DILLARD'S, INC. The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year endedFebruary 1, 2020 .
EXECUTIVE OVERVIEW
InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughoutthe United States and the world. The COVID-19 pandemic has had and continues to have a significant impact on the Company's business, results of operations and financial position. The Company began closing stores onMarch 19, 2020 as mandated by state and local governments, and byApril 9, 2020 , all brick-and-mortar store locations were temporarily closed to the public. During the month endedMay 30, 2020 (fiscal May), we re-opened most of our full-line stores: 45 stores onMay 5th , 80 stores onMay 12th , 115 stores onMay 19th and 20th and 8 stores onMay 26th . All Dillard's store locations had been re-opened byJune 2, 2020 using theCenters for Disease Control and Prevention ("CDC") guidelines to promote a safe environment for our customers and employees. All stores are currently open and operating at reduced hours. A very small number of our locations were temporarily closed to in-store shopping due to government mandate. Other local mandates throughout the country require occupancy limits with which we are required to comply. We continue to monitor additional local government orders that may affect our operations. During the three months endedOctober 31, 2020 , total retail sales decreased approximately 25% and comparable store sales decreased approximately 24% compared to the three months endedNovember 2, 2019 . Retail gross margin increased 210 basis points of sales to 36.6% during the three months endedOctober 31, 2020 compared to 34.5% during the three months endedNovember 2, 2019 , primarily due to lower markdowns. The Company was able to reduce inventory by approximately 22% compared to the prior year third quarter by reducing purchases approximately 31%. Selling, general and administrative expenses decreased to$318.2 million compared to$418.1 million from the prior year third quarter primarily due to decreases in payroll expense partially as a result of the Company's reduced operating hours. The Company reported net income of$31.9 million ($1.43 per share) compared to net income of$5.5 million ($0.22 per share) for the prior year third quarter. The Company expects to be in a net operating loss position for fiscal year 2020. The Coronavirus Aid, Relief and Economic Security ("CARES") Act, signed into law onMarch 27, 2020 , allows for net operating loss carryback to years in which the tax rate was 35%. Included in net income for the quarter endedOctober 31, 2020 is a net tax benefit of$32.4 million ($1.46 per share) related to this provision. Also included in net income for the quarter is a pretax loss of$2.2 million ($1.4 million after tax or$0.06 per share) primarily related to the sale of a store property. Included in net income for the quarter endedNovember 2, 2019 is a pretax loss on disposal of assets of$0.3 million ($0.2 million after tax or$0.01 per share) related to the sale of a store property. Also included in net income for the quarter is$2.8 million ($0.11 per share) in tax benefits related to amended state tax return filings. During the three months endedOctober 31, 2020 , the Company purchased$19.5 million of its outstanding Class A Common Stock under its stock repurchase plan authorized by the Company's Board of Directors inMarch 2018 (the "March 2018 Plan"). As ofOctober 31, 2020 , authorization of$173.1 million remained under theMarch 2018 Plan. As ofOctober 31, 2020 , the Company had working capital of$767.0 million (including cash and cash equivalents of$61.1 million ) and$580.8 million of total debt outstanding, excluding finance lease liabilities and operating lease liabilities. Cash flows used in operating activities were$62.9 million for the nine months endedOctober 31, 2020 .
The Company maintained 282 Dillard's stores, including 32 clearance centers, and
an internet store at
OnFebruary 25, 2020 , the Company provided estimates for certain financial statement items, including depreciation and amortization, rentals, interest and debt expense, net and capital expenditures, for the fiscal year endingJanuary 30, 2021 based upon current conditions at that time, which did not include the impact of COVID-19. Due to heightened uncertainty relating to the impacts of COVID-19 on the Company's business operations, including the duration and impact on overall customer demand, the Company previously withdrew its 2020 guidance. 19
--------------------------------------------------------------------------------
Table of Contents
The Company believes that Dillard's is uniquely positioned, among
?The Company owns approximately 90% of its retail store square footage and 100% of its corporate headquarters, distribution and fulfillment facilities; ?Store rent obligations are small compared to the industry; ?Low long-term debt position with next payment dueJanuary 2023 ($45 million ); ?Amended$800 million revolving credit facility with no financial covenants as long as availability exceeds$100 million and no event of default occurs and is continuing; and ?Strong eCommerce platform at dillards.com which includes ship-from-store capability.
