10-Q 1 tenq3rdqtr.txt FORM 10Q DATED NOVEMBER 30, 2004 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 October 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 1-79 THE MAY DEPARTMENT STORES COMPANY (Exact name of registrant as specified in its charter) Delaware 43-1104396 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 611 Olive Street, St. Louis, Missouri 63101 (Address of principal executive offices) (Zip Code) (314) 342-6300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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. 291,985,741 shares of common stock, $.50 par value, as of November 27, 2004. PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (millions) Oct. 30, Nov. 1, Jan. 31, 2004 2003 2004 ASSETS Current assets: Cash and cash equivalents $ 94 $ 65 $ 564 Accounts receivable, net 2,012 1,478 1,755 Merchandise inventories 3,815 3,482 2,728 Other current assets 102 110 88 Total current assets 6,023 5,135 5,135 Property and equipment, at cost 10,534 9,304 9,103 Accumulated depreciation (4,340) (4,139) (3,954) Property and equipment, net 6,194 5,165 5,149 Goodwill 2,654 1,468 1,504 Intangible assets, net 605 170 168 Other assets 143 129 133 Total assets $ 15,619 $ 12,067 $ 12,089 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 1,050 $ 270 $ - Current maturities of long-term debt 20 235 239 Accounts payable 1,828 1,407 1,191 Accrued expenses 1,118 1,006 967 Income taxes payable 119 28 280 Total current liabilities 4,135 2,946 2,677 Long-term debt 5,786 3,802 3,797 Deferred income taxes 781 831 773 Other liabilities 515 511 507 ESOP preference shares 217 241 235 Unearned compensation - (91) (91) Shareowners' equity 4,185 3,827 4,191 Total liabilities and shareowners' equity $ 15,619 $ 12,067 $ 12,089 The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.
2 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (millions, except per share) 13 Weeks Ended 39 Weeks Ended Oct. 30, Nov. 1, Oct. 30, Nov. 1, 2004 2003 2004 2003 Net sales $ 3,483 $ 2,976 $ 9,402 $ 8,849 Cost of sales: Recurring 2,520 2,160 6,705 6,366 Restructuring markdowns - 1 11 1 Selling, general, and administrative expenses 831 658 2,104 1,955 Restructuring costs 1 5 12 323 Interest expense, net 118 78 276 238 Earnings (loss) before income taxes 13 74 294 (34) Provision (credit) for income taxes 5 27 109 (43) Net earnings $ 8 $ 47 $ 185 $ 9 Basic earnings (loss) per share $ .02 $ .15 $ .59 $ (.01) Diluted earnings (loss) per share $ .02 $ .15 $ .59 $ (.01) Dividends paid per common share $.24-1/4 $ .24 $.72-3/4 $ .72 Weighted average shares outstanding: Basic 292.3 290.0 291.9 289.9 Diluted 292.8 290.5 292.9 289.9 The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
3 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (millions) 39 Weeks Ended Oct. 30, Nov. 1, 2004 2003 Operating Activities: Net earnings $ 185 $ 9 Adjustment for noncash items included in earnings: Depreciation and other amortization 454 420 Intangible asset amortization 6 6 Asset impairment - 317 Working capital changes: Accounts receivable, net 310 298 Merchandise inventories (712) (632) Other current assets (5) 11 Accounts payable 426 306 Accrued expenses (3) 217 Income taxes payable (161) (135) Other, net 22 (126) Cash flows from operations 522 691 Investing Activities: Net additions to property and equipment (389) (447) Business combinations (3,263) (33) Cash flows used for investing activities (3,652) (480) Financing Activities: Net short-term debt issuances 1,050 120 Net long-term debt issuances (repayments) 1,810 (77) Net issuances (purchases) of common stock 23 (24) Dividend payments (223) (220) Cash flows from (used for) financing activities 2,660 (201) Increase (decrease) in cash and cash equivalents (470) 10 Cash and cash equivalents, beginning of period 564 55 Cash and cash equivalents, end of period $ 94 $ 65 Cash paid during the period: Interest $ 260 $ 252 Income taxes 248 85 The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
4 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interim Results The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and should be read in conjunction with the Notes to Consolidated Financial Statements (pages 35-43) in the 2003 Annual Report. In the opinion of management, this information is fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based on estimates for the entire year. Operating results of periods, which exclude the Christmas season, may not be indicative of the operating results that may be expected for the fiscal year. Reclassifications Certain prior period amounts have been reclassified to conform with current year presentation. Business Combinations Effective July 31, 2004, the company completed its acquisition of the Marshall Field's department store group. Marshall Field's operates 62 department stores primarily in the Chicago, Detroit, and Minneapolis metropolitan areas. The company acquired substantially all of Marshall Field's operating assets, including stores, inventory, customer receivables, and distribution centers, and assumed certain liabilities, including accounts payable and accrued expenses. The company also acquired the real estate associated with nine Mervyn's store locations in the Twin Cities area. The Mervyn's portion of the transaction closed in the third quarter 2004. The acquisition was financed through $2.2 billion of long-term debt and $1.0 billion of short-term borrowings and cash on hand. Marshall Field's results of operations have been included in the company's consolidated financial statements since acquisition. The company's October 30, 2004, consolidated balance sheet includes the assets acquired and the liabilities assumed using a preliminary purchase price allocation. The purchase price allocation is based on preliminary estimates and is subject to final third-party valuations. The following summarizes the preliminary purchase price allocation at acquisition (millions): Cash $ 3 Accounts receivable 558 Merchandise inventories 375 Property and equipment 1,117 