EX-13 3 anlrpt1.txt 2000 ANNUAL REPORT TO SHAREOWNERS Exhibit 13 Management's Discussion and Analysis Our 26th consecutive year of increased sales and earnings per share is a record few companies in retailing can match. A solid fourth quarter performance resulted in record earnings per share of $2.62 in 2000, compared with last year's $2.60. Our three-year earnings per share compound growth rate is 8.2%. Net earnings totaled $858 million versus $927 million last year. Our return on equity of 21.0% and our return on net assets of 19.5% continue to be among the best in retailing. Sales were $14.5 billion, an increase of 4.3% over 1999 sales of $13.9 billion. The increase reflects a 0.5% rise in store-for-store sales, 2000 store openings, the full-year impact of 1999 store openings, and the sales from David's Bridal. In 2000 we opened 23 department stores, including 13 former ZCMI stores located in Utah and Idaho, adding 3.3 million square feet of retail space: Lord & Taylor: 4 stores Pittsburgh (Downtown) Pittsburgh, PA Flatiron Crossing Denver, CO Moorestown Mall Moorestown, NJ Providence Place Providence, RI Foley's: 4 stores Flatiron Crossing Denver, CO NorthPark Center Dallas, TX Stonebriar Center Frisco, TX South Park Mall San Antonio, TX Kaufmann's: 1 store Oakdale Mall Johnson City, NY Famous-Barr: 1 store Merle Hay Mall Des Moines, IA Meier & Frank: 13 stores Cottonwood Mall Salt Lake City, UT Fashion Place Salt Lake City, UT Foothill Village Salt Lake City, UT Layton Hills Mall Salt Lake City, UT Ogden City Mall Salt Lake City, UT South Towne Center Salt Lake City, UT Valley Fair Mall Salt Lake City, UT ZCMI Center Salt Lake City, UT Cache Valley Mall Logan, UT Red Cliffs Mall St. George, UT University Mall Orem, UT Grand Teton Mall Idaho Falls, ID Pine Ridge Mall Pocatello, ID We remodeled 20 department stores in 2000 totaling 1.6 million square feet, including the expansion of nine stores by 259,000 square feet. At fiscal year-end we operated 427 department stores in 37 states and the District of Columbia. David's Bridal, the largest retailer of bridal apparel in the United States, joined May in August 2000. At fiscal year-end, David's Bridal operated 123 stores in 36 states and Puerto Rico. We plan to open 22 new department stores in 2001 totaling 4.1 million square feet, including eight stores purchased from Saks Incorporated. We also plan to remodel 32 department stores totaling 2.0 million square feet of retail space, which includes the expansion of 20 stores by a total of 743,000 square feet. David's Bridal plans to add 28 new stores in 2001 totaling 308,000 square feet of retail space. In addition, we have agreed to purchase 13 former Wards stores. Seven are planned as new stores and the remainder will provide expansion in existing malls. We plan to reopen most of the locations in 2002. The new-store plan for 2001 through 2005 would add 89 new department stores and 148 David's Bridal stores totaling 17 million retail square feet, a 5% annualized increase. During this five-year period, the major components of our $4.3 billion capital plan include plans to invest $2.0 billion for new stores, $1.1 billion to expand and remodel existing stores, and $380 million related to systems and operations improvements. Common stock repurchase programs authorized by our board of directors since 1996 totaled more than $2.5 billion: As Repurchased (in millions, except per share) Average Price Authorized $ Shares per Share 2000 $ 650 $789 28.4 $28 1999 500 361 9.9 36 1998 500 500 12.5 40 1997 300 300 9.6 31 1996 600 600 19.1 31 Total $2,550 $2,550 79.5 $32 Review of Operations Earnings per share was $2.62 in 2000, compared with $2.60 in 1999 and $2.30 in 1998. Net earnings totaled $858 million in 2000, compared with $927 million in 1999 and $849 million in 1998. The decline in net earnings is due to lower operating earnings during the first three quarters of 2000, including a $63 million charge to clear excess spring and summer merchandise, and increased interest expense related to the 1999 and 2000 common stock repurchase programs. The 2000, 1999, and 1998 earnings per share growth rates were 0.8%, 13.0%, and 11.1%, respectively. Return on revenues was 5.9% in 2000, compared with 6.7% in 1999 and 6.5% in 1998. Results for the past three years and the related percent of revenues were:
2000 1999 1998 (dollars in millions, except per share) $ % $ % $ % Net retail sales $14,454 $13,854 $13,031 Revenues $14,511 100.0% $13,866 100.0% $13,090 100.0% Cost of sales 9,929 68.4 9,370 67.6 8,901 68.0 Selling, general, and administrative 2,835 19.5 2,686 19.4 2,516 19.2 Interest expense, net 345 2.4 287 2.0 278 2.1 Earnings before income taxes 1,402 9.7 1,523 11.0 1,395 10.7 Provision for income taxes (1) 544 38.8 596 39.1 546 39.1 Net earnings $ 858 5.9% $ 927 6.7% $ 849 6.5% Earnings per share (2) $2.62 0.8% $ 2.60 13.0% $ 2.30 11.1% (1) Percent of revenues columns represent effective income tax rates. (2) Percent of revenues columns represent earnings per share growth rates.