Key Performance Indicators
We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:
Three Months Ended
October 31, November 2,
2020 2019
Net sales (in millions) $ 1,024.9 $ 1,388.3
Retail stores sales trend (25) % (1) %
Comparable retail stores sales trend (24) % - %
Gross profit (in millions) $ 366.2 $ 461.5
Gross profit as a percentage of net sales 35.7 % 33.2 %
Retail gross profit as a percentage of net sales 36.6 % 34.5 %
Selling, general and administrative expenses as a percentage of net sales
31.0 % 30.1 %
Cash flow (used in) provided by operations (in millions)* $ (62.9) $ 23.0
Total retail store count at end of period 282 289
Retail sales per square foot $ 21 $ 28
Retail store inventory trend (22) % (4) %
Annualized retail merchandise inventory turnover 1.8 2.0
*Cash flow from operations data is for the nine months ended
General Net sales. Net sales includes merchandise sales of comparable and non-comparable stores and revenue recognized on contracts ofCDI Contractors, LLC ("CDI"), the Company's general contracting construction company. Comparable store sales includes sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior year, including our internet store. Comparable store sales excludes changes in the allowance for sales returns. Non-comparable store sales includes: sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns. Sales occur as a result of interaction with customers across multiple points of contact, creating an interdependence between in-store and online sales. Online orders are fulfilled from both fulfillment centers and retail stores. Additionally, online customers have the ability to buy online and pick up in-store. Retail in-store customers have the ability to purchase items that may be ordered and fulfilled from either a fulfillment center or another retail store location. Online customers may return orders via mail, or customers may return orders placed online to retail store locations. Customerswho earn reward points under the private label credit card program may earn and redeem rewards through in-store or online purchases. Service charges and other income. Service charges and other income includes income generated through the long-term private label card alliance withWells Fargo Bank, N.A. ("Wells Fargo Alliance "). Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments. 20 -------------------------------------------------------------------------------- Table of Contents Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts, non-specific margin maintenance allowances and merchandise margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, shipping to customers and direct payroll for salon personnel. Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs. Selling, general and administrative expenses. Selling, general and administrative expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
Depreciation and amortization. Depreciation and amortization expenses include depreciation and amortization on property and equipment.
Rentals. Rentals includes expenses for store leases, including contingent rent, office space and data processing and other equipment rentals.
Interest and debt expense, net. Interest and debt expense includes interest, net of interest income and capitalized interest, relating to the Company's unsecured notes, subordinated debentures and borrowings under the Company's credit facility. Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on finance lease liabilities.
Other expense. Other expense includes the interest cost and net actuarial loss components of net periodic benefit costs related to the Company's unfunded, nonqualified defined benefit plan and charges related to the write-off of deferred financing fees, if any.
