share
 
$
112.83

 
$
—

 
$
112.83

 
$
89.34


All repurchases of the Company’s Class A Common Stock above were made at the market price at the trade date.  Accordingly, all amounts paid or payable to reacquire these shares were allocated to Treasury Stock. As of August 1, 2015, $292.1 million of authorization remained under the November 2014 Stock Plan.

Note 8.  Income Taxes
 
During the three months ended August 1, 2015, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes, which included benefits for legislatively-enacted state income tax rate reductions. During the three months ended August 2, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.
 
During the six months ended August 1, 2015 and August 2, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.

Note 9. Reclassifications from Accumulated Other Comprehensive Loss (“AOCL”)
 
Reclassifications from AOCL are summarized as follows (in thousands): 
 
 
Amount Reclassified from AOCL
 
 
 
 
Three Months Ended
 
Six Months Ended
 
Affected Line Item in the Statement Where Net Income Is Presented
Details about AOCL Components
 
August 1, 2015
 
August 2, 2014
 
August 1,
2015
 
August 2,
2014
 
Defined benefit pension plan items
 
 

 
 

 
 

 
 

 
 
Amortization of actuarial losses
 
924

 
665

 
$
1,848

 
$
1,330

 
Total before tax (1)
 
 
353

 
254

 
705

 
509

 
Income tax expense
 
 
$
571

 
$
411

 
$
1,143

 
$
821

 
Total net of tax
_______________________________
(1)        These items are included in the computation of net periodic pension cost.  See Note 5, Benefit Plans, for additional information. 











10

Note 10. Changes in Accumulated Other Comprehensive Loss
 
Changes in AOCL by component (net of tax) are summarized as follows (in thousands): 
 
 
Defined Benefit Pension Plan Items
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1, 2015
 
August 2, 2014
 
August 1,
2015
 
August 2,
2014
Beginning balance
 
$
30,457

 
$
23,664

 
$
31,029

 
$
24,074

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 
—

 
—

 
—

 
—

Amounts reclassified from AOCL
 
(571
)
 
(411
)
 
(1,143
)
 
(821
)
Net other comprehensive income
 
(571
)
 
(411
)
 
(1,143
)
 
(821
)
 
 
 
 
 
 
 
 
 
Ending balance
 
$
29,886

 
$
23,253

 
$
29,886

 
$
23,253

 
Note 11.  Fair Value Disclosures
 
The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange.
 
The fair value of the Company’s long-term debt and subordinated debentures is based on market prices or dealer quotes.
 
The fair value of the Company’s cash and cash equivalents and accounts receivable approximates their carrying values at August 1, 2015 due to the short-term maturities of these instruments.  The fair value of the Company’s long-term debt at August 1, 2015 was approximately $702 million.  The carrying value of the Company’s long-term debt at August 1, 2015 was $615 million.  The fair value of the Company’s subordinated debentures at August 1, 2015 was approximately $210 million.  The carrying value of the Company’s subordinated debentures at August 1, 2015 was $200 million.
 
Note 12.  Recently Issued Accounting Standards
 
Revenue from Contracts with Customers
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update was amended by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date for the Company from the first quarter of fiscal 2017 to the first quarter of fiscal 2018 with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

Presentation of Financial Statements - Going Concern
 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures.  This ASU is effective for annual periods ending after December 15, 2016 and interim periods thereafter.  Early application is permitted.  The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.


11

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, to amend ASC Topic 835. The amendment adds the requirement for an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset and to report amortization of the debt issuance costs as interest expense. This update will be effective for the Company beginning in the first quarter of fiscal 2016. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.


12

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended January 31, 2015.
 
EXECUTIVE OVERVIEW

The Company's second quarter performance of fiscal 2015 was disappointing. During the three months ended August 1, 2015, comparable store sales increased 1% over last year's second quarter. Gross margin from retail operations declined 54 basis points of sales. Selling, general and administrative expenses from retail operations increased 15 basis points of sales, mainly due to increases in payroll and insurance expense partially offset by decreased advertising expense. Net income decreased to $29.9 million ($0.75 per share) for the current year second quarter from $34.5 million ($0.80 per share) for the prior year second quarter.