Fiscal 2000 included 53 weeks. The additional week did not materially affect 2000 earnings. All net retail sales information is presented on a 52-week basis for comparability. References to earnings per share are to diluted earnings per share. The following table shows earnings before interest and taxes excluding the LIFO (last-in, first-out) credit of $29 million in 2000, $30 million in 1999, and $28 million in 1998: (dollars in millions) 2000 1999 1998 Operating earnings $1,718 $1,780 $1,645 Percent of revenues 11.8% 12.8% 12.6% Our 427 quality department stores are operated by eight regional department store companies across the United States under 11 long-standing and widely recognized trade names. Each department store company holds a leading market position in its region. David's Bridal operates 123 stores and is the nation's largest retailer of bridal gowns and bridal-related merchandise. The table below summarizes net retail sales, sales per square foot, gross retail square footage, and the number of stores for each department store company and David's Bridal: Net Retail Sales in Millions of Dollars (1) Store Company: Headquarters 2000 1999 Lord & Taylor: New York City $ 2,181 $2,129 Hecht's, Strawbridge's: Washington, D.C. 2,502 2,442 Foley's: Houston 2,206 2,174 Robinsons-May: Los Angeles 2,171 2,057 Filene's: Boston 1,790 1,703 Kaufmann's: Pittsburgh 1,600 1,597 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 1,319 1,348 Meier & Frank: Portland, Ore. 581 404 Total Department Stores $14,350 $13,854 David's Bridal: Philadelphia (2) 248 192 The May Department Stores Company (3) $14,454 $13,854 Sales per Square Foot (1) Store Company: Headquarters 2000 1999 Lord & Taylor: New York City $214 $222 Hecht's, Strawbridge's: Washington, D.C. 203 203 Foley's: Houston 201 203 Robinsons-May: Los Angeles 217 210 Filene's: Boston 253 253 Kaufmann's: Pittsburgh 191 196 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 174 189 Meier & Frank: Portland, Ore. 170 233 Total Department Stores $205 $210 David's Bridal: Philadelphia (2) 205 207 The May Department Stores Company (3) $205 $210 Gross Retail Square Footage in Thousands Store Company: Headquarters 2000 1999 Lord & Taylor: New York City 10,601 10,070 Hecht's, Strawbridge's: Washington, D.C. 12,583 12,668 Foley's: Houston 11,572 10,975 Robinsons-May: Los Angeles 10,210 10,198 Filene's: Boston 7,222 7,212 Kaufmann's: Pittsburgh 8,721 8,513 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 7,630 7,655 Meier & Frank: Portland, Ore. 3,487 1,769 Total Department Stores 72,026 69,060 David's Bridal: Philadelphia (2) 1,322 1,061 The May Department Stores Company (3) 73,348 69,060 Number of Stores Store Company: Headquarters 2000 New Closed 1999 Lord & Taylor: New York City 82 4 - 78 Hecht's, Strawbridge's: Washington, D.C. 73 - 1 74 Foley's: Houston 60 4 1 57 Robinsons-May: Los Angeles 55 - - 55 Filene's: Boston 44 - - 44 Kaufmann's: Pittsburgh 51 1 - 50 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 42 1 1 42 Meier & Frank: Portland, Ore. 20 13 1 8 Total Department Stores 427 23 4 408 David's Bridal: Philadelphia (2) 123 23 - 100 The May Department Stores Company (3) 550 146 4 408 (1) Fiscal 2000 net retail sales and sales per square foot are shown on a 52-week basis for comparability. (2) David's Bridal shown on a full-year basis. (3) Results of David's Bridal included since August 2000. All David's Bridal stores included as new. Net retail sales exclude the sales of stores that have been closed and not replaced and include lease department sales. Sales per square foot are calculated from net retail sales plus finance charge revenues and average gross retail square footage. Gross retail square footage represents square footage of stores open at the end of the period presented.
(in millions) 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Net retail sales $14,454 $13,854 $13,031 $12,248 $11,446 $10,327 $9,622 $8,884 $8,270 $7,723 $7,349
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Earnings per share $2.62 $2.60 $2.30 $2.07 $1.87 $1.75 $1.62 $1.43 $1.18 $1.02 $1.01
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Sales per square foot $205 $210 $209 $204 $201 $201 $200 $191 $179 $171 $172
(in millions) 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Cash flows $1,369 $1,396 $1,288 $1,191 $1,123 $1,033 $947 $859 $755 $677 $657 Depreciation and amortization $ 511 $ 469 $ 439 $ 412 $ 374 $ 333 $297 $281 $283 $273 $253 Net earnings $ 858 $ 927 $ 849 $ 779 $ 749 $ 700 $650 $578 $472 $404 $404
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Return on equity 21.0% 24.1% 22.2% 21.2% 19.4% 20.8% 21.3% 22.1% 21.5% 20.7% 21.8%
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Return on net assets 19.5% 20.7% 19.8% 18.5% 18.8% 20.1% 20.1% 19.0% 15.4% 14.5% 15.8%
(per common share) 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Dividend rate at year-end $0.93 $0.89 $0.85 $0.80 $0.77 $0.76 $0.69 $0.61 $0.55 $0.54 $0.53
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Common stock closing price and price range Low price $19.19 $29.19 $33.17 $29.08 $27.00 $22.33 $21.50 $22.29 $17.33 $15.08 $12.46 High price $39.50 $45.38 $47.25 $38.08 $34.83 $30.83 $30.08 $31.00 $24.83 $20.13 $19.71 Closing price $37.30 $31.25 $40.25 $35.04 $29.67 $29.25 $23.42 $26.50 $23.46 $18.29 $15.17
Net Retail Sales Net retail sales (sales) exclude the sales of stores that have been closed and not replaced and include lease department sales. 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, but are not included in store-for-store sales. Sales increases (decreases) for 2000 and 1999 were: 2000 1999 Store-for- Store-for- Quarter Total Store Total Store First 3.5% 0.0% 8.1% 3.5% Second 2.6 (0.6) 9.2 4.7 Third 5.0 (0.1) 5.4 1.1 Fourth 5.5 1.8 4.0 1.6 Year 4.3% 0.5% 6.3% 2.6% The total sales increase for 2000 reflects a 0.5% rise in store-for-store sales, the opening of 19 net new department stores in 2000, the full-year impact of 1999 store openings, and the sales from David's Bridal. The total sales increase for 1999 includes a 2.6% store-for-store sales increase, the opening of 15 net new stores, and the full-year impact of 1998 store openings. Revenues Revenues (see page 26 for definition) include finance charge revenues of $301 million, $304 million, and $298 million in 2000, 1999, and 1998, respectively. Cost of Sales Cost of sales includes cost of merchandise sold and buying and occupancy costs. The impact of LIFO on cost of sales and the related percent of revenues were: 2000 1999 1998 (dollars in millions) $ % $ % $ % Cost of sales $9,929 68.4% $9,370 67.6% $8,901 68.0% LIFO credit 29 0.2 30 0.2 28 0.2 Cost of sales before LIFO credit $9,958 68.6% 9,400 67.8% $8,929 68.2% Before the LIFO credit, cost of sales as a percent of revenues increased in 2000 compared with 1999 due to a higher level of markdowns, including a $63 million charge to clear excess spring and summer merchandise, which increased cost of sales as a percent of revenues by 0.5% in 2000. The remaining increase in cost of sales as a percent of revenues was in buying and occupancy costs. Before the LIFO credit, cost of sales as a percent of revenues decreased in 1999 compared with 1998 due to the elimination of the consumer electronics business. Selling, General, and Administrative Expenses Selling, general, and administrative expenses and the related percent of revenues were: 2000 1999 1998 (dollars in millions) $ % $ % $ % Selling, general, and administrative $2,835 19.5% $2,686 19.4% $2,516 19.2% As a percent of revenues, selling, general, and administrative expenses increased from 19.4% in 1999 to 19.5% in 2000 as a result of an increase in payroll expense partially offset by lower retirement and other employee benefit expenses. As a percent of revenues, selling, general, and administrative expenses increased from 19.2% in 1998 to 19.4% in 1999 as a result of increases in advertising and sales promotion, payroll, retirement, and