Goodwill and other intangibles 1,586 Assumed liabilities/other (399) Net purchase price $ 3,240 Goodwill and other intangible assets include $419 million of trade names and $20 million of customer relationships. The trade names have an indefinite useful life and are not amortizable. The customer relationships will be amortized over an estimated useful life of 15 years. Assumed liabilities/other includes $22 million of transaction fees. 5 The following pro forma information presents the company's net sales, net earnings (loss) and diluted earnings (loss) per share as if the Marshall Field's acquisition had occurred on February 2, 2003 (millions, except per share): 13 Weeks Ended 39 Weeks Ended Oct. 30, Nov. 1, Oct. 30, Nov. 1, 2004 2003 2004 2003 Net sales $ 3,483 $ 3,580 $10,543 $10,548 Net earnings (loss) $ 8 $ 39 $ 171 $ (14) Diluted earnings (loss) per share $ .02 $ .12 $ .54 $ (.09) Pro forma adjustments have been made to reflect depreciation and amortization using the asset values recognized after applying purchase accounting adjustments and interest expense on borrowings used to finance the acquisition. This pro forma information is presented for informational purposes only and is not necessarily indicative of actual results had the acquisition been effected at the beginning of the respective periods presented, is not necessarily indicative of future results, and does not reflect potential synergies, integration costs, or other such costs or savings. Restructuring Costs In July 2003, the company announced its intention to divest 34 underperforming department stores. These divestitures will result in total estimated charges of $380 million, consisting of asset impairments of $317 million, liquidation markdowns of $35 million, severance benefits of $23 million, and other charges of $5 million. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. Of the $380 million of expected total charges, $351 million has been recognized to date. The company recognized $1 million and $23 million in the third quarter and first nine months of 2004, respectively, and $6 million and $324 million in the third quarter and first nine months of 2003, respectively. The significant components of the store divestiture costs and status of the related liability are summarized below: (millions) Total | Balance at Charges | 2004 Payments Non-cash Oct. 30, to Date | Charges (Proceeds) Uses 2004 Asset impairments $ 317 | $ - $ - $ - $ - Disposal (gains) losses (13)| (4) (37) 33 - Liquidation markdowns 17 | 11 11 - - Severance benefits 10 | 4 4 - - Other 20 | 12 12 - - Total $ 351 | $ 23 $ (10) $ 33 $ - Asset impairment charges were recorded to reduce store assets to their estimated fair value because of the shorter period over which they will be used. Estimated fair values were based on estimated market values of similar assets. Disposal gains or losses are recognized as each store is divested. Liquidation markdowns are incurred to liquidate inventory as stores to be divested are closed. The company is negotiating agreements with landlords and developers for each store divestiture. Through the end of the 2004 third quarter, 19 stores have been closed. Severance benefits are recognized as each store is closed. As of October 30, 2004, severance benefits have been paid to approximately 1,600 associates. Remaining amounts will be recognized as each store is divested. 6 Income Taxes The effective income tax rate for the first nine months of 2004 was 37.0%, compared with 126.8% for the first nine months of 2003. 2003 results included a $31 million tax credit recorded in the first quarter of 2003 upon the resolution of various federal and state income tax issues. Excluding the $31 million tax credit, the company's estimated effective tax rate for the first nine months of 2003 was 37.0%. Inventories Merchandise inventories are principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. There was no LIFO provision or credit in the third quarter or first nine months of 2004 or 2003. Debt On July 20, 2004, the company issued $2.2 billion of long-term debt maturing over three to 30 years at a weighted average interest rate, including amortized hedge and financing costs, of 5.71% to partially fund the Marshall Field's acquisition. In August 2004, the company also increased its unsecured revolving credit facility to $1.4 billion and extended the term to August 2009. The company entered into treasury lock agreements to hedge interest rate fluctuations in anticipation of the issuance of debt related to the Marshall Field's acquisition. The contracts were deemed highly effective at offsetting the changes in interest rates of the debt issued. Accordingly, the $27 million paid to settle the hedges will be amortized as increases to interest expense over the 10 to 30 year life of the debt hedged. The hedge settlement payments were recorded as a reduction to accumulated other comprehensive income. On August 1, 2004, the company redeemed its $200 million 8-3/8% debentures due in 2024. Interest expense for the 2004 third quarter includes early debt redemption costs of $10 million. Pension Benefits The components of net periodic benefit costs for the company's pension plans for the third quarter and first nine months of 2004 and 2003 were: (millions) 13 Weeks Ended Qualified Plan Nonqualified Plan Oct. 30, Nov. 1, Oct. 30, Nov. 1, 2004 2003 2004 2003 Service cost $ 14 $ 11 $ 1 $ 2 Interest cost 12 12 3 5 Expected return on assets (10) (8) - - Net amortization (1) 1 6 1 1 Net periodic benefit cost $ 17 $ 21 $ 5 $ 8 39 Weeks Ended Qualified Plan Nonqualified Plan Oct. 30, Nov. 1, Oct. 30, Nov. 1, 2004 2003 2004 2003 Service cost $ 42 $ 35 $ 4 $ 4 Interest cost 35 36 10 10 Expected return on assets (29) (24) - - Net amortization (1) 6 18 4 4 Net periodic benefit cost $ 54 $ 65 $ 18 $ 18 (1) Prior service cost and actuarial gains and losses are amortized over the remaining estimated service period. 7 In September 2004, the company contributed $23 million to the qualified pension plan, and the company expects to make an additional contribution of approximately $60 million to the qualified plan in January 2005. Earnings per Share The following tables reconcile net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings (loss) per share ("EPS") for the periods shown. (millions, except per share) 13 Weeks Ended Oct. 30, 2004 Nov. 1, 2003 Earnings Shares EPS Earnings Shares EPS Net earnings $ 8 $ 47 ESOP preference share dividends (4) (4) Basic EPS 4 292.3 $ .02 43 290.0 $ .15 Assumed exercise of options (treasury stock method) - 0.5 - 0.5 Diluted EPS $ 4 292.8 $ .02 $ 43 290.5 $ .15