Loss (gain) on disposal of assets. Loss (gain) on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment, as well as gains from insurance proceeds in excess of the cost basis of insured assets, if any. LIBOR The use of LIBOR is expected to be phased out by the end of 2021. At this time, there is no definitive information regarding the future utilization of LIBOR beyond 2021 or of any particular replacement rate. Going forward, we intend to work with our lenders to use a suitable alternative reference rate for the amended credit agreement, theWells Fargo Alliance and any other applicable agreements. We will continue to monitor, assess and plan for the phase out of LIBOR. Seasonality Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. 21 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding):
Three Months Ended Nine Months Ended
October 31, November 2, October 31, November 2,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Service charges and other income 2.7 2.5 3.2 2.3
102.7 102.5 103.2 102.3
Cost of sales 64.3 66.8 72.8 67.4
Selling, general and administrative expenses 31.0 30.1 32.1 28.8
Depreciation and amortization 5.2 4.0 5.7 3.8 Rentals 0.5 0.4 0.6 0.4 Interest and debt expense, net 1.2 0.8 1.4 0.8 Other expense 0.2 0.1 0.2 0.1 Loss (gain) on disposal of assets 0.2 - 0.1
(0.3)
Income (loss) before income taxes - 0.2 (9.6) 1.2
Income taxes (benefit) (3.1) (0.2) (4.5) 0.2
Net income (loss) 3.1 % 0.4 % (5.1) % 1.0 %
Net Sales
Three Months Ended
October 31, November 2,
(in thousands of dollars) 2020 2019 $ Change
Net sales:
Retail operations segment $ 994,588 $ 1,334,205 $ (339,617)
Construction segment 30,311 54,105 (23,794)
Total net sales $ 1,024,899 $ 1,388,310 $ (363,411)
The percent change in the Company's sales by segment and product category for
the three months ended October 31, 2020 compared to the three months ended
November 2, 2019 as well as the sales percentage by segment and product category
to total net sales for the three months ended October 31, 2020 are as follows:
% Change % of
2020 - 2019 Net Sales
Retail operations segment
Cosmetics (20.4) % 14 %
Ladies' apparel (38.3) 20
Ladies' accessories and lingerie (15.9) 15
Juniors' and children's apparel (24.4) 10
Men's apparel and accessories (24.7) 18
Shoes (25.2) 16
Home and furniture (3.5) 4
97
Construction segment (44.0) 3
Total 100 %
22--------------------------------------------------------------------------------
Table of Contents
Net sales from the retail operations segment decreased$339.6 million during the three months endedOctober 31, 2020 compared to the three months endedNovember 2, 2019 , decreasing approximately 25% in total and approximately 24% in comparable stores, primarily due to the impact of the COVID-19 pandemic. Sales in all product categories decreased significantly over the third quarter last year with the exception of home and furniture, which decreased moderately. We recorded a return asset of$7.5 million and$11.1 million and an allowance for sales returns of$12.5 million and$17.8 million as ofOctober 31, 2020 andNovember 2, 2019 , respectively. During the three months endedOctober 31, 2020 , net sales from the construction segment decreased$23.8 million or 44.0% compared to the three months endedNovember 2, 2019 due to a decrease in construction activity. The remaining performance obligations related to executed construction contracts totaled$97.2 million as ofOctober 31, 2020 decreasing approximately 38% fromFebruary 1, 2020 and increasing approximately 35% fromNovember 2, 2019 , respectively. We expect these remaining performance obligations to be earned over the next nine to eighteen months. Nine Months Ended October 31, November 2, (in thousands of dollars) 2020 2019 $ Change Net sales: Retail operations segment$ 2,638,831 $ 4,132,890 $ (1,494,059) Construction segment 91,767 147,724 (55,957) Total net sales$ 2,730,598 $ 4,280,614 $ (1,550,016) The percent change in the Company's sales by segment and product category for the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 as well as the sales percentage by segment and product category to total net sales for the nine months endedOctober 31, 2020 are as follows: % Change % of 2020 - 2019 Net Sales Retail operations segment Cosmetics (30.2) % 14 % Ladies' apparel (45.4) 21 Ladies' accessories and lingerie (31.3) 15 Juniors' and children's apparel (35.7) 10 Men's apparel and accessories (34.2) 18 Shoes (37.4) 15 Home and furniture (19.7) 4 97 Construction segment (37.9) 3 Total 100 % Net sales from the retail operations segment decreased$1.5 billion , or approximately 36% during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 primarily due to the impact of the COVID-19 pandemic. The Company reported no comparable store sales data for the period due to the temporary closure of its brick-and-mortar stores as well as the interdependence between in-store and online sales. Sales in all product categories decreased significantly during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 . During the nine months endedOctober 31, 2020 , net sales from the construction segment decreased$56.0 million or approximately 38% compared to the nine months endedNovember 2, 2019 due to a decrease in construction activity. 23