profit sharing expenses. Selling, general, and administrative expenses included advertising and sales promotion costs of $572 million, $540 million, and $500 million in 2000, 1999, and 1998, respectively. As a percent of revenues, advertising and sales promotion costs were 3.9% in 2000 and 1999 and 3.8% in 1998. Interest Expense Interest expense components were: (dollars in millions) 2000 1999 1998 Interest expense $373 $315 $311 Interest income (11) (12) (19) Capitalized interest (17) (16) (14) Interest expense, net $345 $287 $278 Percent of revenues 2.4% 2.0% 2.1% Interest expense principally relates to long-term debt. Seasonal working capital requirements were met through commercial paper borrowings. In 2000, we issued $1.1 billion in new debt. We did not issue any long-term debt in 1999. In 1998, we issued $350 million in new debt. Income Taxes The effective income tax rate for 2000 was 38.8%,compared with 39.1% in 1999 and 1998, as a result of implementing corporate structure changes which have a favorable impact on our effective tax rate. Impact of Inflation Inflation did not have a material impact on our 2000 sales and earnings growth. We value inventory principally on a LIFO basis, and as a result the current cost of merchandise is reflected in current operating results. Review of Financial Condition We continue to meet our objective of generating top quartile shareowner returns in the retail industry while maintaining access to capital at reasonable costs. Return on Equity Return on equity is our principal measure for evaluating our performance for shareowners and our ability to invest shareowners' funds profitably. Our objective is performance that places our return on equity in the top quartile of the retail industry. Return on beginning equity was 21.0% in 2000, compared with 24.1% in 1999 and 22.2% in 1998. Return on Net Assets Return on net assets measures performance independent of capital structure. Return on net assets is pretax earnings before net interest expense and the interest component of operating leases, divided by beginning-of-year net assets(including present value of operating leases). Return on net assets was 19.5% in 2000, compared with 20.7% in 1999 and 19.8% in 1998. Cash Flows Cash flows from operations (net earnings plus depreciation and amortization) was $1.4 billion, or 9.4% of revenues in 2000. This compares with 10.1% in 1999 and 9.8% in 1998. Our cash flows as a percent of revenues continues to be one of the highest in the retail industry and provides us with significant resources to enhance shareowners' value. Sources (uses) of cash flows were: (dollars in millions) 2000 1999 1998 Net earnings plus depreciation and amortization $1,369 $1,396 $1,288 Working capital (increases) decreases (71) 14 158 Other operating activities 48 120 59 Net capital expenditures (550) (678) (586) Business combinations (420) (40) (302) Net long-term debt issuances (repayments) 835 (135) 129 Net purchases of common stock (1) (792) (434) (525) Dividend payments (304) (314) (308) Increase (decrease) in cash and cash equivalents $ 115 $ (71) $ (87) (1)Includes common stock repurchase programs authorized by our board of directors as described on page 18. See "Consolidated Statement of Cash Flows" on page 24. Capital Expenditures Capital expenditures are primarily related to new stores, remodels and expansions. Our strong financial condition enables us to make capital expenditures to enhance growth and improve operations. The operating measures we emphasize when we invest in new stores and remodel or expand existing stores include return on net assets, internal rate of return, and sales per square foot. Business Combinations In August 2000, David's Bridal, Inc. joined May. The cost of this transaction was approximately $420 million. In December 1999, we completed the merger of Zions Co-operative Mercantile Institution (ZCMI) stores. We issued 1.6 million shares of May common stock valued at $50 million to ZCMI shareholders and assumed $73 million of debt, of which $40 million was repaid at closing. In September 1998, we purchased 11 former Mercantile stores for approximately $302 million including merchandise inventories. These business combinations have been accounted for as purchases and did not have a material effect on our results of operations or financial position. In January 2001, we announced that we will purchase nine department store locations from Saks Incorporated. The cash purchase price includes approximately $237 million for the stores and approximately $72 million for merchandise inventories and accounts receivable. The transaction is expected to close in the first quarter of 2001. This transaction will be accounted for as a purchase and will not have a material effect on our financial statements. Available Credit and Debt Ratings We can borrow up to $878 million 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. Our bonds are rated A1 by Moody's Investors Service, Inc. and A+ by Standard & Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poor's. Our senior unsecured bank credit agreement is rated A1 by Moody's. Financial Ratios Our debt-to-capitalization and fixed-charge coverage ratios are consistent with our capital structure objective. Our capital structure provides us with substantial financial and operational flexibility. The debt-to-capitalization ratios were 50%, 44%, and 45% for 2000, 1999, and 1998, respectively. The ratio increased in 2000 due to current year long-term borrowings of $1.1 billion and the repurchase of $789 million of our common stock. For purposes of the debt-to-capitalization ratio, we define total debt as short-term and long-term debt (including the Employee Stock Ownership Plan [ESOP] debt reduced by unearned compensation) and the capitalized value of all leases, including operating leases. We define capitalization as total debt, noncurrent deferred taxes, ESOP preference shares, and shareowners' equity. See "Profit Sharing" on page 27 for discussion of the ESOP. The fixed-charge coverage ratios were 4.0x in 2000, 4.8x in 1999, and 4.5x in 1998. The ratio declined in 2000 due to higher interest expense related to the new debt issuances and lower operating earnings as previously discussed in "Review of Operations,"compared with 1999. We define fixed charges as gross interest expense, interest expense on the ESOP debt, total rent expense, and the pretax equivalent of dividends on redeemable preferred stock. Common Stock Dividends and Market Prices Our dividend policy is based on earnings growth and capital investment requirements. We increased the annual dividend by 1 cent to 94 cents per share effective with the March 2001 dividend. This is our 26th consecutive annual dividend increase. We have paid consecutive quarterly dividends since 1911. The quarterly price ranges of the common stock and dividends per share in 2000 and 1999 were: 2000 1999 Market Price Dividends Market Price Dividends Quarter High Low per Share High Low per Share First $32.13 $23.75 $0.2325 $42.19 $36.00 $0.2225 Second 31.13 23.25 0.2325 45.38 38.13 0.2225 Third 25.50 19.19 0.2325 41.56 32.50 0.2225 Fourth 39.50 22.94 0.2325 34.63 29.19 0.2225 Year $39.50 $19.19 $0.9300 $45.38 $29.19 $0.8900 The approximate number of common shareowners as of March 1, 2001, was 43,000. 