As of August 1, 2015, we had working capital of $934.0 million, cash and cash equivalents of $175.1 million and $814.8 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $62.0 million for the six months ended August 1, 2015.  We operated 272 Dillard's locations, 25 clearance centers and one internet store as of August 1, 2015, an increase of one store from August 2, 2014.
 
Key Performance Indicators
 
We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following: 
 
 
Three Months Ended
 
 
August 1,
2015
 
August 2,
2014
Net sales (in millions)
 
$
1,513.8

 
$
1,474.5

Retail stores sales trend
 
—
%
 
—
 %
Comparable retail stores sales trend
 
1
%
 
1
 %
Gross profit (in millions)
 
$
493.4

 
$
498.2

Gross profit as a percentage of net sales
 
32.6
%
 
33.8
 %
Retail gross profit as a percentage of net sales
 
33.5
%
 
34.0
 %
Selling, general and administrative expenses as a percentage of net sales
 
26.7
%
 
27.2
 %
Cash flow from operations (in millions)*
 
$
62.0

 
$
133.8

Total retail store count at end of period
 
297

 
296

Retail sales per square foot
 
$
30

 
$
29

Comparable retail store inventory trend
 
3
%
 
(1
)%
Retail merchandise inventory turnover
 
2.5

 
2.6

 

*Cash flow from operations data is for the six months ended August 1, 2015 and August 2, 2014.

General
 
Net sales.  Net sales includes merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company.  Comparable store sales includes sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior year.  Comparable store sales excludes changes in the allowance for sales returns.  Non-comparable store sales includes:  sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns.
 
Service charges and other income.  Service charges and other income includes income generated through the long-term private label card alliance with Wells Fargo Bank, N.A. (“Wells Fargo Alliance”) and former private label card alliance with

13

Synchrony Financial ("Synchrony Alliance").  Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.
 
Cost of sales.  Cost of sales includes the cost of merchandise sold (net of purchase discounts and non-specific margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, and direct payroll for salon personnel.  Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.
 
Selling, general and administrative expenses.  Selling, general and administrative expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses.  Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
 
Depreciation and amortization.  Depreciation and amortization expenses include depreciation and amortization on property and equipment.
 
Rentals.  Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.
 
Interest and debt expense, net.  Interest and debt expense includes interest, net of interest income and capitalized interest, relating to the Company’s unsecured notes, subordinated debentures and borrowings under the Company’s credit facility.  Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on capital lease obligations.
 
Gain on disposal of assets.  Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment.
 
Income on and equity in earnings of joint ventures.  Income on and equity in earnings of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures as well as the distribution of excess cash from a mall joint venture.
 
Seasonality
 
Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season.  Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

 


14

RESULTS OF OPERATIONS
 
The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding): 
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Service charges and other income
 
2.4

 
2.6

 
2.5

 
2.5

 
 
 
 
 
 
 
 
 
 
 
102.4

 
102.6

 
102.5

 
102.5

 
 
 
 
 
 
 
 
 
Cost of sales
 
67.4

 
66.2

 
64.2

 
63.3

Selling, general and administrative expenses
 
26.7

 
27.2

 
26.2

 
26.2

Depreciation and amortization
 
4.0

 
4.2

 
3.9

 
4.1

Rentals
 
0.4

 
0.4

 
0.4

 
0.4

Interest and debt expense, net
 
1.0

 
1.0

 
1.0

 
1.0

Gain on disposal of assets
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
Income before income taxes and income on and equity in earnings of joint ventures
 
3.0

 
3.6

 
6.9

 
7.5

Income taxes
 
1.0

 
1.3

 
2.4

 
2.6

Income on and equity in earnings of joint ventures
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
Net income
 
2.0
 %
 
2.3
 %
 
4.5
 %
 
4.8
 %




15

Net Sales

 
 
Three Months Ended
 
 
(in thousands of dollars)
 
August 1,
2015
 
August 2,
2014
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
1,467,709

 
$
1,461,134

 
$
6,575

Construction segment
 
46,069

 
13,350

 
32,719

Total net sales
 
$
1,513,778

 
$
1,474,484

 
$
39,294

 
The percent change in the Company’s sales by segment and product category for the three months ended August 1, 2015 compared to the three months ended August 2, 2014 as well as the sales percentage by segment and product category to total net sales for the three months ended August 1, 2015 are as follows: 
 