--------------------------------------------------------------------------------
Table of Contents
Service Charges and Other Income
Three Months Ended Nine Months Ended Three Months Nine Months
November 2, October 31, November 2, $ Change $ Change
(in thousands of dollars) October 31, 2020 2019 2020 2019 2020-2019 2020-2019
Service charges and other income:
Retail operations segment
Income from Wells Fargo Alliance $ 16,472 $ 23,879 $ 51,958 $ 66,219 $ (7,407) $ (14,261)
Shipping and handling income 7,917 6,670 28,140 18,908 1,247 9,232
Leased department income 212 993 1,075 3,202 (781) (2,127)
Other 2,562 2,482 6,600 8,604 80 (2,004)
27,163 34,024 87,773 96,933 (6,861) (9,160)
Construction segment 50 1,325 500 2,892 (1,275) (2,392)
Total service charges and other income $ 27,213 $ 35,349 $ 88,273 $ 99,825 $ (8,136) $ (11,552)
Service charges and other income is composed primarily of income from the Wells
Fargo Alliance . Income from the alliance decreased during the three and nine
months ended October 31, 2020 compared to the three and nine months ended
November 2, 2019 primarily due to decreases in finance charges. Shipping and
handling income increased during the three and nine months ended October 31,
2020 compared to the three and nine months ended November 2, 2019 primarily due
to the increase in online orders and ship-from-store capabilities.
Leased department income consisted primarily of commissions from a principal
licensed department of an upscale women's apparel vendor located in certain
stores. By the end of July 2020 , our agreement with this principal licensed
department had been terminated. We expect future leased department income to be
minimal.
Gross Profit
(in thousands of dollars) October 31, 2020 November 2, 2019 $ Change % Change
Gross profit:
Three months ended
Retail operations segment $ 364,232 $ 460,549 $ (96,317) (20.9) %
Construction segment 1,983 979 1,004 102.6
Total gross profit $ 366,215 $ 461,528 $ (95,313) (20.7) %
Nine months ended
Retail operations segment $ 737,673 $ 1,392,057 $ (654,384) (47.0) %
Construction segment 5,925 1,994 3,931 197.1
Total gross profit $ 743,598 $ 1,394,051 $ (650,453) (46.7) %
Three Months Ended Nine Months Ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Gross profit as a percentage of segment net
sales:
Retail operations segment 36.6 % 34.5 % 28.0 % 33.7 %
Construction segment 6.5 1.8 6.5 1.3
Total gross profit as a percentage of net
sales 35.7 33.2 27.2 32.6
Gross profit, as a percentage of sales, increased to 35.7% from 33.2% during the
three months ended
24
--------------------------------------------------------------------------------
Table of Contents
Gross profit from retail operations, as a percentage of sales, increased to
36.6% from 34.5% during the three months ended October 31, 2020 compared to the
three months ended November 2, 2019 primarily due to decreased markdowns. Gross
margin increased significantly in ladies' accessories and lingerie and home and
furniture. Gross margin increased moderately in ladies' apparel, men's apparel
and accessories, junior's and children's apparel and shoes. Gross margin was
essentially flat in cosmetics.
Gross profit from the construction segment increased 473 basis points of
construction sales for the three months ended
Gross profit, as a percentage of sales, decreased to 27.2% from 32.6% during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 . Gross profit from retail operations, as a percentage of sales, decreased to 28.0% from 33.7% during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 primarily due to increased markdowns taken as a result of the impact of the COVID-19 pandemic. Gross margin decreased significantly in ladies' apparel and shoes. Gross margin decreased moderately in men's apparel and accessories and junior's and children's apparel, while decreasing slightly in cosmetics. Gross margin increased moderately in ladies' accessories and lingerie, while increasing significantly in home and furniture.
Gross profit from the construction segment increased 511 basis points of
construction sales for the nine months ended
Inventory decreased 22% in total as ofOctober 31, 2020 compared toNovember 2, 2019 . A 1% change in the dollar amount of markdowns would have impacted the net loss by approximately$1 million and$5 million for the three and nine months endedOctober 31, 2020 , respectively.