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. CONSOLIDATED STATEMENT OF EARNINGS (dollars in millions, except per share) 2000 1999 1998 Net retail sales $14,454 $13,854 $13,031 Revenues $14,511 $13,866 $13,090 Cost of sales 9,929 9,370 8,901 Selling, general, and administrative expenses 2,835 2,686 2,516 Interest expense, net 345 287 278 Earnings before income taxes 1,402 1,523 1,395 Provision for income taxes 544 596 546 Net earnings $ 858 $ 927 $ 849 Basic earnings per share $ 2.74 $ 2.73 $ 2.43 Diluted earnings per share $ 2.62 $ 2.60 $ 2.30 Fiscal 2000 was a 53-week year. Net retail sales for fiscal 2000 are shown on a 52-week basis for comparability. Net retail sales for the 53 weeks ended February 3, 2001, were $14,593. See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEET February 3, January 29, (dollars in millions, except per share) 2001 2000 Assets Current assets: Cash $ 17 $ 16 Cash equivalents 139 25 Accounts receivable, net of allowance for uncollectible accounts of $76 and $76 2,081 2,173 Merchandise inventories, net of LIFO reserve of $6 and $35 2,938 2,817 Other current assets 95 84 Total current assets 5,270 5,115 Property and equipment: Land 329 326 Buildings and improvements 4,090 3,863 Furniture, fixtures, and equipment 3,689 3,543 Property under capital leases 59 65 Total property and equipment 8,167 7,797 Accumulated depreciation (3,268) (3,028) Property and equipment, net 4,899 4,769 Goodwill, net of accumulated amortization of $263 and $228 1,312 981 Other assets 93 70 Total assets $11,574 $10,935 Liabilities and shareowners' equity Current liabilities: Current maturities of long-term debt $ 85 $ 259 Accounts payable 965 1,030 Accrued expenses 871 892 Income taxes payable 293 234 Total current liabilities 2,214 2,415 Long-term debt 4,534 3,560 Deferred income taxes 586 540 Other liabilities 335 314 ESOP preference shares 299 315 Unearned compensation (249) (286) Shareowners' equity: Common stock 149 163 Additional paid-in capital - - Retained earnings 3,706 3,914 Total shareowners' equity 3,855 4,077 Total liabilities and shareowners' equity $11,574 $10,935 Common stock has a par value of $0.50 per share; 1 billion shares are authorized and 470.5 million shares were issued. At February 3, 2001, 298.2 million shares were outstanding, and 172.3 million shares were held in treasury. At January 29, 2000, 325.5 million shares were outstanding, and 145.0 million shares were held in treasury. ESOP preference shares have a par value of $0.50 per share and a stated value of $507 per share; 800,000 shares are authorized. At February 3, 2001, 589,962 shares (convertible into 19.9 million shares of common stock) were issued and outstanding. At January 29, 2000, 622,197 shares (convertible into 21.0 million shares of common stock) were issued and outstanding. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in millions) 2000 1999 1998 Operating activities Net earnings $ 858 $ 927 $ 849 Adjustments for noncash items included in earnings: Depreciation and other amortization 476 440 414 Goodwill amortization 35 29 25 Deferred income taxes 59 75 49 Working capital changes: Accounts receivable, net 97 13 20 Merchandise inventories (77) (137) (176) Other current assets (9) (22) 12 Accounts payable (77) 57 176 Accrued expenses (70) 57 89 Income taxes payable 65 46 37 Other assets and liabilities, net (11) 45 10 Total operating activities 1,346 1,530 1,505 Investing activities Capital expenditures (598) (703) (630) Dispositions of property and equipment 48 25 44 Business combinations (420) (40) (302) Total investing activities (970) (718) (888) Financing activities Issuances of long-term debt 1,076 - 350 Repayments of long-term debt (241) (135) (221) Purchases of common stock (828) (468) (589) Issuances of common stock 36 34 64 Dividend payments (304) (314) (308) Total financing activities (261) (883) (704) Increase (decrease) in cash and cash equivalents 115 (71) (87) Cash and cash equivalents, beginning of year 41 112 199 Cash and cash equivalents, end of year $ 156 $ 41 $ 112 Cash paid during the year: Interest expense $ 376 $ 307 $ 297 Income taxes 414 463 411 See "Business Combinations" in Notes to Consolidated Financial Statements for a description of noncash transactions. See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY Outstanding Additional Total Common Stock Paid-in Retained Shareowners' (dollars in millions, shares in thousands) Shares Dollars Capital Earnings Equity Balance at January 31, 1998 346,512 $ 173 $ - $ 3,636 $3,809 Net earnings - - - 849 849 Dividends paid: Common stock ($0.84 2/3 per share) - - - (290) (290) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 3,141 1 74 - 75 Common stock purchased (14,989) (7) (74) (508) (589) Balance at January 30, 1999 334,664 167 - 3,669 3,836 Net earnings - - - 927 927 Dividends paid: Common stock ($0.89 per share) - - - (295) (295) ESOP preference shares, net of tax benefit - - - (19) (19) Common stock issued 3,678 2 94 - 96 Common stock purchased (12,877) (6) (94) (368) (468) Balance at January 29, 2000 325,465 163 - 3,914 4,077 Net earnings - - - 858 858 Dividends paid: Common stock ($0.93 per share) - - - (286) (286) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 2,350 1 51 - 52 Common stock purchased (29,645) (15) (51) (762) (828) Balance at February 3, 2001 298,170 $149 $ - $3,706 $3,855
Treasury Shares (shares in thousands) 2000 1999 1998 Balance, beginning of year 144,990 135,791 123,943 Common stock issued: Exercise of stock options (569) (673) (1,914) Deferred compensation plan (221) (224) (227) Restricted stock grants, net of forfeitures (158) (372) (306) Conversion of ESOP preference shares (1,089) (781) (694) Contribution to profit sharing plan (313) - - Business combination - (1,628) - (2,350) (3,678) (3,141) Common stock purchased 29,645 12,877 14,989 Balance, end of year 172,285 144,990 135,791 Outstanding common stock excludes shares held in treasury. See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies Fiscal Year The company's fiscal year ends on the Saturday closest to January 31. Fiscal year 2000 ended on February 3, 2001, and included 53 weeks. The additional week did not materially affect 2000 earnings. Fiscal years 1999 and 1998 ended on January 29, 2000, and January 30, 1999, respectively, and included 52 weeks. References to years in this annual report relate to fiscal years or year-ends rather than calendar years. Basis of Reporting The consolidated financial statements include the accounts of The May Department Stores Company, a Delaware corporation, and all wholly owned subsidiaries (May or the company). The company's 427 quality department stores are operated by eight regional department store companies across the United States under 11 long-standing and widely recognized trade names. David's Bridal operates 123 stores and is the nation's largest retailer of bridal gowns and bridal-related merchandise. The company aggregates its eight department store companies and David's Bridal into one reportable segment. Use of Estimates Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates. Net Retail Sales Net retail sales (sales) represent sales of stores operating at the end of the latest period including lease department sales and excluding finance charge revenues and the sales of stores that have been closed and not replaced. Sales are net of returns and exclude sales tax. 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, but are not included in store-for-store sales. Revenues Revenues include sales from all stores operating during the period, finance charge revenues, and lease department income. Revenues are net of estimated merchandise returns. Revenues include finance charge revenues of $301 million, $304 million, and $298 million in 2000, 1999, and 1998, respectively. Cost of Sales Cost of sales includes the cost of merchandise sold and the company's buying and occupancy costs. Advertising Costs Advertising and sales promotion costs are expensed at the time the advertising takes place. These costs were $572 million, $540 million, and $500 million in 2000, 1999, and 1998, respectively. Preopening Expenses Preopening expenses of new stores are expensed as incurred. Income Taxes Income taxes are accounted for by the liability method. The liability method applies statutory tax rates in effect at the date of the balance sheet to differences between the book basis and the tax basis of assets and liabilities. Earnings per Share References to earnings per share relate to diluted earnings per share. Stock-based Compensation The company accounts for stock-based compensation by applying APB Opinion No. 25, as allowed under SFAS No. 123, "Accounting for Stock-based Compensation." Cash Equivalents Cash equivalents consist primarily of commercial paper with maturities of less than three months. Cash equivalents are stated at cost, which approximates fair value. Merchandise Inventories Merchandise inventories are principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. 