 
% Change
2015-2014
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(0.6
)%
 
13
%
Ladies’ apparel
 
0.7

 
24

Ladies’ accessories and lingerie
 
(1.3
)
 
16

Juniors’ and children’s apparel
 
2.2

 
8

Men’s apparel and accessories
 
0.7

 
17

Shoes
 
5.2

 
15

Home and furniture
 
(11.2
)
 
4

 
 
 

 
97

Construction segment
 
245.1

 
3

Total
 
 

 
100
%
 
Net sales from the retail operations segment increased $6.6 million during the three months ended August 1, 2015 compared to the three months ended August 2, 2014. Net sales from the retail operations segment remained essentially unchanged on a percentage basis for the three month period ended August 1, 2015. Sales in comparable stores for the period increased 1%. Sales of shoes increased significantly, while sales of juniors' and children's apparel increased moderately over the prior year period. Sales of ladies' apparel and men's apparel and accessories increased slightly over the prior year period. Sales of cosmetics and ladies' accessories and lingerie decreased slightly over the prior year period while sales of home and furniture decreased significantly.
 
The number of sales transactions decreased 2% for the three months ended August 1, 2015 compared to the three months ended August 2, 2014 while the average dollars per sales transaction increased 2%. We recorded an allowance for sales returns of $7.1 million and $6.6 million as of August 1, 2015 and August 2, 2014, respectively.
 
During the three months ended August 1, 2015, net sales from the construction segment increased $32.7 million, or 245%, compared to the three months ended August 2, 2014 due to an increase in construction activity. The backlog of awarded construction contracts at August 1, 2015 totaled $288.5 million, decreasing approximately 5% from January 31, 2015 and decreasing approximately 15% from August 2, 2014.

16

 
 
Six Months Ended
 
 
(in thousands of dollars)
 
August 1,
2015
 
August 2,
2014
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
2,986,069

 
$
3,000,327

 
$
(14,258
)
Construction segment
 
101,202

 
25,471

 
75,731

Total net sales
 
$
3,087,271

 
$
3,025,798

 
$
61,473

 
The percent change in the Company’s sales by segment and product category for the six months ended August 1, 2015 compared to the six months ended August 2, 2014 as well as the sales percentage by segment and product category to total net sales for the six months ended August 1, 2015 are as follows: 
 
 
% Change
2015-2014
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(0.9
)%
 
14
%
Ladies’ apparel
 
0.6

 
24

Ladies’ accessories and lingerie
 
(1.3
)
 
15

Juniors’ and children’s apparel
 
1.7

 
9

Men’s apparel and accessories
 
(1.7
)
 
17

Shoes
 
2.9

 
15

Home and furniture
 
(14.4
)
 
3

 
 
 

 
97

Construction segment
 
297.3

 
3

Total
 
 

 
100
%
 
Net sales from the retail operations segment decreased $14.3 million during the six months ended August 1, 2015 compared to the six months ended August 2, 2014, remaining essentially unchanged on a percentage basis in both total and comparable stores. Sales of juniors' and children's apparel and shoes increased moderately while sales of ladies' apparel increased slightly over the prior year period. Sales of cosmetics and ladies' accessories and lingerie decreased slightly over the prior year period. Sales of men's apparel and accessories decreased moderately, and sales of home and furniture decreased significantly over the prior year period.
 
The number of sales transactions decreased 5% for the six months ended August 1, 2015 compared to the six months ended August 2, 2014 while the average dollars per sales transaction increased 4%.

Storewide sales penetration of exclusive brand merchandise for the six months ended August 1, 2015 was 22.1% compared to 21.6% during the six months ended August 2, 2014.
 
During the six months ended August 1, 2015, net sales from the construction segment increased $75.7 million or 297% compared to the six months ended August 2, 2014 due to an increase in construction activity.
 