Selling, General and Administrative Expenses ("SG&A")
(in thousands of dollars) October 31, 2020 November 2, 2019 $ Change % Change SG&A: Three months ended Retail operations segment $ 316,738 $ 416,707$ (99,969) (24.0) % Construction segment 1,480 1,442 38 2.6 Total SG&A $ 318,218 $ 418,149$ (99,931) (23.9) % Nine months ended Retail operations segment $ 871,096$ 1,227,588 $ (356,492) (29.0) % Construction segment 4,630 4,846 (216) (4.5) Total SG&A $ 875,726$ 1,232,434 $ (356,708) (28.9) % Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 SG&A as a percentage of segment net sales: Retail operations segment 31.8 % 31.2 % 33.0 % 29.7 % Construction segment 4.9 2.7 5.0 3.3 Total SG&A as a percentage of net sales 31.0 30.1 32.1 28.8 SG&A decreased by$99.9 million and increased 93 basis points of net sales during the three months endedOctober 31, 2020 compared to the three months endedNovember 2, 2019 . SG&A from retail operations decreased by$100.0 million and increased 62 basis points of net sales during the three months endedOctober 31, 2020 compared to the three months endedNovember 2, 2019 . The decrease in SG&A dollars was realized across all SG&A categories; however, it was primarily due to decreases in payroll expense. Payroll expense and related payroll taxes for the three months endedOctober 31, 2020 was$207.5 million compared to$288.6 million for the three months endedNovember 2, 2019 , a decline of 28.1%, which was driven by retail store locations operating at reduced hours, which required fewer sales associates. 25
--------------------------------------------------------------------------------
Table of Contents
SG&A decreased by$356.7 million and increased 328 basis points of net sales during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 . SG&A from retail operations decreased by$356.5 million and increased 331 basis points of net sales during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 . The decrease in SG&A dollars was realized across all SG&A categories; however, the decrease was primarily due to decreases in payroll expense. Payroll expense and related payroll taxes for the nine months endedOctober 31, 2020 was$560.1 million compared to$854.0 million for the nine months endedNovember 2, 2019 , a decline of 34.4%. The Company furloughed store associates as stores closed due to the COVID-19 pandemic, and furlough actions were also implemented in certain corporate and support facility functions. Stores then re-opened at reduced operating hours, requiring fewer sales associates. During the nine months endedOctober 31, 2020 , the Company was also able to reduce payroll expense and related benefits by$6.1 million through the employee retention credit available under the CARES Act. Depreciation and Amortization October 31, November 2, (in thousands of dollars) 2020 2019 $ Change % Change Depreciation and amortization: Three months ended Retail operations segment$ 53,290 $ 55,963 $ (2,673) (4.8) % Construction segment 87 180 (93) (51.7) Total depreciation and amortization$ 53,377 $ 56,143 $ (2,766) (4.9) % Nine months ended Retail operations segment$ 154,806 $ 162,364 $ (7,558) (4.7) % Construction segment 423 526 (103) (19.6) Total depreciation and amortization$ 155,229 $ 162,890 $ (7,661) (4.7) % Depreciation and amortization expense decreased$2.8 million and$7.7 million during the three and nine months endedOctober 31, 2020 compared to the three and nine months endedNovember 2, 2019 , primarily due to the timing and composition of capital expenditures.
Interest and Debt Expense, Net
October 31, November 2,
(in thousands of dollars) 2020 2019 $ Change % Change
Interest and debt expense (income), net:
Three months ended
Retail operations segment $ 12,167 $ 11,562 $ 605 5.2 %
Construction segment (5) (26) 21 80.8
Total interest and debt expense, net $ 12,162 $ 11,536 $ 626 5.4 %
Nine months ended
Retail operations segment $ 37,343 $ 35,104 $ 2,239 6.4 %
Construction segment (38) (83) 45 54.2
Total interest and debt expense, net $ 37,305 $ 35,021 $ 2,284 6.5 %
Net interest and debt expense increased $0.6 million during the three months
ended October 31, 2020 compared to the three ended November 2, 2019 primarily
due to an increase in fees associated with the amendment of the credit facility.