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 capitalized and amortized over the expected useful life. Capitalized interest was $17 million, $16 million, and $14 million in 2000, 1999, and 1998, respectively. Goodwill Goodwill represents the excess of cost over the fair value of net tangible assets acquired at the dates of acquisition. Substantially all amounts are amortized using the straight-line method over a 40-year period. Long-lived Assets Long-lived assets and certain identifiable intangibles are reviewed to determine whether the net book value is recoverable. Impairment losses resulting from these reviews have not been significant. Financial Derivatives The company uses financial derivatives only to reduce risk in specific business transactions. The company periodically purchases forward contracts on firm commitments to minimize the risk of foreign currency fluctuations. These contracts are not significant. The company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in 2000. This statement did not have a material impact on the company. Reclassifications Certain prior-period amounts have been reclassified to conform with the current-year presentation. Quarterly Results (Unaudited) Quarterly results are determined in accordance with annual accounting policies. They include certain items based upon estimates for the entire year. Summarized quarterly results for the last two years were: (dollars in millions, 2000 except per share) First Second Third (1) Fourth (2) Year Revenues $3,050 $3,131 3,326 $5,004 $14,511 Cost of sales 2,141 2,154 2,397 3,237 9,929 Selling, general, and administrative expenses 638 670 697 830 2,835 Pretax earnings 200 225 141 836 1,402 Net earnings 120 135 85 518 858 Earnings per share: Basic $ 0.36 $ 0.42 $ 0.28 $ 1.68 $ 2.74 Diluted 0.35 0.41 0.27 1.59 2.62 (1) The 2000 third quarter results included a $63 million charge to clear excess spring and summer merchandise. (2) The 2000 fourth quarter included 14 weeks. The additional week increased both cost of sales and selling, general, and administrative expenses as a percent of revenues by 0.2%. (dollars in millions, 1999 except per share) First Second Third Fourth Year Revenues $2,989 $3,067 $3,176 $4,634 $13,866 Cost of sales 2,086 2,098 2,218 2,968 9,370 Selling, general, and administrative expenses 629 640 660 757 2,686 Pretax earnings 203 257 228 835 1,523 Net earnings 122 154 138 513 927 Earnings per share: Basic $ 0.35 $ 0.45 $ 0.40 $ 1.53 $ 2.73 Diluted 0.34 0.43 0.38 1.45 2.60 There are variables and uncertainties in the factors used to estimate the annual LIFO provision (credit) on an interim basis. If the final variables and factors had been known at the beginning of the year, the pro forma earnings (loss) per share impact of LIFO would have been: 2000 1999 Pro As Pro As Quarter Forma Reported Forma Reported First $0.01 $(0.01) $0.01 $(0.01) Second 0.01 (0.01) 0.01 (0.01) Third 0.01 (0.01) 0.01 (0.01) Fourth 0.02 0.08 0.02 0.08 Year $0.05 $ 0.05 $0.05 $ 0.05 Profit Sharing The company has a qualified profit sharing plan that covers most associates who work 1,000 hours or more in a year and have attained age 21. The plan is a defined-contribution program that provides for discretionary matching allocations at a variable matching rate generally based upon changes in the company's annual earnings per share, as defined in the plan. The plan's matching allocation value totaled $52 million for 2000, an effective match rate of 92%. The matching allocation values were $54 million in 1999 and $57 million in 1998. The plan includes an Employee Stock Ownership Plan (ESOP) under which the plan borrowed $400 million in 1989, guaranteed by the company, at an average rate of 8.5%. The proceeds were used to purchase $400 million (788,955 shares) of convertible preference stock of the company (ESOP preference shares). Each share is convertible into 33.787 shares of common stock and has a stated value of $15.01 per common share equivalent. The annual dividend rate on the ESOP preference shares is 7.5%. The $249 million outstanding portion of the guaranteed ESOP debt is reflected on the consolidated balance sheet as long-term debt because the company will fund the required debt service through 2004. The company's contributions to the ESOP and the dividends on the ESOP preference shares are used to repay the loan principal and interest. Interest expense associated with the ESOP debt was $22 million in 2000, $25 million in 1999, and $27 million in 1998. ESOP preference shares' dividends were $23 million in 2000, $24 million in 1999, and $25 million in 1998. The release of ESOP preference shares is based upon debt-service payments. Upon release, the shares are allocated to participating associates' accounts. Unearned compensation, initially an equal offsetting amount to the $400 million guaranteed ESOP debt, has been adjusted for the difference between the expense related to the ESOP and cash payments to the ESOP. It is reduced as principal is repaid. The company's profit sharing expense was $41 million in 2000, $40 million in 1999, and $28 million in 1998. At February 3, 2001, the plan beneficially owned 15.1 million shares of the company's common stock and 100% of the company's ESOP preference shares, representing 11.0% of the company's common stock. Pension and Other Postretirement Benefits The company has a qualified defined-benefit plan that covers most associates who work 1,000 hours or more in a year and have attained age 21. The company also maintains two nonqualified, supplementary defined-benefit plans for certain associates. All plans are noncontributory and provide benefits based upon years of service and pay during employment. Pension expense is based on information provided by an outside actuarial firm that uses assumptions to estimate the total benefits ultimately payable to associates and allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The accumulated benefit obligations (ABO), change in projected benefit obligations (PBO), change in net plan assets, and funded status of the benefit plans were: Qualified Plan Nonqualified Plans (dollars in millions) 2000 1999 2000 1999 Change in PBO (1) PBO at beginning of year $542 $517 $ 129 $ 122 Service cost 31 36 3 3 Interest cost 41 36 10 9 Business combinations - 27 - - Actuarial loss (gain) (2) 52 (74) 12 1 Plan amendments - 68 - - Benefits paid (74) (68) (7) (6) PBO at end of year $592 $542 $ 147 $ 129 ABO at end of year (3) $536 $516 $ 121 $ 104 Change in net plan assets Fair value of net plan assets at beginning of year $622 $579 $ - $ - Actual return on plan assets 4 38 - - Employer contribution 26 48 - - Business combinations - 25 - - Benefits paid (74) (68) - - Fair value of net plan assets at end of year $578 $622 $ - $ - Funded status Plan assets in excess of (less than) PBO $(14) $ 80 $(147) $(129) Unrecognized net actuarial loss (gain) (26) (124) 28 19 Unrecognized prior service cost 59 66 14 14 Additional minimum liability(4) - - (16) (8) Prepaid (accrued) benefit cost $ 19 $ 22 $(121) $(104) Plan assets in excess of (less than) ABO $ 42 $106 $(121) $(104) (1) PBO is the actuarial present value of benefits attributed by the benefit formula to prior associate service; it takes into consideration future salary increases. (2) Actuarial loss (gain) is the change in value of the benefit obligations or the plan assets resulting from changes in actuarial assumptions or from experience different than assumed. (3) ABO is the actuarial present value of benefits attributed by the pension benefit formula to prior associate service based on current