Diluted EPS excludes 15 million ESOP preference shares and $3 million of earnings adjustments for the third quarter of 2004 and 16 million ESOP preference shares and $3 million of earnings adjustments for the third quarter of 2003 because of their antidilutive effect. 39 Weeks Ended Oct. 30, 2004 Nov. 1, 2003 Earnings Shares EPS Earnings Shares EPS Net earnings $ 185 $ 9 ESOP preference share dividends (12) (12) Basic EPS 173 291.9 $ .59 (3) 289.9 $ (.01) Assumed exercise of options (treasury stock method) - 1.0 - - Diluted EPS $ 173 292.9 $ .59 $ (3) 289.9 $ (.01)
Diluted EPS excludes 15 million ESOP preference shares and $10 million of earnings adjustments for the first nine months of 2004 and 17 million ESOP preference shares and $11 million of earnings adjustments for the first nine months of 2003 because of their antidilutive effect. Stock Compensation Plans Effective February 2, 2003, the company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The company adopted SFAS No. 123 using the prospective transition method, under which all stock-based compensation granted after February 2, 2003 is expensed using the fair value method. Stock option expense is recorded over each option grant's vesting period, usually four years. Accordingly, the cost related to stock-based employee compensation included in net earnings, using the prospective method of transition, is less than it would have been had the fair value method been applied retroactively to all outstanding grants. The following table illustrates the pro forma effect on net earnings and earnings (loss) per share for the third quarter and first nine months of 2004 and 2003 if the fair value- based method had been applied retroactively rather than prospectively to all outstanding unvested grants. 8 (millions, except per share) 13 Weeks Ended 39 Weeks Ended Oct. 30, Nov. 1, Oct. 30, Nov. 1, 2004 2003 2004 2003 Net earnings, as reported $ 8 $ 47 $ 185 $ 9 Add: Compensation expense for employee stock options included in net earnings, net of tax 2 1 4 2 Deduct: Total compensation expense for employee stock options determined under retroactive fair value-based method, net of tax (5) (6) (15) (19) Pro forma net earnings (loss) $ 5 $ 42 $ 174 $ (8) Earnings (loss) per share: Basic - as reported (prospective) $ .02 $ .15 $ .59 $ (.01) Basic - pro forma (retroactive) $ .00 $ .13 $ .56 $ (.07) Diluted - as reported (prospective) $ .02 $ .15 $ .59 $ (.01) Diluted - pro forma (retroactive) $ .00 $ .13 $ .55 $ (.07)
Lease Obligations The company is a guarantor with respect to certain lease obligations of previously divested businesses. The leases, two of which include potential extensions to 2087, have future minimum lease payments aggregating approximately $802 million, and are offset by payments from existing tenants and subtenants. In addition, the company is liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by the current tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the company. The company believes that the risk of significant loss from these lease obligations is remote. Common Stock Repurchase Programs In July 2004, the company suspended the $500 million common stock repurchase program that was announced in February 2004. Shareowners Rights' Plan In August 2004, the company entered into an Amended and Restated Rights Agreement with The Bank of New York, extending final expiration of the previous agreement to August 31, 2014. 9 CONDENSED CONSOLIDATING FINANCIAL INFORMATION The company ("Parent") has fully and unconditionally guaranteed certain long- term debt obligations of its wholly-owned subsidiary, The May Department Stores Company, New York ("Subsidiary Issuer"). Other subsidiaries of the Parent include May Department Stores International, Inc. (MDSI), Leadville Insurance Company, Snowdin Insurance Company, Priscilla of Boston, and David's Bridal, Inc. and subsidiaries, including After Hours Formalwear, Inc. Condensed consolidating balance sheets as of October 30, 2004, November 1, 2003, and January 31, 2004, the related condensed consolidating statements of earnings for the thirteen week and thirty-nine week periods ended October 30, 2004, and November 1, 2003, and the related condensed consolidating statements of cash flows for the thirty-nine week periods ended October 30, 2004, and November 1, 2003 are presented below. Condensed Consolidating Balance Sheet As of October 30, 2004 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 70 $ 24 $ - $ $94 Accounts receivable, net - 2,000 45 (33) 2,012 Merchandise inventories - 3,708 107 - 3,815 Other current assets - 87 35 (20) 102 Total current assets - 5,865 211 (53) 6,023 Property and equipment, at cost - 10,232 302 - 10,534 Accumulated depreciation - (4,241) (99) - (4,340) Property and equipment, net - 5,991 203 - 6,194 Goodwill - 2,276 378 - 2,654 Intangible assets, net - 441 164 - 605 Other assets - 134 9 - 143 Intercompany (payable) receivable (3,912) 3,368 3,769 (3,225) - Investment in subsidiaries 8,314 - - (8,314) - Total assets $ 4,402 $18,075 $ 4,734 $(11,592) $15,619 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 1,050 $ - $ - $ 1,050 Current maturities of long-term debt - 20 - - 20 Accounts payable - 1,725 101 2 1,828 Accrued expenses - 1,047 126 (55) 1,118 Income taxes payable - 57 62 - 119 Total current liabilities - 3,899 289 (53) 4,135 Long-term debt - 5,785 1 - 5,786 Intercompany note payable - 3,225 - (3,225) - Deferred income taxes - 714 67 - 781 Other liabilities - 1,009 9 (503) 515 ESOP preference shares 217 - - - 217 Unearned compensation - - - - - Shareowners' equity 4,185 3,443 4,368 (7,811) 4,185 Total liabilities and shareowners' equity $ 4,402 $18,075 $ 4,734 $(11,592) $15,619