Net interest and debt expense increased $2.3 million during the nine ended
October 31, 2020 compared to the nine months ended November 2, 2019 primarily
due to an increase in short term borrowings under the credit facility. Total
weighted average debt increased by $10.3 million and $111.8 million during the
three and nine months ended October 31, 2020 , respectively, compared to the
three and nine months ended November 2, 2019 primarily due to the increase of
short term borrowings.
26--------------------------------------------------------------------------------
Table of Contents
Loss (Gain) on Disposal of Assets
October 31, November 2,
(in thousands of dollars) 2020 2019 $ Change
Loss (gain) on disposal of assets:
Three months ended
Retail operations segment
(13) 1 (14)
Total loss (gain) on disposal of assets Nine months ended Retail operations segment
(26) 1 (27)
Total loss (gain) on disposal of assets During the three and nine months endedOctober 31, 2020 , the Company recorded proceeds of$1.5 million primarily from the sale of one store property, resulting in a loss of$2.2 million that was recorded in loss (gain) on disposal of assets. During the three months endedNovember 2, 2019 , the Company recorded a loss of$0.3 million primarily from the sale of one store property. that was recorded in loss (gain) on disposal of assets. During the nine months endedNovember 2, 2019 , the Company recorded proceeds of$22.0 million primarily from the sale of three store properties, resulting in a gain of$12.0 million that was recorded in loss (gain) on disposal of assets.
Income Taxes
The Company expects to be in a net operating loss position for the fiscal year. The CARES Act, signed into law onMarch 27, 2020 , allows for net operating loss carryback to years in which the statutory federal tax rate was 35% rather than the current 21%. The Company's estimated federal and state effective income tax rate was approximately 46.9% for the nine months endedOctober 31, 2020 . During the three and nine months endedOctober 31, 2020 , income tax benefit differed from what would be computed using the current statutory federal tax rate of 21% primarily due to the recognition of a net tax benefit of$32.4 million and$64.6 million , respectively, related to the rate differential in the carryback year including its impact on changes in estimates of temporary differences for the current and prior year. Income tax benefit for the three and nine months also included the effects of federal tax credits and state and local income taxes. The Company's estimated federal and state effective income tax rate was approximately -88.2% and 15.8% for the three and nine months endedNovember 2, 2019 , respectively. During the three and nine months endedNovember 2, 2019 , income taxes differed from what would be computed using the statutory federal tax rate primarily due to the effects of federal tax credits and state and local income taxes which included tax benefits recognized of approximately$2.8 million for amended state income tax return filings and related decreases to accrued state income taxes. Due to uncertainty relating to the impacts of COVID-19 on the Company's business operations, the Company is not providing an expected fiscal 2020 federal and state effective income tax rate. 27 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION
A summary of net cash flows for the nine months ended
Nine Months Ended
(in thousands of dollars) October 31, 2020 November 2, 2019 $ Change
Operating Activities $ (62,938) $ 22,984 $ (85,922)
Investing Activities (50,352) (47,534) (2,818)
Financing Activities (102,663) (11,427) (91,236)
Total Decrease in Cash, Cash Equivalents and Restricted Cash $
(215,953) $ (35,977)
Net cash flows from operations decreased$85.9 million during the nine months endedOctober 31, 2020 compared to the nine months endedNovember 2, 2019 due to significant decreases in net income, primarily due to decreases in sales, and changes in working capital.