17

Service Charges and Other Income
 
 
 
Three Months Ended
 
Six Months Ended
 
Three
 Months
 
Six
 Months
(in thousands of dollars)
 
August 1, 2015
 
August 2, 2014
 
August 1,
2015
 
August 2,
2014
 
$ Change
2015-2014
 
$ Change
2015-2014
Service charges and other income:
 
 

 
 

 
 

 
 

 
 

 
 

Retail operations segment
 
 

 
 

 
 

 
 

 
 

 
 

Income from Wells Fargo Alliance and former Synchrony Alliance
 
$
23,991

 
$
28,229

 
$
50,727

 
$
55,747

 
$
(4,238
)
 
$
(5,020
)
Shipping and handling income
 
6,021

 
5,203

 
11,800

 
10,057

 
818

 
1,743

Leased department income
 
1,798

 
2,083

 
3,413

 
4,050

 
(285
)
 
(637
)
Other
 
5,210

 
2,873

 
10,732

 
5,753

 
2,337

 
4,979

 
 
37,020

 
38,388

 
76,672

 
75,607

 
(1,368
)
 
1,065

Construction segment
 
46

 
16

 
319

 
24

 
30

 
295

Total service charges and other income
 
$
37,066

 
$
38,404

 
$
76,991

 
$
75,631

 
$
(1,338
)
 
$
1,360

 
Service charges and other income is composed primarily of income from the Wells Fargo Alliance and former Synchrony Alliance.  Income from the alliances decreased during the three months ended August 1, 2015 compared to the three months ended August 1, 2014 due to increased credit losses partially resulting from the portfolio transition. Income from the alliances decreased during the six months ended August 1, 2015 compared to the six months ended August 2, 2014 primarily due to increased credit losses.
 
Gross Profit
 
(in thousands of dollars)
 
August 1, 2015
 
August 2, 2014
 
$ Change
 
% Change
Gross profit:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
491,645

 
$
497,319

 
$
(5,674
)
 
(1.1
)%
Construction segment
 
1,802

 
896

 
906

 
101.1

Total gross profit
 
$
493,447

 
$
498,215

 
$
(4,768
)
 
(1.0
)%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
1,102,639

 
$
1,108,691

 
$
(6,052
)
 
(0.5
)%
Construction segment
 
3,882

 
1,614

 
2,268

 
140.5

Total gross profit
 
$
1,106,521

 
$
1,110,305

 
$
(3,784
)
 
(0.3
)%
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Gross profit as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
33.5
%
 
34.0
%
 
36.9
%
 
37.0
%
Construction segment
 
3.9

 
6.7

 
3.8

 
6.3

Total gross profit as a percentage of net sales
 
32.6

 
33.8

 
35.8

 
36.7

 
Gross profit as a percentage of net sales declined 119 basis points and 85 basis points of sales during the three and six months ended August 1, 2015 compared to the three and six months ended August 2, 2014.

Gross profit from retail operations declined 54 basis points of sales during the three month comparable periods primarily from increased markdowns. Gross margin declined moderately in ladies' accessories and lingerie and declined slightly in shoes and juniors' and children's apparel. Gross margin was essentially flat in cosmetics, ladies' apparel and men's apparel and accessories. Gross margin improved slightly in home and furniture.


18

Gross profit from retail operations declined 2 basis points of sales during the six month comparable periods. Gross margin in ladies' accessories and lingerie declined moderately. Gross margin was essentially flat in cosmetics, juniors’ and children’s apparel, shoes and ladies' apparel. Gross margin improved slightly in men’s apparel and accessories and home and furniture.

Gross profit from the construction segment improved $0.9 million and $2.3 million during the three and six months ended August 1, 2015, respectively, due to increased sales over the comparable prior year three and six month periods.

Inventory increased 3% in both total and comparable stores as of August 1, 2015 compared to August 2, 2014.  A 1% change in the dollar amount of markdowns would have impacted net income by approximately $3 million and $5 million for the three and six months ended August 1, 2015.

Selling, General and Administrative Expenses (“SG&A”)
 
(in thousands of dollars)
 
August 1, 2015
 
August 2, 2014
 
$ Change
 
% Change
SG&A:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
403,007

 
$
398,968

 
$
4,039

 
1.0
 %
Construction segment
 
1,271

 
1,491

 
(220
)
 
(14.8
)
Total SG&A
 
$
404,278

 
$
400,459

 
$
3,819

 
1.0
 %
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
805,260

 
$
791,176

 
$
14,084

 
1.8
 %
Construction segment
 
2,578

 
2,934

 
(356
)
 
(12.1
)
Total SG&A
 
$
807,838

 
$
794,110

 
$
13,728

 
1.7
 %
 
 
Three Months Ended
 
Six Months Ended
 
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
SG&A as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
27.5
%
 
27.3
%
 
27.0
%
 
26.4
%
Construction segment
 
2.8

 
11.2

 
2.5

 
11.5

Total SG&A as a percentage of net sales
 
26.7

 
27.2

 
26.2

 
26.2

 
SG&A decreased 45 basis points of sales during the three months ended August 1, 2015 compared to the three months ended August 2, 2014 while total SG&A dollars increased $3.8 million. SG&A from retail operations increased $4.0 million or 15 basis points of sales during the three months ended August 1, 2015 compared to the three months ended August 2, 2014. This increase was primarily due to an increase in payroll and payroll taxes ($4.7 million) and insurance expense ($2.0 million) partially offset by a decrease in advertising expense ($1.6 million).