10 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended October 30, 2004 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 3,321 $ 576 $ (414) $ 3,483 Cost of sales: Recurring - 2,475 455 (410) 2,520 Restructuring markdowns - - - - - Selling, general, and administrative expenses - 758 82 (9) 831 Restructuring costs - 1 - - 1 Interest expense (income), net: External - 118 - - 118 Intercompany - 73 (72) (1) - Equity in earnings of subsidiaries (8) - - 8 - Earnings (loss) before income taxes 8 (104) 111 (2) 13 Provision (credit) for income taxes - (35) 40 - 5 Net earnings (loss) $ 8 $ (69) $ 71 $ (2) $ 8
Condensed Consolidating Statement of Earnings For the Thirty-nine Weeks Ended October 30, 2004 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 8,836 $ 1,481 $ (915) $ 9,402 Cost of sales: Recurring - 6,502 1,104 (901) 6,705 Restructuring markdowns - 11 - - 11 Selling, general, and administrative expenses - 1,868 265 (29) 2,104 Restructuring costs - 12 - - 12 Interest expense (income), net: External - 276 - - 276 Intercompany - 215 (213) (2) - Equity in earnings of subsidiaries (185) - - 185 - Earnings (loss) before income taxes 185 (48) 325 (168) 294 Provision (credit) for income taxes - (10) 119 - 109 Net earnings (loss) $ 185 $ (38) $ 206 $ (168) $ 185
11 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Cash Flows For the Thirty-nine Weeks Ended October 30, 2004 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 185 $ (38) $ 206 $ (168) $ 185 Equity in earnings of subsidiaries (185) - - 185 - Depreciation and other amortization - 422 32 - 454 Intangible asset amortization - 2 4 - 6 Decrease (increase) in working capital (4) (178) 37 - (145) Other, net 77 27 (65) (17) 22 Cash flows from operations 73 235 214 - 522 Investing activities: Net additions to property and equipment - (326) (63) - (389) Business combinations - (3,258) (5) - (3,263) Cash flows used for investing activities - (3,584) (68) - (3,652) Financing activities: Net short-term debt issuances - 1,050 - - 1,050 Net long-term debt issuances - 1,810 - - 1,810 Net issuances of common stock 16 7 - - 23 Dividend payments (224) 1 - - (223) Intercompany activity, net 135 - (135) - - Cash flow from (used for) financing activities (73) 2,868 (135) - 2,660 Increase (decrease) in cash and cash equivalents - (481) 11 - (470) Cash and cash equivalents, beginning of period - 551 13 - 564 Cash and cash equivalents, end of period $ - $ 70 $ 24 $ - $ 94
12 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 52 $ 13 $ - $ 65 Accounts receivable, net - 1,469 45 (36) 1,478 Merchandise inventories - 3,391 91 - 3,482 Other current assets - 104 24 (18) 110 Total current assets - 5,016 173 (54) 5,135 Property and equipment, at cost - 9,078 226 - 9,304 Accumulated depreciation - (4,070) (69) - (4,139) Property and equipment, net - 5,008 157 - 5,165 Goodwill - 1,129 339 - 1,468 Intangible assets, net - 5 165 - 170 Other assets - 119 10 - 129 Intercompany (payable) receivable (820) 317 3,728 (3,225) - Investment in subsidiaries 4,797 - - (4,797) - Total assets $ 3,977 $11,594 $ 4,572 $ (8,076) $12,067 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 270 $ - $ - $ 270 Current maturities of long-term debt - 235 - - 235 Accounts payable - 1,306 101 - 1,407 Accrued expenses - 944 97 (35) 1,006 Income taxes payable - - 46 (18) 28 Total current liabilities - 2,755 244 (53) 2,946 Long-term debt - 3,801 1 - 3,802 Intercompany note payable - 3,225 - (3,225) - Deferred income taxes - 766 65 - 831 Other liabilities - 991 9 (489) 511 ESOP preference shares 241 - - - 241 Unearned compensation (91) (91) - 91 (91) Shareowners' equity 3,827 147 4,253 (4,400) 3,827 Total liabilities and shareowners' equity $ 3,977 $11,594 $ 4,572 $ (8,076) $12,067
13 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 2,838 $ 589 $ (451) $ 2,976 Cost of sales - 2,135 467 (441) 2,161 Selling, general, and administrative expenses - 602 71 (15) 658 Restructuring costs - 5 - - 5 Interest expense (income), net: External - 78 - - 78 Intercompany - 71 (71) - - Equity in earnings of subsidiaries (47) - - 47 - Earnings (loss) before income taxes 47 (53) 122 (42) 74 Provision (credit) for income taxes - (16) 43 - 27 Net earnings (loss) $ 47 $ (37) $ 79 $ (42) $ 47
Condensed Consolidating Statement of Earnings For the Thirty-nine Weeks Ended November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 8,376 $ 1,488 $ (1,015) $ 8,849 Cost of sales - 6,229 1,130 (992) 6,367 Selling, general, and administrative expenses - 1,782 212 (39) 1,955 Restructuring costs - 323 - - 323 Interest expense (income), net: External - 238 - - 238 Intercompany - 213 (213) - - Equity in earnings of subsidiaries (9) - - 9 - Earnings (loss) before income taxes 9 (409) 359 7 (34) Provision (credit) for income taxes - (173) 130 - (43) Net earnings (loss) $ 9 $ (236) $ 229 $ 7 $ 9
14 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Cash Flows For the Thirty-nine Weeks Ended November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 9 $ (236) $ 229 $ 7 $ 9 Equity in earnings of subsidiaries (9) - - 9 - Depreciation and other amortization - 398 22 - 420 Intangible asset amortization - 1 5 - 6 Asset impairment - 317 - - 317 (Increase) decrease in working capital (4) 36 33 - 65 Other, net 150 (173) (87) (16) (126) Cash flows from operations 146 343 202 - 691 Investing activities: Net additions to property and equipment - (406) (41) - (447) Business combinations - - (33) - (33) Cash flows used for investing activities - (406) (74) - (480) Financing activities: Net short-term debt issuances - 120 - - 120 Net long-term debt repayments - (52) (25) - (77) Net issuances (purchases) of common stock (33) 9 - - (24) Dividend payments (221) 1 - - (220) Intercompany activity, net 108 - (108) - - Cash flows from (used for) financing activities (146) 78 (133) - (201) Increase (decrease) in cash and cash equivalents - 15 (5) - 10 Cash and cash equivalents, beginning of period - 37 18 - 55 Cash and cash equivalents, end of period $ - $ 52 $ 13 $ - $ 65