and past compensation levels. (4) The additional minimum liability represents the excess of the accumulated benefit obligation over the accrued pension costs recognized. Recognizing the additional minimum liability results in an intangible asset being recorded for an equal amount. The components of net periodic benefit costs and actuarial assumptions for the benefit plans were: (dollars in millions) 2000 1999 1998 Components of pension expense (all plans) Service cost $ 34 $ 39 $ 33 Interest on PBO 51 45 40 Expected return on assets (48) (39) (34) Net amortization (1) 4 8 3 Total $ 41 $ 53 $ 42 (1) Prior service cost and actuarial (gain) loss are amortized over the remaining service period. (as of January 1) 2001 2000 1999 Actuarial assumptions Discount rate 7.50% 8.00% 6.75% Expected return on plan assets 7.75 8.25 7.00 Salary increase 4.25 4.50 4.25 The accrued pension costs are included in other liabilities. Prepaid pension costs and intangible assets are included in other assets. The company also provides postretirement life and/or health benefits for certain associates. As of February 3, 2001, the company's estimated PBO (at a discount rate of 7.50%) for postretirement benefits was $51 million, of which $49 million was accrued in other liabilities. As of January 29, 2000, the company's estimated PBO (at a discount rate of 8.00%) for postretirement benefits was $48 million, which was accrued in other liabilities. An unrecognized net loss of less than 10% of PBO need not be amortized. The postretirement plan is unfunded. The postretirement benefit expense was $4 million in 2000, 1999, and 1998. The estimated future obligations for postretirement medical benefits are based upon assumed annual healthcare cost increases of 12% for 2001, decreasing by 1% annually to 5% for 2008 and future years. A 1% increase or decrease in the assumed annual healthcare cost increases would increase or decrease the present value of estimated future obligations for postretirement benefits by approximately $2 million. Another important element in the retirement programs is the Social Security system, into which the company paid $174 million in 2000 as its matching contribution to the $174 million paid in by associates. David's Bridal provides retirement benefits to associates who have worked three months or more and have attained age 21 through a separate 401(k) plan (a defined-contribution plan) that provides for a discretionary company contribution. Taxes The provision for income taxes and the related percent of pretax earnings for the last three years were: 2000 1999 1998 (dollars in millions) $ % $ % $ % Federal $412 $440 $420 State and local 73 81 77 Current taxes 485 34.6% 521 34.2% 497 35.6% Federal 50 63 41 State and local 9 12 8 Deferred taxes 59 4.2 75 4.9 49 3.5 Total $544 38.8% $596 39.1% $546 39.1% The reconciliation between the statutory federal income tax rate and the effective income tax rate for the last three years follows: (percent of pretax earnings) 2000 1999 1998 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 5.8 6.1 6.1 Federal tax benefit of state and local income taxes (2.0) (2.2) (2.2) Other, net - 0.2 0.2 Effective income tax rate 38.8% 39.1% 39.1% Major components of deferred tax assets (liabilities) were: (dollars in millions) 2000 1999 Accrued expenses and reserves $ 132 $ 96 Deferred and other compensation 134 139 Merchandise inventories (167) (167) Depreciation and amortization and basis differences (587) (528) Other deferred income tax liabilities, net (52) (49) Net deferred income taxes (540) (509) Less: Net current deferred income tax assets 46 31 Noncurrent deferred income taxes $(586) $(540) Net current deferred income tax assets are included in other current assets in the accompanying balance sheet. 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 for 2000, 1999, and 1998. 2000 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $858 ESOP preference shares' dividends (18) Basic earnings per share $840 306.4 $2.74 ESOP preference shares 17 20.5 Assumed exercise of options (treasury stock method) - 0.8 Diluted earnings per share $857 327.7 $2.62 1999 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $927 ESOP preference shares' dividends (19) Basic earnings per share $908 332.2 $2.73 ESOP preference shares 16 21.5 Assumed exercise of options (treasury stock method) - 1.9 Diluted earnings per share $924 355.6 $2.60 1998 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $849 ESOP preference shares' dividends (18) Basic earnings per share $831 342.6 $2.43 ESOP preference shares 15 22.2 Assumed exercise of options (treasury stock method) - 2.6 Diluted earnings per share $846 367.4 $2.30 Accounts Receivable Credit sales under department store credit programs as a percent of net retail sales were 40.3% in 2000. This compares with 40.7% in 1999 and 42.3% in 1998. An estimated 27 million customers hold credit cards under the company's various credit programs. Sales made through third-party credit cards totaled $5.0 billion in 2000, compared with $4.6 billion in 1999 and $4.1 billion in 1998. Net accounts receivable consisted of: (dollars in millions) 2000 1999 Customer accounts receivable (1) $2,032 $2,124 Other accounts receivable 125 125 Total accounts receivable 2,157 2,249 Allowance for uncollectible accounts (76) (76) Accounts receivable, net $2,081 $2,173 (1) The decrease in customer accounts receivable was primarily related to the additional week of customer payments as a result of the 53-week year. The fair value of customer accounts receivable approximates their carrying values at February 3, 2001, and January 29, 2000, due to the short-term nature of these accounts. Other Current Assets In addition to net current deferred income tax assets, other current assets consisted of prepaid expenses and supply inventories of $49 million in 2000 and $53 million in 1999. Other Assets Other assets consisted of: (dollars in millions) 2000 1999 Deferred debt expense $40 $31 Prepaid and intangible pension asset 35 32 Other 18 7 Total $93 $70 Accrued Expenses Accrued expenses consisted of: (dollars in millions) 2000 1999 Insurance costs $184 $184 Salaries, wages, and employee benefits 172 196 Advertising and other operating expenses 148 128 Interest and rent expense 127 143 Sales, use, and other taxes 116 110 Construction costs 52 71 Other 72 60 Total $871 $892 Short-term Debt and Lines of Credit Short-term borrowings for the last three years were: (dollars in millions) 2000 1999 1998 Balance outstanding at year $ - $ - $ - Average balance outstanding 242 67 195 Average interest rate on average balance 6.6% 5.7% 5.4% Maximum balance outstanding $667 $407 $621 The average balance of short-term borrowings outstanding, primarily commercial paper, and the respective weighted average interest rates are based on the number of days such short-term borrowings were outstanding during the year. The company has $878 million available under credit agreements. Long-term Debt Long-term debt and capital lease obligations were: (dollars in millions) 2000 1999 Unsecured notes and sinking-fund debentures due 2001-2036 $4,470 $3,638 Mortgage notes and bonds due 2001-2016 97 124 Capital lease obligations 52 57 Total debt 4,619 3,819 Less: Current maturities of long-term debt 85 259 Long-term debt $4,534 $3,560 The weighted average interest rate of long-term debt was 8.2% at February 3, 2001, and 8.3% at January 29, 2000. The annual maturities of long-term debt, including sinking fund requirements, are $85 million, $315 million, $134 million, $258 million, and $172 million for 2001 through 2005. The net book value of property encumbered under long-term debt agreements was $128 million at February 3, 2001. The fair value of long-term debt (excluding capital lease obligations) was approximately $4.8 billion and $3.7 billion at February 3, 2001, and January 29, 2000, respectively. The fair value was determined using borrowing rates for debt instruments with similar