SG&A decreased 7 basis points of sales during the six months ended August 1, 2015 compared to the six months ended August 2, 2014 while total SG&A dollars increased $13.7 million.  SG&A from retail operations increased $14.1 million or 60 basis points of sales during the six months ended August 1, 2015 compared to the six months ended August 2, 2014. This increase was primarily due to an increase in payroll and payroll taxes ($13.9 million) and services purchased expense ($4.4 million) partially offset by decreased advertising expense ($2.8 million).




19

Depreciation and Amortization
 
(in thousands of dollars)
 
August 1, 2015
 
August 2, 2014
 
$ Change
 
% Change
Depreciation and amortization:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
60,415

 
$
61,983

 
$
(1,568
)
 
(2.5
)%
Construction segment
 
85

 
75

 
10

 
13.3

Total depreciation and amortization
 
$
60,500

 
$
62,058

 
$
(1,558
)
 
(2.5
)%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
121,477

 
$
123,868

 
$
(2,391
)
 
(1.9
)%
Construction segment
 
176

 
149

 
27

 
18.1

Total depreciation and amortization
 
$
121,653

 
$
124,017

 
$
(2,364
)
 
(1.9
)%
 
The decrease in depreciation and amortization expense for the three and six months ended August 1, 2015 compared to the three and six months ended August 2, 2014 was primarily due to the timing and composition of capital expenditures.

 Interest and Debt Expense, Net
 
(in thousands of dollars)
 
August 1, 2015
 
August 2, 2014
 
$ Change
 
% Change
Interest and debt expense (income), net:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
14,780

 
$
15,212

 
$
(432
)
 
(2.8
)%
Construction segment
 
(15
)
 
(9
)
 
(6
)
 
(66.7
)
Total interest and debt expense, net
 
$
14,765

 
$
15,203

 
$
(438
)
 
(2.9
)%
 
 
 
 
 
 
 
 
 
Six months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
30,020

 
$
31,066

 
$
(1,046
)
 
(3.4
)%
Construction segment
 
(28
)
 
(22
)
 
(6
)
 
(27.3
)
Total interest and debt expense, net
 
$
29,992

 
$
31,044

 
$
(1,052
)
 
(3.4
)%
 
The decrease in net interest and debt expense for the three months ended August 1, 2015 compared to the three months ended August 2, 2014 was primarily attributable to an increase in capitalized interest. The decrease in net interest and debt expense for the six months ended August 1, 2015 compared to the six months ended August 2, 2014 was primarily attributable to an increase in capitalized interest and interest income. Total weighted average debt increased approximately $6.4 million and $3.2 million for the three and six months ended August 1, 2015 compared to the three and six months ended August 2, 2014, respectively.

Income Taxes
 
The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 34.3% and 35.4% for the three months ended August 1, 2015 and August 2, 2014, respectively.  During the three months ended August 1, 2015, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes, which included benefits for legislatively-enacted state income tax rate reductions. During the three months ended August 2, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 34.6% and 35.3% for the six months ended August 1, 2015 and August 2, 2014, respectively.  During the six months ended August 1, 2015 and August 2, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.


20

The Company expects the fiscal 2015 federal and state effective income tax rate to approximate 35%.  This rate may change if results of operations for fiscal 2015 differ from management’s current expectations.  Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

21

FINANCIAL CONDITION
 
A summary of net cash flows for the six months ended August 1, 2015 and August 2, 2014 follows: 
 
 
Six Months Ended
 
 
(in thousands of dollars)
 
August 1, 2015
 
August 2, 2014
 
$ Change
Operating Activities
 
$
61,974

 
$
133,836

 
$
(71,862
)
Investing Activities
 
(79,452
)
 
(64,090
)
 
(15,362
)
Financing Activities
 
(211,137
)
 
(71,549
)
 
(139,588
)
Total Cash Provided
 
$
(228,615
)
 
$
(1,803
)
 
$
(226,812
)
 
Net cash flows from operations decreased $71.9 million during the six months ended August 1, 2015 compared to the six months ended August 2, 2014.  This decline was primarily attributable to a decrease of $63.5 million related to changes in working capital items, primarily due to increases in inventories and decreases in income taxes payable.
 