15 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of January 31, 2004 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 551 $ 13 $ - $ 564 Accounts receivable, net - 1,740 46 (31) 1,755 Merchandise inventories - 2,633 95 - 2,728 Other current assets - 76 32 (20) 88 Total current assets - 5,000 186 (51) 5,135 Property and equipment, at cost - 8,860 243 - 9,103 Accumulated depreciation - (3,882) (72) - (3,954) Property and equipment, net - 4,978 171 - 5,149 Goodwill - 1,129 375 - 1,504 Intangible assets, net - 4 164 - 168 Other assets - 125 8 - 133 Intercompany (payable) receivable (642) 161 3,706 (3,225) - Investment in subsidiaries 4,981 - - (4,981) - Total assets $ 4,339 $11,397 $ 4,610 $ (8,257) $12,089 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ - $ - $ - $ - Current maturities of long-term debt - 239 - - 239 Accounts payable - 1,095 91 5 1,191 Accrued expenses 4 914 105 (56) 967 Income taxes payable - 240 40 - 280 Total current liabilities 4 2,488 236 (51) 2,677 Long-term debt - 3,796 1 - 3,797 Intercompany note payable - 3,225 - (3,225) - Deferred income taxes - 706 67 - 773 Other liabilities - 985 9 (487) 507 ESOP preference shares 235 - - - 235 Unearned compensation (91) (91) - 91 (91) Shareowners' equity 4,191 288 4,297 (4,585) 4,191 Total liabilities and shareowners' equity $ 4,339 $11,397 $ 4,610 $ (8,257) $12,089
16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The weakening sales trend that began in the 2004 second quarter continued throughout the 2004 third quarter, resulting in sales below our expectations. Continued improvements in inventory management led to higher merchandise margins. However, expenses as a percent of net sales increased due to the decreased sales leverage resulting from negative store-for-store sales. The expense structure at Marshall Field's and start-up integration expenses negatively impacted our overall third quarter results. Third quarter 2004 net sales were $3.48 billion, a 17.0% increase from the 2003 third quarter net sales principally due to the Marshall Field's acquisition. Store-for-store sales decreased 3.4% for the quarter. The decrease in store-for-store sales is characterized by a decrease in the number of department store transactions partially offset by an increase in the average selling price per item. Although a number of merchandise categories continued to experience growth, this positive momentum was offset by mixed back-to-school results and continued difficulty in the home store. Net earnings were $8 million, or $.02 per share, for the 2004 third quarter compared with net earnings of $47 million, or $.15 per share, for the 2003 third quarter. Third quarter 2004 net earnings include restructuring charges of $1 million and early debt redemption costs of $10 million, or $.02 per share. Third quarter 2003 net earnings included restructuring charges of $6 million, or $.01 per share. The integration of Marshall Field's is proceeding on schedule. The Marshall Field's acquisition had a negative effect on third quarter earnings of $.06 per share, of which $.03 per share was start-up integration expenses. Net sales increased 6.2% to $9.40 billion for the first nine months of 2004. Net earnings were $185 million, or $.59 per share, for the first nine months of 2004 compared to net earnings of $9 million, or a net loss of $.01 per share, for the first nine months of 2003. Net earnings for the first nine months of 2004 include restructuring charges of $23 million, or $.05 per share. Net earnings for the first nine months of 2003 included restructuring charges of $324 million, or $.70 per share, and a $31 million, or $.10 per share, tax credit. During the third quarter 2004, we opened four department stores: a Foley's store in El Paso, Texas; a Hecht's store in Nashville, Tenn.; a Meier & Frank store in Portland, Ore.; and a Robinsons-May store in Rancho Cucamonga, Calif. To date, we have opened five department stores and acquired 62 Marshall Field's stores in 2004. Three additional department store openings are planned for the fourth quarter 2004. Year-to-date, we have closed ten department stores we previously announced we would divest. Also, during the third quarter, our Bridal Group opened nine David's Bridal stores and six After Hours stores. The Bridal Group plans to open an additional 11 David's Bridal stores and seven After Hours stores by year-end. At the end of the third quarter, we operated 500 department stores, 229 David's Bridal stores, 458 After Hours Formalwear stores, and 11 Priscilla of Boston stores in 46 states, the District of Columbia, and Puerto Rico. 17 Results of Operations Net Sales Net sales include merchandise sales and lease department income. Store-for-store sales compare sales of stores open during both periods beginning the first day a new store has prior-year sales and exclude sales of stores closed during both periods. Net sales and related increases (decreases) were as follows (dollars in millions): Percent Store-for-Store 2004 2003 Increase Decrease Third quarter $3,483 $2,976 17.0% (3.4)% First nine months 9,402 8,849 6.2 (1.3) The total net sales increase of $507 million for the 2004 third quarter was principally due to a $650 million increase in new store sales, including Marshall Field's, offset by an $88 million decrease in store-for-store sales and a $51 million decrease related to divested store sales. The total net sales increase of $553 million for the first nine months of 2004 was principally due to a $782 million increase in new store sales, including Marshall Field's, offset by a $67 million decrease in store-for-store sales and a $147 million decrease related to divested store sales. The following table presents the statements