The Company took a number of actions to enhance liquidity during the nine months
ended
?Extended vendor payment terms during the first quarter but restored most vendors to standard payment terms byAugust 1, 2020 ?Canceled, suspended and significantly delayed merchandise shipments ?Reduced merchandise purchases during the first, second and third quarters by 33%, 62% and 31%, respectively ?Reviewed and reduced discretionary operating and capital expenditures ?Reduced payroll expense ?Executed aggressive promotional markdowns to clear inventory Wells Fargo owns and manages the Dillard's private label cards under theWells Fargo Alliance . Under theWells Fargo Alliance , Wells Fargo establishes and owns private label card accounts for our customers, retains the benefits and risks associated with the ownership of the accounts, provides key customer service functions, including new account openings, transaction authorization, billing adjustments and customer inquiries, receives the finance charge income and incurs the bad debts associated with those accounts. Pursuant to theWells Fargo Alliance , we receive on-going cash compensation from Wells Fargo based upon the portfolio's earnings. The compensation received from the portfolio is determined monthly and has no recourse provisions. The amount the Company receives is dependent on the level of sales on Wells Fargo accounts, the level of balances carried on Wells Fargo accounts by Wells Fargo customers, payment rates on Wells Fargo accounts, finance charge rates and other fees on Wells Fargo accounts, the level of credit losses for the Wells Fargo accounts as well as Wells Fargo's ability to extend credit to our customers. We participate in the marketing of the private label cards, which includes the cost of customer reward programs.The Wells Fargo Alliance expires in fiscal 2024. The Company received income of$52.0 million and$66.2 million from theWells Fargo Alliance during the nine months endedOctober 31, 2020 andNovember 2, 2019 , respectively. The Company is unable to quantify the impact of the COVID-19 pandemic on the portfolio's earnings and the on-going cash compensation from theWells Fargo Alliance . During the nine months endedOctober 31, 2020 , the Company received proceeds from insurance of$8.7 million for claims filed for merchandise losses related to storm damage incurred at two stores. Capital expenditures were$52.1 million and$70.9 million for the nine months endedOctober 31, 2020 andNovember 2, 2019 , respectively. The capital expenditures were primarily related to equipment purchases and the remodeling of existing stores during the current year.
During the nine months ended
During the nine months endedNovember 2, 2019 , the Company received cash proceeds of$22.0 million and recorded a related gain of$12.0 million for the sale of three store locations inBoardman, Ohio ,Boynton Beach, Florida andCary, North Carolina . The proceeds from theCary, North Carolina store sale were being held in escrow for the acquisition of replacement property under a like-kind exchange agreement. The escrow account was administered by an intermediary. Pursuant to the like- 28 -------------------------------------------------------------------------------- Table of Contents kind exchange agreement, the cash was restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. As ofNovember 2, 2019 , the acquisitions of a replacement property had not yet occurred; therefore, the proceeds were classified as restricted cash on the condensed consolidated balance sheet. The proceeds from theBoardman, Ohio store sale were previously held in escrow prior to the acquisition of the replacement property atColumbia Mall inColumbia, Missouri during the third quarter of fiscal 2019. During the nine months endedOctober 31, 2020 , the Company opened an 85,000 square foot expansion atColumbia Mall inColumbia, Missouri (dual-anchor location totaling 185,000 square feet). Additionally, the Company replaced a 100,000 square foot leased facility atRichland Fashion Mall inWaco, Texas with a 125,000 square foot owned facility (dual-anchor location totaling 190,000 square feet). During the nine months endedOctober 31, 2020 , we permanently closed the locations atCentral Mall inLawton, Oklahoma (100,000 square feet); Crossroads Center inWaterloo, Iowa (150,000 square feet); andNorth Plains Mall inClovis, New Mexico (62,000 square feet). We announced the upcoming closure of theParadise Valley Mall location inPhoenix, Arizona (200,000 square feet). We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to such stores when they close. The Company had cash on hand of$61.1 million as ofOctober 31, 2020 . As part of our overall liquidity management strategy and for peak working capital requirements, the Company maintained an unsecured credit facility that provided a borrowing capacity of$800 million with a$200 million expansion option ("credit agreement") until the credit agreement was amended inApril 2020 (the "amended credit agreement"). After giving effect to the amendment, the amended credit agreement became secured by certain deposit accounts of the Company and certain inventory of certain subsidiaries. The amended credit agreement is available to the Company for general corporate purposes including, among other uses, working capital financing, the issuance of letters of credit, capital expenditures and, subject to certain restrictions, the repayment of existing indebtedness and share repurchases. The rate of interest on borrowings under the amended credit agreement is the greater of LIBOR or 1.0% plus 1.750%, and the commitment fee for unused borrowings is 0.30% per annum. So long as availability exceeds$100 million and no event of default occurs and is continuing, there are no financial covenant requirements under the amended credit agreement. The Company paid$3.2 million in issuance costs related to the amended credit agreement, which were recorded in other assets on the condensed consolidated balance sheet. As part of the Company's liquidity strategy during the COVID-19 pandemic, inMarch 2020 , the Company borrowed$779 million under the credit agreement, which was repaid concurrent with the execution of the amended credit agreement. AtOctober 31, 2020 , borrowings of$15.0 million were outstanding, and letters of credit totaling$21.1 million were issued under the amended credit agreement leaving unutilized availability under the credit facility of$763.9 million . The weighted average interest rate under the credit agreement for the borrowings outstanding atOctober 31, 2020 was 2.75%. During the nine months endedOctober 31, 2020 , the Company repurchased 2.2 million shares of Class A Common Stock at an average price of$42.83 per share for$95.6 million under the Company'sMarch 2018 Plan. Additionally, the Company paid$7.3 million for share repurchases that had not yet settled but were accrued atFebruary 1, 2020 . During the nine months endedNovember 2, 2019 , the Company repurchased 1.7 million shares of Class A Common Stock at an average price of$60.96 per share for$101.5 million under the Company'sMarch 2018 Plan. AtOctober 31, 2020 ,$173.1 million of authorization remained under theMarch 2018 Plan. The ultimate disposition of the repurchased stock has not been determined. The COVID-19 pandemic has had a significant negative effect on the Company's liquidity and net sales. Due to heightened uncertainty relating to the impacts of COVID-19 on the Company's business operations, including the duration and impact on overall customer demand, our liquidity, net sales and profitability may be further impacted if we are unable to appropriately manage our inventory levels and expenses. The Company expects to finance its operations during fiscal 2020 from cash on hand, cash flows generated from operations and utilization of the credit facility. Depending upon our actual and anticipated sources and uses of liquidity, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to fund working capital or for other corporate purposes. There have been no material changes in the information set forth under caption "Contractual Obligations and Commercial Commitments" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Company's Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 . 29 -------------------------------------------------------------------------------- Table of Contents OFF-BALANCE-SHEET ARRANGEMENTS The Company has not created, and is not party to, any special-purpose entities or off-balance-sheet arrangements for the purpose of raising capital, incurring debt or operating the Company's business. The Company does not have any off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources. 30 -------------------------------------------------------------------------------- Table of Contents NEW ACCOUNTING STANDARDS
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2, Accounting Standards, in the "Notes to Condensed Consolidated Financial Statements," in Part I, Item I hereof.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "estimate," "continue," or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company's future occurrences, plans and objectives, including statements regarding management's expectations and forecasts for the remainder of fiscal 2020 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements concerning capital expenditures and sources of liquidity, statements regarding the expected impact of the COVID-19 pandemic and related government responses, statements concerning share repurchases, statements concerning pension contributions, statements regarding the expected phase out of LIBOR and statements concerning estimated taxes. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) the COVID-19 pandemic and its effects on public health, our supply chain, the health and well-being of our employees and customers, and the retail industry in general; other general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company's stores are located and the effect of these factors on the buying patterns of the Company's customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in tax legislation; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability and pricing of materials, production facilities and labor from which the Company sources its merchandise; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company's future business; fluctuations in LIBOR and other base borrowing rates; the elimination of LIBOR; potential disruption from terrorist activity and the effect on ongoing consumer confidence; other epidemic, pandemic or public health issues; potential disruption of international trade and supply chain efficiencies; any government-ordered restrictions on the movement of the general public or the mandated or voluntary closing of retail stores in response to the COVID-19 pandemic; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company's filings with theSecurities and Exchange Commission , including its Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements.
© Edgar Online, source