Synchrony Financial ("Synchrony") owned and managed Dillard’s private label credit cards under the Synchrony Alliance that expired in November 2014. Following that scheduled expiration, Wells Fargo Bank, N.A. ("Wells Fargo") purchased the Dillard's private label card portfolio from Synchrony and began managing Dillard's private label cards under a new 10-year agreement ("Wells Fargo Alliance"). Under the Wells Fargo Alliance, Wells Fargo establishes and owns private label card accounts for our customers, retains the benefits and risks associated with the ownership of the accounts, provides key customer service functions, including new account openings, transaction authorization, billing adjustments and customer inquiries, receives the finance charge income and incurs the bad debts associated with those accounts.

Pursuant to the Wells Fargo Alliance, we receive on-going cash compensation from Wells Fargo based upon the portfolio's earnings. The compensation earned on the portfolio is determined monthly and has no recourse provisions. The amount the Company receives is dependent on the level of sales on Wells Fargo accounts, the level of balances carried on Wells Fargo accounts by Wells Fargo customers, payment rates on Wells Fargo accounts, finance charge rates and other fees on Wells Fargo accounts, the level of credit losses for the Wells Fargo accounts as well as Wells Fargo's ability to extend credit to our customers. We participate in the marketing of the private label cards, which includes the cost of customer reward programs. We accept payments on the private label cards in our stores as a convenience to customers who prefer to pay in person rather than by paying online or mailing their payments to Wells Fargo. The Wells Fargo Alliance expires in fiscal 2024.

The Company received income of approximately $50.7 million and $55.7 million from the Wells Fargo Alliance and former Synchrony Alliance during the six months ended August 1, 2015 and August 2, 2014, respectively. 
 
Capital expenditures were $87.0 million and $68.8 million for the six months ended August 1, 2015 and August 2, 2014, respectively.  The current year expenditures were primarily for the construction of new stores and the remodeling of existing stores.  Capital expenditures for fiscal 2015 are expected to be approximately $160 million compared to actual expenditures of $152 million during fiscal 2014.

The Company opened its new 200,000 square foot location at Fashion Place in Murray, Utah on August 8, 2015. The store replaces a 190,000 square foot location at the same center. Construction continues on the following new locations:  
Center
City
Square Feet

 
Projected 2015 Opening
Fremaux Town Center
Slidell, Louisiana
126,000

*
October
Liberty Center
Cincinnati, Ohio
155,000

 
October
* replacement store
No stores were closed during the six months ended August 1, 2015; however, we remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.

The cash proceeds from the prior year sale of a store location were originally held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts were administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash was restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows. During the six months ended August 1, 2015, payments of $7.3 million were made from restricted cash for like-kind property.

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The Company had cash on hand of $175.1 million as of August 1, 2015.  In May 2015, as part of our overall liquidity management strategy and for peak working capital requirements, the Company entered into a new $1.0 billion senior unsecured revolving credit facility, replacing the secured credit facility. The new credit agreement matures on May 13, 2020 and is available to the Company for working capital needs and general corporate purposes. To be in compliance with the financial covenants of the credit agreement, the Company's total leverage ratio cannot exceed 4.0 to 1.0 and the coverage ratio cannot be less than 2.5 to 1.0.

At August 1, 2015, no borrowings were outstanding, and letters of credit totaling $28.0 million were issued under the credit agreement. 

During the six months ended August 1, 2015, the Company repurchased 1.8 million shares of Class A Common Stock at an average price of $112.83 per share for $208.0 million (including the accrual of $5.0 million of share repurchases that had not settled as of August 1, 2015).  During the six months ended August 2, 2014, the Company repurchased 0.7 million shares of stock for $65.9 million at an average price of $89.34 per share under the Company's stock plans.  At August 1, 2015, $292.1 million of authorization remained under the Company's November 2014 Stock Plan.  The ultimate disposition of the repurchased stock has not been determined.