of earnings as a percent of net sales. Third Quarter First Nine Months 2004 2003 2004 2003 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales: Recurring 72.4 72.6 71.3 71.9 Restructuring markdowns 0.0 0.0 0.1 0.0 Selling, general, and administrative expenses 23.8 22.1 22.4 22.1 Restructuring costs 0.0 0.2 0.1 3.7 Interest expense, net 3.4 2.6 3.0 2.7 Earnings (loss) before income taxes 0.4 2.5 3.1 (0.4) Income taxes 37.0* 37.0* 37.0* 126.8* Net earnings 0.2% 1.6% 2.0% 0.1% * - Percent represents effective income tax rate. Cost of Sales Recurring cost of sales includes the cost of merchandise, inbound freight, distribution expenses, buying, and occupancy costs. Restructuring markdowns are incurred to liquidate inventory as stores to be divested are closed. For the thirteen weeks ended October 30, 2004, recurring cost of sales as a percent of net sales decreased by 0.2% principally because of an 0.8% decrease in the cost of merchandise, offset by a 0.5% increase in buying and occupancy costs related to the decline in store-for-store sales. For the thirty-nine weeks ended October 30, 2004, recurring cost of sales as a percent of net sales decreased by 0.6% principally because of a 0.9% decrease in the cost of merchandise. The lower merchandise costs were driven by a combination of improved mark-ups and improved markdowns. Selling, General, and Administrative Expenses Selling, general, and administrative expenses (SG&A) as a percent of net sales increased from 22.1% in the third quarter 2003 to 23.8% in the third quarter 2004. The increase was largely driven by decreased sales leverage resulting in a 1.1% increase in costs such as payroll, insurance, and advertising. The 18 expense structure at Marshall Field's and start-up integration expenses negatively impacted SG&A by an additional 0.6% in the quarter. The increase in SG&A expenses as a percent of net sales from 22.1% in the first nine months of 2003 to 22.4% in the first nine months of 2004 was primarily due to the expense structure at Marshall Field's and start-up integration costs. Business Combinations Effective July 31, 2004, we completed our acquisition of the Marshall Field's department store group. Marshall Field's operates 62 department stores primarily in the Chicago, Detroit, and Minneapolis metropolitan areas. We acquired substantially all of Marshall Field's operating assets, including stores, inventory, customer receivables, and distribution centers and assumed certain liabilities, including accounts payable and accrued expenses. We also acquired the real estate associated with nine Mervyn's store locations in the Twin Cities area. The Mervyn's portion of the transaction closed in the third quarter 2004. The acquisition was financed through $2.2 billion of long-term debt and $1.0 billion of short-term borrowings and cash on hand. Marshall Field's results of operations have been included in our consolidated financial statements since acquisition. Our October 30, 2004 consolidated balance sheet includes the assets acquired and liabilities assumed using a preliminary purchase price allocation. The purchase price allocation is based on preliminary estimates and is subject to final third-party valuations. Restructuring Costs In July 2003, we announced our intention to divest 34 underperforming department stores. These divestitures will result in total estimated charges of $380 million, consisting of asset impairments of $317 million, liquidation markdowns of $35 million, severance benefits of $23 million, and other charges of $5 million. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. Of the $380 million of expected total charges, $351 million has been recognized to date. We recognized $1 million and $23 million in the third quarter and first nine months of 2004, respectively, and $6 million and $324 million was recognized in the third quarter and first nine months of 2003, respectively. Asset impairment charges were recorded to reduce store assets to their estimated fair value because of the shorter period over which they will be used. Estimated fair values were based on estimated market values for similar assets. Disposal gains or losses are recognized as each store is divested. Liquidation markdowns are incurred to liquidate inventory as stores to be divested are closed. The company is negotiating agreements with landlords and developers for each store divestiture. Through the end of the 2004 third quarter, 19 stores have been closed. Severance benefits are recognized as each store is closed. Severance benefits of $10 million for approximately 1,600 associates and liquidation markdowns and other costs of $24 million have been incurred to date. Remaining amounts will be recognized as each store is divested. Interest Expense Components of net interest expense were (millions): Third Quarter First Nine Months 2004 2003 2004 2003 Interest expense $121 $ 82 $290 $252 Interest income (1) - (8) (1) Capitalized interest (2) (4) (6) (13) Net interest expense $118 $ 78 $276 $238 On July 20, 2004, we issued $2.2 billion of long-term debt maturing over three to 30 years at a weighted average interest rate, including 19 amortized hedge and financing costs, of 5.71% to partially fund the Marshall Field's acquisition. The increase in interest expense in the 2004 third quarter and the first nine months of 2004 is due to the borrowings used to fund the Marshall Field's acquisition and debt redemption costs of $10 million. Short-term borrowings were (dollars in millions): Third Quarter First Nine Months 2004 2003 2004 2003 Average balance outstanding $817 $137 $280 $236 Average interest rate on average balance 1.8% 1.3% 1.8% 1.3% Income Taxes The effective income tax rate for the first nine months of 2004 was 37.0%, compared with 126.8% for the first nine months of 2003. 