terms and maturities. Lease Obligations The company leases approximately 27% of its gross retail square footage. Rental expense for the company's operating leases consisted of: (dollars in millions) 2000 1999 1998 Minimum rentals $63 $48 $49 Contingent rentals based on sales 18 18 18 Real property rentals 81 66 67 Equipment rentals 4 3 3 Total $85 $69 $70 Future minimum lease payments at February 3, 2001, were: Capital Operating (dollars in millions) Lease Leases Total 2001 $ 7 $ 72 $ 79 2002 7 68 75 2003 7 65 72 2004 7 61 68 2005 7 55 62 After 2005 76 286 362 Minimum lease payments $111 $607 $718 The present value of minimum lease payments under capital leases was $52 million at February 3, 2001, of which $2 million was included in current liabilities. The present value of operating leases was $414 million at February 3, 2001. Property under capital leases was: (dollars in millions) 2000 1999 Cost $ 59 $ 65 Accumulated amortization (29) (32) Total $30 $ 33 Other Liabilities In addition to accrued pension and postretirement costs, other liabilities consisted principally of deferred compensation liabilities of $165 million at February 3, 2001, and $162 million at January 29, 2000. Under the company's deferred compensation plan, eligible associates may elect to defer part of their compensation each year into cash and/or stock unit alternatives. The company issues shares to settle obligations with participants who defer in stock units and it maintains shares in treasury sufficient to settle all outstanding stock unit obligations. Litigation There are no legal proceedings, other than ordinary routine litigation incidental to the business, to which the company or any of its subsidiaries is a party or of which any of their property is the subject. Business Combinations In August 2000, David's Bridal, Inc. joined the company. The cost of this transaction was approximately $420 million. In December 1999, the company completed the merger of Zions Co-operative Mercantile Institution (ZCMI) stores. May issued 1.6 million shares of May common stock valued at $50 million to ZCMI shareholders and assumed $73 million of debt, of which $40 million was repaid at closing. The company repurchased a comparable number of shares in the open market as were issued to acquire ZCMI. In September 1998, the company purchased 11 former Mercantile stores for approximately $302 million including merchandise inventories. At the date of purchase, nine of these stores were leased. The leases have both put and call options that obligate the company to buy the underlying properties for approximately $100 million. As of February 3, 2001, the company has purchased five of these stores for $57 million. These business combinations have been accounted for as purchases and did not have a material effect on the results of operations or financial position. In January 2001, the company announced that it will purchase nine department store locations from Saks Incorporated. The cash purchase price includes approximately $237 million for the stores and approximately $72 million for merchandise inventories and accounts receivable. The transaction is expected to close in the first quarter of 2001. This transaction will be accounted for as a purchase and will not have a material effect on the company's financial statements. Stock Option and Stock-related Plans Under the company's common stock option plans, options are granted at the market price on the date of grant. Options to purchase may extend for up to 10 years, may be exercised in installments only after stated intervals of time, and are conditional upon continued active employment with the company. The company's plans are accounted for as provided by APB Opinion No. 25. For stock options, no compensation cost has been recognized because the option exercise price is fixed at the market price on the date of grant. A combined summary of the stock option plans at the end of 2000, 1999, and 1998, and of the changes in outstanding shares within years is presented below: 2000 1999 1998 Average Average Average Exercise Exercise Exercise (shares in thousands) Shares Price Shares Price Shares Price Beginning of year 14,872 $37 11,764 $33 10,230 $28 Granted 7,222 25 4,329 44 4,230 43 Exercised (570) 24 (690) 25 (1,922) 25 Forfeited or expired (1,467) 34 (531) 42 (774) 33 End of year 20,057 $33 14,872 $37 11,764 $33 Exercisable at end of year 8,377 $34 5,904 $30 3,719 $26 Shares available for grants 14,463 4,218 8,015 Fair value of options granted $ 8 $14 $12 The following table summarizes information about stock options outstanding at February 3, 2001: Options Outstanding Options Exercisable Average Exercise Number Remaining Average Number Average Price Outstanding Contractual Exercise Exercisable Exercise Range (in thousands) Life Price (in thousands) Life $16-24 1,408 4 $22 1,257 3 25-34 11,245 8 30 4,142 6 35-45 7,404 8 43 2,978 8 20,057 7 $34 8,377 6 Under the 1994 Stock Incentive Plan, the company is authorized to grant up to 3.4 million shares of restricted stock to management associates with or without performance restrictions. No monetary consideration is paid by associates who receive restricted stock. All restrictions lapse over periods of up to 10 years. In 2000 and 1999, the company granted 235,150 and 407,167 shares of restricted stock, respectively. For restricted stock grants, compensation expense is based upon the grant date market price; it is recorded over the lapsing period. For performance-based restricted stock, compensation expense is recorded over the performance period and is based on estimates of performance levels. As an alternative to accounting for stock-based compensation under APB No. 25, SFAS No. 123, "Accounting for Stock-based Compensation," establishes a fair-value method of accounting for employee stock options or similar equity instruments. The company used the Black-Scholes option pricing model to estimate the grant date fair value of its 1995 and later option grants. The fair value is recognized over the option vesting period, which is typically four years. Had compensation cost for these plans been determined in accordance with SFAS No. 123, the company's net earnings and net earnings per share would have been: (dollars in millions, except per share) 2000 1999 1998 Net earnings: As reported $ 858 $ 927 $ 849 Pro forma 835 903 833 Basic earnings per share: As reported $2.74 $2.73 $2.43 Pro forma 2.67 2.66 2.38 Diluted earnings per share: As reported $2.62 $2.60 $2.30 Pro forma 2.55 2.54 2.27 The Black-Scholes assumptions were: Assumptions 2000 1999 1998 Risk-free interest rate 6.4% 5.5% 5.6% Expected dividend $0.93 $0.89 $0.85 Expected option life (years) 7 7 7 Expected volatility 32% 26% 23% Common Stock Repurchase Programs During 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 $500 million 1999 stock repurchase program and the $650 million common stock repurchase program authorized in 2000. The 2000 buyback was in addition to $361 million, or 9.9 million shares, purchased in 1999 and $500 million, or 12.5 million shares, purchased in 1998. Preference Stock The company is authorized to issue up to 25 million shares of $0.50 par value preference stock. As of February 3, 2001, 800,000 ESOP preference shares were authorized and 589,962 were outstanding. 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. Shareowner Rights Plan The company has a shareowner rights plan under which a right is attached to each share of the company's common stock. The rights become exercisable only under certain circumstances involving actual or potential acquisitions of May's common stock by a person or by affiliated persons. Depending upon the circumstances the holder may be entitled to purchase units of the company's preference stock, shares of the company's common stock, or shares of common stock of the acquiring person. The rights will remain in existence until August 31, 2004, unless they are terminated, extended, exercised, or redeemed.