During fiscal 2015, the Company expects to finance its capital expenditures and its working capital requirements, including stock repurchases, from cash on hand, cash flows generated from operations and utilization of the credit facility. Depending on conditions in the capital markets and other factors, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.
 
There have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7,  Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
 
OFF-BALANCE-SHEET ARRANGEMENTS
 
The Company has not created, and is not party to, any special-purpose entities or off-balance-sheet arrangements for the purpose of raising capital, incurring debt or operating the Company’s business.  The Company does not have any off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources.
 
NEW ACCOUNTING STANDARDS
 
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 12 to the accompanying financial statements.
 
FORWARD-LOOKING INFORMATION
 
This report contains certain forward-looking statements.  The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995:  (a) statements including words such as “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company’s future occurrences, plans and objectives, including statements regarding management’s expectations and forecasts for the remainder of fiscal 2015 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements concerning capital expenditures and sources of liquidity, statements concerning pension contributions and statements concerning estimated taxes. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance.  The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions.   Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company’s stores are located and the effect of these factors on the buying patterns of the Company’s customers, including the effect of changes in

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prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company’s future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature.   The Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended January 31, 2015, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
There have been no material changes in the information set forth under caption “Item 7A-Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
 
Item 4.  Controls and Procedures
 
The Company has established and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  The Company’s management, with the participation of our Principal Executive Officer and Co-Principal Financial Officers, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the fiscal quarter covered by this quarterly report, and based on that evaluation, the Company’s Principal Executive Officer and Co-Principal Financial Officers have concluded that these disclosure controls and procedures were effective.
 
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended August 1, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
From time to time, the Company is involved in litigation relating to claims arising out of the Company’s operations in the normal course of business.  This may include litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities.  As of September 3, 2015, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.
 
Item 1A.  Risk Factors
 
There have been no material changes in the information set forth under caption “Item 1A-Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities

On July 1, 2015, the Company issued 528 shares of Class A Common Stock in exchange for 528 shares of Class B Common Stock tendered for conversion pursuant to the Certificate of Incorporation.  The transaction was exempt from registration under Section 3(a)(9) of the Securities Act of 1933. 

(b) Purchases of Equity Securities
Issuer Purchases of Equity Securities
Period
 
(a) Total Number of Shares Purchased

 
(b) Average Price Paid per Share

 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

May 3, 2015 through May 30, 2015
 
858,467

 
$
116.30

 
858,467

 
$
400,156,831

May 31, 2015 through July 4, 2015
 
707,621

 
112.29

 
707,621

 
320,701,250

July 5, 2015 through August 1, 2015
 
276,959

 
103.43

 
276,959

 
292,055,451

Total
 
1,843,047

 
$
112.83

 
1,843,047

 
$
292,055,451


In November 2014, the Company’s Board of Directors authorized the repurchase of up to $500 million of the Company’s Class A Common Stock under an open-ended stock plan.  This authorization permits the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 or through privately negotiated transactions. The authorization has no expiration date.
During the three months ended August 1, 2015, the Company repurchased 1.8 million shares totaling $208 million. Reference is made to the discussion in Note 7, Stock Repurchase Programs, in the “Notes to Condensed Consolidated Financial Statements” in Part I of this Quarterly Report on Form 10-Q, which information is incorporated by reference herein.

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Item 6.  Exhibits
 
Number
 
Description
 
 
 
10 *
 
Five-Year Credit Agreement between Dillard's, Inc., Dillard Store Services, Inc. and JPMorgan Chase Bank, N.A. as agent for a syndicate of lenders (Exhibit 10.1 to Form 8-K filed on May 15, 2015, File No. 1-6140).
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Co-Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.3
 
Certification of Co-Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
32.2
 
Certification of Co-Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
32.3
 
Certification of Co-Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
* Incorporated by reference as indicated

 

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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:
September 3, 2015
 
/s/ Chris B. Johnson
 
 
 
Chris B. Johnson
 
 
 
Senior Vice President and Co-Principal Financial Officer
 
 
 
 
 
 
 
/s/ Phillip R. Watts
 
 
 
Phillip R. Watts
 
 
 
Senior Vice President, Co-Principal Financial Officer and Principal Accounting Officer


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