2003 results included a $31 million tax credit recorded in the first quarter 2003 upon the resolution of various federal and state income tax issues. Excluding the $31 million tax credit, our estimated effective tax rate for the first nine months of 2003 was 37.0%. We do not expect the recently enacted tax legislation to have a significant effect on our effective income tax rate. Trailing Years' Results Operating results for the trailing years were as follows (millions, except per share): Oct. 30, Nov. 1, 2004 2003 Net sales $ 13,896 $ 13,222 Net earnings $ 610 $ 396 Diluted earnings per share $ 1.97 $ 1.25 Financial Condition Cash Flows Cash flows from operations were $522 million and $691 million in the first nine months of 2004 and 2003, respectively. The decrease in cash flows from operations is due to the reduced effect of non-cash items, partially offset by an increase in earnings. Investing activities consisted primarily of the Marshall Field's acquisition, which was financed with a combination of short-term and long-term debt and cash on hand. Liquidity and Available Credit We finance our activities primarily with cash flows from operations, borrowings under credit facilities, and issuances of long-term debt. We can borrow up to $1.4 billion under our multi-year credit agreement expiring in August 2009. In addition, we have filed with the Securities and Exchange Commission shelf registration statements that enable us to issue up to $525 million of debt securities. On August 1, 2004, we redeemed $200 million 8-3/8% debentures due in 2024. Early redemption costs of $10 million, or $.02 per share, were recorded in the 2004 third quarter. Financial Ratios Key financial ratios as of and for the thirty-nine weeks ended October 30, 2004 and November 1, 2003 and as of and for the fifty-two weeks ended January 31, 2004 are as follows: Oct. 30, Nov. 1, Jan. 31, 2004 2003 2004 Current Ratio 1.5 1.7 1.9 Debt-Capitalization Ratio 59% 50% 46% Fixed Charge Coverage 1.9x 0.8x 2.6x 20 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, our ability to hire and retain qualified associates, our ability to manage the business to minimize the disruption of sales and customer service as a result of the restructuring activities, and those risks generally associated with the integration of Marshall Field's with May. Because of these factors, actual performance could differ materially from that described in the forward-looking statements. Item 3 - Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk primarily arises from changes in interest rates on short-term debt. Short-term debt has generally been used to finance seasonal working capital needs resulting in minimal exposure to interest rate fluctuations. Under certain circumstances, short-term debt may also be used to temporarily finance a portion of an acquisition, which may result in increased market risk from interest rate fluctuations. Long-term debt is at fixed interest rates. Our merchandise purchases are denominated in United States dollars. Operating expenses of our international offices are generally paid in local currency and are not material. During the first nine months of 2004, we entered into treasury lock agreements to hedge interest rate fluctuations in anticipation of the issuance of long-term debt related to the Marshall Field's acquisition. The results of the hedges did not have a material impact on our results of operations or financial position. We were not a party to any other derivative financial instruments during the first nine months of 2004 or 2003. Item 4 - Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. Other than described below, there have been no changes in our internal controls or in other factors that could materially affect these controls subsequent to the date the controls were evaluated. On July 31, 2004, we acquired the operating assets of the Marshall Field's department store group from Target Corporation. Target will continue to provide accounting and other systems support for Marshall Field's over a transition period not to exceed eight months while we migrate Marshall Field's to our information technology systems. During the 2004 third quarter, we converted proprietary credit operations and fixed asset accounting from Target to May systems and will convert to the May payroll system in the 2004 fourth quarter. The remaining accounting, merchant reporting, and store operating systems will convert in February and March 2005. Target and its operating divisions generally operate under a common set of controls and information technology systems. During the transition period, Marshall Field's will be subject to the same 21 financial reporting controls historically provided by Target. Target has not disclosed any material control weaknesses or material changes in its internal controls in previous public filings. PART II - OTHER INFORMATION Item 1 - Legal Proceedings The company is involved in claims, proceedings, and litigation arising from the operation of its business. The company does not believe any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the company's consolidated financial statements taken as a whole. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds In the third quarter 2004, the company did not repurchase any of its common stock. Item 3 - Defaults Upon Senior Securities - None. Item 4 - Submission of Matters to a Vote of Security Holders - None. Item 5 - Other Information - None. Item 6 - Exhibits Location 1.1 - Purchase Agreement, dated July 13, 2004 Incorporated by Reference to Exhibit 1.1 to Current Report on Form 8-K, filed July 21, 2004. 3.1 - Amended and Restated Certificate of Incorporated by Incorporation of May, dated May 22, 1996 Reference to Exhibit 4(a) of Post Effective Amendment No. 1 to Form S-8, filed May 29, 1996. 3.2 - Certificate of Amendment of the Amended and Incorporated by Restated Certificate of Incorporation, dated Reference to May 21, 1999 Exhibit 3(b) of Form 10-Q filed June 8, 1999. 3.3 - By-Laws of May Incorporated by Reference to Exhibit 3.3 of Form 10-Q filed September 3, 2004. 4.1 - Amended and Restated Rights Agreement, dated Incorporated by as of August 31, 2004 Reference to Exhibit 4.1 to Current Report on Form 8-K, filed September 3, 2004. 