Eleven-year financial summary (in millions, except per share and operating statistics) 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Net retail sales $14,454 $13,854 $13,031 $12,248 $11,446 $10,327 $9,622 $8,884 $8,270 $7,723 $7,349 Total percent increase 4.3% 6.3% 6.4% 7.0% 10.8% 7.3% 8.3% 7.4% 7.1% 5.1% 6.8% Store-for-store percent increase 0.5 2.6 3.5 3.6 4.3 2.5 5.4 5.4 4.5 (0.6) 0.6 Operations Revenues $14,511 $13,866 $13,090 $12,390 $11,727 $10,708 $9,886 $9,353 $9,154 $8,864 $8,497 Cost of sales 9,929 9,370 8,901 8,437 7,953 7,217 6,658 6,328 6,251 6,071 5,844 Selling, general, and administrative expenses 2,835 2,686 2,516 2,375 2,265 2,081 1,916 1,824 1,859 1,861 1,772 Interest expense, net 345 287 278 299 277 250 233 244 279 315 278 Earnings before income taxes 1,402 1,523 1,395 1,279 1,232 1,160 1,079 957 579(7) 617 603 Provision for income taxes 544 596 546 500 483 460 429 379 107(7) 213 199 Net earnings (1) 858 927 849 779 749 700 650 578 472 404 404 Percent of revenues 5.9% 6.7% 6.5% 6.3% 6.4% 6.5% 6.6% 6.2% 5.2% 4.6% 4.8% LIFO provision(credit) $ (29) $ (30)$ (28) $ (5) $ (20) $ (53) $ (46) $ 7 $ 10 $ 26 $ 39 Per share Net earnings (1) $ 2.62 $ 2.60 $ 2.30 $ 2.07 $ 1.87 $ 1.75 $ 1.62 $ 1.43 $ 1.18 $ 1.02 $ 1.01 Dividends paid (2) 0.93 0.89 0.85 0.80 0.77 0.74 0.67 0.60 0.55 0.54 0.51 Book value 12.93 12.53 11.46 10.99 10.27 12.28 11.10 9.77 8.55 7.51 6.69 Market price - high 39.50 45.38 47.25 38.08 34.83 30.83 30.08 31.00 24.83 20.13 19.71 Market price -low 19.19 29.19 33.17 29.08 27.00 22.33 21.50 22.29 17.33 15.08 12.46 Market price - year-end close 37.30 31.25 40.25 35.04 29.67 29.25 23.42 26.50 23.46 18.29 15.17 Financial statistics Return on equity 21.0% 24.1% 22.2% 21.2% 19.4% 20.8% 21.3% 22.1% 21.5% 20.7% 21.8% Return on net assets 19.5 20.7 19.8 18.5 18.8 20.1 20.1 19.0 15.4(8)14.5 15.8 Operating statistics Stores open at year-end Department stores 427 408 393 369 365 346 314 301 303 318 324 David's Bridal (3) 123 100 77 59 48 36 23 14 6 5 1 Gross retail square footage (in millions) (4) 73.3 69.1 66.7 62.8 62.1 57.6 52.0 49.4 49.5 51.9 52.4 Sales per square foot (4) (5) $ 205 $ 210 $ 209 $ 204 $ 201 $ 201 $ 200 $ 191 $ 179 $ 171 $ 172 Cash flows and financial position Cash flows from operations (6) $ 1,369 $ 1,396 $ 1,288 $ 1,191 $ 1,123 $ 1,033 $ 947 $ 859 $ 755 $ 677 $ 657 Percent of revenues 9.4% 10.1% 9.8% 9.6% 9.6% 9.6% 9.6% 9.2% 8.3% 7.6% 7.7% Depreciation and amortization $ 511 $ 469 $ 439 $ 412 $ 374 $ 333 $ 297 $ 281 $ 283 $ 273 $ 253 Capital expenditures 598 703 630 496 632 801 682 560 284 366 466 Dividends on common stock 286 295 290 279 287 277 251 223 204 198 191 Working capital 3,056 2,700 2,928 3,012 3,156 3,536 3,069 2,960 2,730 3,089 2,672 Long-term debt and preference stock 4,833 3,875 4,152 3,849 4,196 3,701 3,240 3,192 3,256 4,299 3,948 Shareowners' equity 3,855 4,077 3,836 3,809 3,650 4,585 4,135 3,639 3,181 2,781 2,467 Total assets 11,574 10,935 10,533 9,930 10,059 10,122 9,237 8,614 8,376 8,566 8,083 Average diluted shares outstanding and equivalents 327.7 355.6 367.4 373.6 396.2 397.3 397.3 398.2 397.0 394.3 397.1 All years included 52 weeks, except 2000 and 1995, which included 53 weeks. Net retail sales for 2000 and 1995 are shown on a 52-week basis for comparability. (1) Represents net earnings and diluted earnings per share from continuing operations. (2) The annual dividend was increased to $0.94 per share effective with the March 15, 2001, dividend payment. (3) David's Bridal joined the company in 2000. Stores open at year-end prior to 2000 are shown for comparability. (4) David's Bridal included since August 2000. (5) Sales per square foot are calculated from net retail sales plus finance charge revenues and average gross retail square footage. (6) Cash flows from operations represents net earnings plus depreciation and amortization. It is different from cash flows from operating activities as shown on the statement of cash flows. (7) Pretax earnings include a net special and nonrecurring charge of $187 million, and the provision for income taxes includes a nonrecurring tax benefit of $187 million. (8) Based on pretax earnings before special and nonrecurring items.
REPORTS OF MANAGEMENT AND INDEPENDENT PUBLIC ACCOUNTANTS Report of Management Management is responsible for the preparation, integrity, and objectivity of the financial information included in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. Although the financial statements reflect all available information and management's judgment and estimates of current conditions and circumstances, prepared with the assistance of specialists within and outside the company, actual results could differ from those estimates. Management has established and maintains an internal control structure to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, that the accounting records provide a reliable basis for the preparation of financial statements, and that such financial statements are not misstated due to material fraud or error. Internal controls include the careful selection of associates, the proper segregation of duties, and the communication and application of formal policies and procedures that are consistent with high standards of accounting and administrative practices. An important element of this structure is a comprehensive internal audit program. Management continually reviews, modifies, and improves its systems of accounting and controls in response to changes in business conditions and operations, and in response to recommendations in the reports prepared by the independent public accountants and internal auditors. Management believes that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards and in conformity with the law. These standards are described in the company's policies on business conduct, which are publicized throughout the company. To the Board of Directors and Shareowners of The May Department Stores Company: We have audited the accompanying consolidated balance sheet of The May Department Stores Company (a Delaware corporation) and subsidiaries as of February 3, 2001, and January 29, 2000, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended February 3, 2001. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The May Department Stores Company and subsidiaries as of February 3, 2001, and January 29, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 14, 2001