22 Item 6 - Exhibits (continued) Location 4.2 - Certificate of Designation, Preferences and Incorporated by Rights of the Junior Participating Preference Reference to Shares and ESOP Preference Shares Exhibit 4.4 of Form S-4 filed June 7, 1996. 4.3 - Indenture, dated as of July 20, 2004 Incorporated by Reference to Exhibit 4.1 to Current Report on Form 8-K, filed July 21, 2004. 4.4 - Indenture, dated as of June 17, 1996 Incorporated by Reference to Exhibit 4.1 of Form S-3 filed June 18, 1996. 4.5 - Registration Rights Agreement, Incorporated by dated July 20, 2004 Reference to Exhibit 4.2 to Current Report on Form 8-K, filed July 21, 2004. 10.1 - 1994 Stock Incentive Plan Incorporated by Reference to Exhibit 10.1 of Form 10-Q filed June 2, 2004. 10.2 - Deferred Compensation Plan Incorporated by Reference to Exhibit 10.2 of Form 10-Q filed June 2, 2004. 10.3 - Executive Incentive Compensation Incorporated by Plan for Corporate Executives Reference to the Definitive Proxy Statement for the 2004 Annual Meeting of Shareowners. 10.4 - Form of Employment Agreement Incorporated by Reference to Exhibit 10.4 of Form 10-K filed April 19, 2000. 10.5 - Amended and Restated Five-Year Credit Incorporated by Agreement, dated August 24, 2004 Reference to Exhibit 10.1 to Current Report on Form 8-K filed August 27, 2004. 23 Item 6 - Exhibits (continued) Location 12 - Computation of Ratio of Earnings Filed herewith. to Fixed Charges 15 - Letter Regarding Unaudited Interim Filed herewith. Financial Information 31.1 - Certification Pursuant to Exchange Filed herewith. Act 13a-15(e) and 15d-15(e) 31.2 - Certification Pursuant to Exchange Filed herewith. Act 13a-15(e) and 15d-15(e) 32 - Certification Pursuant to Section 906 of Filed herewith. the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted) 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY (Registrant) Date: November 30, 2004 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer 25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareowners of The May Department Stores Company We have reviewed the accompanying condensed consolidated balance sheets of The May Department Stores Company and subsidiaries (the "Company") as of October 30, 2004 and November 1, 2003, and the related condensed consolidated statements of earnings for the thirteen and thirty-nine week periods ended October 30, 2004 and November 1, 2003, and of cash flows for the thirty-nine week periods ended October 30, 2004 and November 1, 2003. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of January 31, 2004, and the related consolidated statements of earnings, shareowners' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 19, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP St. Louis, Missouri November 29, 2004 Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED JANUARY 31, 2004 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2004 AND NOVEMBER 1, 2003 (dollars in millions) 39 Weeks Ended Fiscal Year Ended Oct. 30, Nov. 1, Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29, 2004 2003 2004 2003 2002 2001 2000 Earnings Available for Fixed Charges: Pretax earnings (loss) $ 294 $ (34) $ 639 $ 820 $1,139 $1,402 $1,523 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 315 276 367 405 411 406 346 Dividends on ESOP preference shares (12) (14) (18) (20) (22) (23) (24) Capitalized interest amortization 7 7 10 9 8 8 7 $ 604 $ 235 $ 998 $1,214 $1,536 $1,793 $1,852 Fixed Charges: Gross interest expense (a) $ 292 $ 260 $ 345 $ 392 $ 401 $ 395 $ 340 Interest factor attributable to rent expense 29 30 38 36 32 28 22 $ 321 $ 290 $ 383 $ 428 $ 433 $ 423 $ 362 Ratio of Earnings to Fixed Charges 1.9 0.8 2.6 2.8 3.5 4.2 5.1 (a) Represents interest expense on long-term and short-term debt, ESOP debt, and amortization of debt discount and debt issue expense.
Exhibit 15 November 29, 2004 The May Department Stores Company St. Louis, Missouri We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim condensed consolidated financial information of The May Department Stores Company and subsidiaries (the "Company") for the thirteen and thirty-nine week periods ended October 30, 2004 and November 1, 2003, as indicated in our reports dated November 29, 2004 and December 4, 2003; because we did not perform an audit, we expressed no opinion on that information. We are aware that our reports referred to above, which are included in your Quarterly Reports on Form 10-Q for the quarters ended October 30, 2004 and November 1, 2003, are incorporated by reference in Registration Statements Nos. 333-59792, 333-76227, 333-00957, 333-103352 and 333-111987 on Form S-8, Registration Statements Nos. 333-42940 and 333-42940-01 on Form S-3, and Registration Statement No. 333-12007 on Form S-4. We also are aware that the aforementioned reports, pursuant to Rule 436(c) under the Securities Act of 1933, are not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP St. Louis, Missouri Exhibit 31.1 CERTIFICATION I, Eugene S. Kahn, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The May Department Stores Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 30, 2004 /s/ Eugene S. Kahn Eugene S. Kahn Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Thomas D. Fingleton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The May Department Stores Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 30, 2004 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350, as adopted) In connection with the Quarterly Report of The May Department Stores Company (the "Company") on Form 10-Q for the period ending October 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Eugene S. Kahn, Chairman of the Board and Chief Executive Officer, and Thomas D. Fingleton, Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), that: 1. The Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 30, 2004 /s/Eugene S. Kahn /s/ Thomas D. Fingleton Eugene S. Kahn Thomas D. Fingleton Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer