ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Dillard's, Inc. operates 280 retail department stores spanning 29 states and an Internet store. The Company also operates a general contracting construction company, CDI, a portion of whose business includes constructing and remodeling stores for the Company, which is a reportable segment separate from our retail operations.
In accordance with the National Retail Federation fiscal reporting calendar and our bylaws, the Company's fiscal year ends on the Saturday nearest January 31 of each year. Fiscal 2021, 2020 and 2019 ended on January 29, 2022, January 30, 2021 and February 1, 2020, respectively, and contained 52 weeks each.
A discussion regarding results of operations and analysis of financial condition for the year ended January 30, 2021, as compared to the year ended February 1, 2020 is included in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended January 30, 2021.
Due to the significant impact of COVID-19 on prior year figures, the information that follows will include certain comparisons to 2019 to provide additional context.
EXECUTIVE OVERVIEW
Fiscal 2021
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to impact the United States and global economies. The COVID-19 pandemic has had a significant impact on the Company's business, results of operations and financial position. The Company began closing stores on March 19, 2020 as mandated by state and local governments, and by April 9, 2020, all of the Company's brick-and-mortar store locations were temporarily closed to the public. Our eCommerce capabilities allowed us to use our closed store locations (with limited staffing) to fill orders from our Internet store.
During the month ended May 30, 2020 (fiscal May), we re-opened most of our full-line stores, and by June 2, 2020 all Dillard's store locations had been re-opened. All stores remained open throughout the fiscal year ended January 29, 2022, although operating at reduced hours compared to fiscal 2019.
Our results for fiscal 2021 improved significantly over fiscal 2020 and 2019. Beginning in the first quarter of 2021, as COVID-19 vaccines were rolled out, stimulus checks were released and warmer weather arrived, we began to experience improving sales, with momentum continuing throughout the year. Total retail sales increased 53% compared to fiscal 2020. The Company is not reporting comparable store retail sales for the 2021 fiscal year compared to fiscal 2020 due to the aforementioned COVID-19 store closures during the first half of fiscal 2020. Compared to fiscal 2019, comparable store retail sales increased 8%.
Gross margin improved significantly in fiscal 2021 compared to fiscal 2020 and 2019 primarily as a result of stronger consumer demand combined with our continued efforts to control inventory. Both factors resulted in less promotional activity and decreased markdowns compared to fiscal 2020 and 2019. Consolidated gross margin improved to a record 42.3% of sales during fiscal 2021 from 28.6% of sales in fiscal 2020. Retail gross margin for fiscal 2021 improved to a record 42.9% of sales from 29.4% of sales and 32.6% of sales for fiscal 2020 and 2019, respectively. Inventory at January 29, 2022 decreased 1% compared to January 30, 2021.
Consolidated selling, general and administrative (“SG&A”) expenses for fiscal 2021 increased to $1,536.6 million compared to $1,211.5 million for fiscal 2020. The increase of $325.1 million is primarily a result of COVID-19 related disruption in fiscal 2020 marked by temporary store closures and SG&A expense saving measures. Improved sales during 2021 provided support for the increased SG&A expenses which decreased approximately 450 basis points to 23.7% of sales from 28.2% of sales in fiscal 2020. Compared to fiscal 2019, consolidated SG&A expenses decreased $154.5 million to $1,536.6 million from $1,691.0 million, improving approximately 360 basis points of sales. The decrease is primarily due to decreased payroll and payroll-related taxes as we operated with reduced hours and fewer associates during fiscal 2021 compared to fiscal 2019.
Dillard's reported record net income for fiscal 2021 of $862.5 million ($41.88 per share) compared to a net loss of $71.7 million ($3.16 per share) for fiscal 2020.
Included in net income for fiscal 2021 is a pretax gain of $24.7 million ($19.5 million after tax or $0.95 per share) primarily related to the sale of three store properties and a net tax benefit of $18.0 million ($0.88 per share) due to the deduction related to that portion of a special dividend of $15 per share that was paid to the Dillard's, Inc. Investment and Employee Stock Ownership Plan during the year.
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Included in the net loss for fiscal 2020 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 and $10.7 million ($8.4 million after tax or $0.37 per share) in asset impairment charges. Also included in the net loss for fiscal 2020 is a net tax benefit of $45.2 million ($1.99 per share) related to The Coronavirus Aid, Relief and Economic Security ("CARES") Act.
We reported record cash flow provided by operations for fiscal 2021 of $1,280.0 million compared to $252.9 million for fiscal 2020. During fiscal 2021, we purchased $561.1 million (approximately 3.2 million shares) of Class A Common Stock under our share repurchase programs. As of January 29, 2022, authorization of $112.0 million remained under the May 2021 Stock Plan. During fiscal 2021, we paid $305.2 million in dividends including a special dividend of $15 per share in December of 2021. On February 24, 2022, we announced a new $500 million share repurchase program.
As of January 29, 2022, we had working capital of $948.5 million (including cash and cash equivalents of $716.8 million) and $566.0 million of total debt outstanding, excluding operating lease liabilities, and including one scheduled debt maturity of $44.8 million at the end of fiscal 2022.
Key Performance Indicators
We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:
Gross margin as a percentage of net sales 42.3 % 28.6 % 31.7 %
Retail gross margin as a percentage of retail net sales 42.9 % 29.4 % 32.6 %
Total retail store count at end of period 280 282 285
Retail sales per square foot $ 138 $ 90 $ 127
Retail stores sales trend 53 % (31) % (2) % *
Comparable retail store sales trend ** ** (1) % *
Retail store inventory trend (1) % (26) % (4) %
Retail merchandise inventory turnover 2.9 2.0 2.4
* Based upon the 52 weeks ended February 1, 2020 and the 52 weeks ended February 2, 2019.
** The Company reported no comparable store sales data for the fiscal year due to the temporary COVID-19-related closures of its brick-and-mortar stores during the first and second quarters of fiscal 2020 as well as the interdependence between in-store and online sales.
Trends and Uncertainties
Fluctuations in the following key trends and uncertainties may have a material effect on our operating results.
•Cash flow—Cash from operating activities is a primary source of our liquidity that is adversely affected when the retail industry faces economic challenges. Furthermore, operating cash flow can be negatively affected by competitive factors.
•Pricing—If our customers do not purchase our merchandise offerings in sufficient quantities, we respond by taking markdowns. If we have to reduce our retail selling prices, the cost of sales on our consolidated statement of operations will correspondingly rise, thus reducing our net income and cash flow.
•Success of brand—The success of our exclusive brand merchandise as well as merchandise we source from national vendors is dependent upon customer fashion preferences and how well we can predict and anticipate trends.
•Sourcing—Our store merchandise selection is dependent upon our ability to acquire appealing products from a number of sources. Our ability to attract and retain compelling vendors as well as in-house design talent, the adequacy and stable availability of materials and production facilities from which we source our merchandise
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and the speed at which we can respond to customer trends and preferences all have a significant impact on our merchandise mix and, thus, our ability to sell merchandise at profitable prices.
•Store growth—Our ability to open new stores is dependent upon a number of factors, such as the identification of suitable markets and locations and the availability of shopping developments, especially in a weak economic environment. Store growth can be further hindered by mall attrition and subsequent closure of underperforming properties.
At present, a number of economic and geopolitical factors are affecting the U.S. and world economies, including rising gas prices (in part due to the war in Ukraine and the resulting sanctions imposed on Russia by the U.S. and other countries), increased shipping costs with reduced shipping capacity, U.S. port slowdowns, increasing U.S. wages in a tight labor market as well as some continuing effects from the COVID-19 pandemic, including countries from which we source some of our merchandise. The extent to which our business will be affected by these factors depends on our customer’s ability and willingness to accept price increases. Accordingly, the related financial impact to fiscal 2022 from these factors cannot be reasonably estimated at this time.
Seasonality and Inflation
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.
We do not believe that inflation has had a material effect on our results during the periods presented; however, our business will likely be affected by inflation in fiscal 2022, the extent of which depends on the customer's ability and willingness to accept price increases.
2022 Guidance
A summary of management's estimates of certain financial measures for fiscal 2022 is shown below:
(in millions of dollars) Fiscal 2022 Estimated Fiscal 2021 Actual
Depreciation and amortization $ 190 $ 199
Interest and debt expense, net 42 43
General
Net sales. Net sales includes merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company. Comparable store sales includes sales for those stores which were in operation for a full period in both the most recently completed quarter and the corresponding quarter for the prior fiscal 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. Customers who 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 marketing and servicing alliance with Wells 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.
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
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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, 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 obligations.
Other expense. Other expense includes the interest cost and net actuarial loss components of net periodic benefit costs and charges related to the write off of certain deferred financing fees in connection with the amendment and extension of the Company's secured revolving credit facility.
(Gain) loss on disposal of assets. (Gain) loss on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment, as well as gains from any insurance proceeds in excess of the cost basis of the insured assets.
Asset impairment and store closing charges. Asset impairment and store closing charges consist of (a) write-downs to fair value of under-performing or held for sale properties and cost method investments and (b) exit costs associated with the closure of certain stores, if any. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.
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Critical Accounting Policies and Estimates
The Company's significant accounting policies are also described in Note 1 in the "Notes to Consolidated Financial Statements" in Item 8 hereof. As disclosed in that note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Since future events and their effects cannot be determined with absolute certainty, actual results could differ from those estimates.
Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Company's consolidated financial statements.
Merchandise inventory. All of the Company’s inventories are valued at the lower of cost or market using the last-in, first-out (“LIFO”) inventory method. Approximately 95% of the Company's inventories are valued using the LIFO retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost to retail ratio to the retail value of inventories. The retail inventory method is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the retail inventory method calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. During periods of deflation, inventory values on the first-in, first-out ("FIFO") retail inventory method may be lower than the LIFO retail inventory method. Additionally, inventory values at LIFO cost may be in excess of net realizable value. At January 29, 2022 and January 30, 2021, merchandise inventories valued at LIFO, including adjustments as necessary to record inventory at the lower of cost or market, approximated the cost of such inventories using the FIFO retail inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales for fiscal 2021, 2020, or 2019. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $8 million for fiscal 2021.
The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of merchandise inventory. Complete physical inventories of the Company's stores and warehouses are performed at least once during each fiscal year, with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts. The differences between the estimated amounts of shrinkage and the actual amounts realized during the past three years have not been material.
Revenue recognition. The Company's retail operations segment recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns of merchandise. The asset and liability for sales returns are based on historical evidence of our return rate. We recorded an allowance for sales returns of $19.6 million and $11.7 million and return assets of $10.8 million and $7.5 million as of January 29, 2022 and January 30, 2021, respectively. The return asset and the allowance for sales returns are recorded in the consolidated balance sheets in other current assets and trade accounts payable and accrued expenses, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision were not material for fiscal 2021, 2020 and 2019.
The Company's share of income under the Wells Fargo Alliance, involving the Dillard's branded private label credit cards is included as a component of service charges and other income. The Company recognized income of $74.8 million, $78.6 million and $91.2 million from the alliance in fiscal 2021, 2020 and 2019, respectively. The Company participates in the marketing of the private label credit cards, which includes the cost of customer reward programs. Through the reward programs, customers earn points that are redeemable for discounts on future purchases. The Company defers a portion of its net sales upon the sale of merchandise to its customer reward program members that is recognized in net sales when the reward is redeemed or expired at a future date.
Revenues from CDI construction contracts are generally measured based on the ratio of costs incurred to total estimated contract costs (the "cost-to-cost method"). Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on stand-alone selling prices. Construction contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods and services that are not distinct from the existing contracts; therefore, the modifications are accounted for as if they were part of the existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation for which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. The length of each contract varies but is typically nine to eighteen months. The progress towards completion is
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determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. Estimated contract losses are recognized in full when determined.
Construction contracts give rise to accounts receivable, contract assets and contract liabilities. We record accounts receivable based on amounts billed to customers. We also record costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) in other current assets and trade accounts payable and accrued expenses, respectively, on the consolidated balance sheets.
Vendor allowances. The Company receives concessions from vendors through a variety of programs and arrangements, including cooperative advertising, payroll reimbursements and margin maintenance programs.
Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. We are not able to assess the impact of vendor advertising allowances on creating additional revenues, as such allowances do not directly generate revenues for our stores.
Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred.
Amounts of margin maintenance allowances are recorded only when an agreement has been reached with the vendor and the collection of the concession is deemed probable. All such merchandise margin maintenance allowances are recognized as a reduction of cost purchases. Under the retail inventory method, a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory.
Insurance accruals. The Company's consolidated balance sheets include liabilities with respect to claims for self-insured workers' compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $2 million per claim). The Company's retentions are insured through a wholly-owned captive insurance subsidiary. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As of January 29, 2022 and January 30, 2021, insurance accruals of $39.9 million and $37.9 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. These expenses declined in fiscal 2020 due to temporary store closures, reduced operating hours and decreased associate headcount in response to COVID-19. We do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. A 10% change in our self-insurance reserve would have affected net income by approximately $3 million for fiscal 2021.
Long-lived assets. The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets and operating lease assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
•Significant changes in the manner of our use of assets or the strategy for the overall business;
•Significant negative industry or economic trends;
•A current-period operating or cash flow loss combined with a history of operating or cash flow losses; and
•Store closings.
The Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the fair value, the carrying value is reduced to its fair value. Various factors including future sales growth, profit margins and real estate values are included in this analysis. To the extent these future projections, the Company's strategies, or market conditions change, the conclusion regarding impairment may differ from the current estimates.
Income taxes. Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management's estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company's actual results differ from estimated results due to changes in tax laws, changes in store locations, settlements of tax audits or tax planning, the Company's effective tax rate and tax balances could be affected.
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As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change. Changes in the Company's assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.
The total amount of unrecognized tax benefits as of January 29, 2022 was $6.7 million, of which, $3.9 million would, if recognized, affect the Company's effective tax rate. The total amount of unrecognized tax benefits as of January 30, 2021 was $5.1 million, of which $3.3 million would, if recognized, affect the Company’s effective tax rate. The Company does not expect a significant change in unrecognized tax benefits in the next twelve months. The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements as income tax expense. The total amounts of interest and penalties were not material.
The fiscal tax years that remain subject to examination for the federal tax jurisdiction are 2015, 2016 and 2018 and forward. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company's consolidated financial statements.
Pension obligations. The discount rate that the Company utilizes for determining future pension obligations is based on the FTSE Above Median Pension yield curve on its annual measurement date as of the end of each fiscal year and is matched to the future expected cash flows of the benefit plans by semi-annual periods. The discount rate increased to 3.0% as of January 29, 2022 from 2.5% as of January 30, 2021. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $226.3 million is appropriately stated as of January 29, 2022; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would increase or decrease the pension liability by approximately $13 million. The Company expects to make a contribution to the pension plan of approximately $6.2 million in fiscal 2022. The Company expects pension expense to be approximately $11.8 million in fiscal 2022.
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RESULTS OF OPERATIONS
The following table sets forth the results of operations and percentage of net sales, for the periods indicated:
For the years ended
Asset impairment and store closing charges — — 10,736 0.2 — —
Sales
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Net sales:
The percent change by segment and product category in the Company's sales for the past two years is as follows:
Percent Change
Retail operations segment
Ladies' accessories and lingerie 41.9 (25.8)
Juniors' and children's apparel 61.5 (30.5)
Men's apparel and accessories 61.1 (29.9)
Construction segment (15.9) (26.5)
2021 Compared to 2020
Net sales from the retail operations segment increased $2.2 billion during fiscal 2021 compared to fiscal 2020, an increase of 53% primarily due to the impact of the COVID-19 pandemic. The Company reported no comparable store sales data for the fiscal year due to the temporary closure of its brick-and-mortar stores in fiscal 2020 as well as the interdependence between in-store and online sales. During fiscal 2021, sales in all product categories increased significantly.
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Net sales from the construction segment decreased $22.4 million or 16% during fiscal 2021 as compared to fiscal 2020 due to a decrease in construction activity. The remaining performance obligations related to executed construction contracts totaled $93.9 million, increasing approximately 23% from January 30, 2021.
2021 Compared to 2019
Net sales from the retail operations segment increased $362.6 million during fiscal 2021 compared to fiscal 2019, an increase of 6%, while sales in comparable stores increased 8%.
Exclusive Brand Merchandise
Sales penetration of exclusive brand merchandise for fiscal 2021, 2020 and 2019 was 22.7%, 20.4% and 21.1% of total net sales, respectively.
Service Charges and Other Income
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Service charges and other income:
Retail operations segment
2021 Compared to 2020
Service charges and other income is composed primarily of income from the Wells Fargo Alliance. Income from the alliance decreased $3.8 million in fiscal 2021 compared to fiscal 2020 primarily due to decreases in finance charges partially offset by decreases in credit losses. Shipping and handling income increased during fiscal 2021 primarily due to an increase in online shopping.
2021 Compared to 2019
Income from the Wells Fargo Alliance decreased $16.4 million in fiscal 2021 compared to fiscal 2019 primarily due to decreases in finance charges partially offset by decreases in credit losses. Shipping and handling income increased $13.6 million in fiscal 2021 compared to fiscal 2019 primarily due to the increase in online orders and ship-from-store capabilities.
Gross Margin
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Gross margin:
Gross margin as a percentage of segment net sales:
Retail operations segment 42.9 % 29.4 % 32.6 %
Construction segment 7.2 5.8 3.8
Total gross margin as a percentage of net sales 42.3 28.6 31.7
2021 Compared to 2020
Gross margin as a percentage of net sales increased 1,364 basis points of sales during fiscal 2021 compared to fiscal 2020. Gross margin from retail operations increased 1,352 basis points of segment net sales during the same periods. The
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increase is primarily due to increased markdowns taken during fiscal 2020 as a result of the COVID-19 pandemic as well as better inventory management and stronger customer demand leading to decreased markdowns in fiscal 2021. During fiscal 2021, gross margin increased significantly in all product categories, except for cosmetics, which increased moderately. Retail store inventory decreased 1% at January 29, 2022 compared to January 30, 2021.
We source a significant portion of our private label and exclusive brand merchandise from countries that have experienced widespread transmission of the COVID-19 virus. Additionally, many of our branded merchandise vendors may also source a significant portion of their merchandise from these same countries. Manufacturing capacity in those countries has been significantly impacted by the pandemic and in some countries the pandemic continues to negatively impact our supply chain with shipping delays as well as increased shipping costs.
Additionally, disruptions in the global transportation network, which began in fiscal 2020, continued throughout fiscal 2021, and it is unclear when these issues will be resolved. The California ports of Los Angeles and Long Beach, which together handle a significant portion of United States merchandise imports including our own imports, have experienced and are continuing to experience delays in processing imported merchandise, thereby resulting in untimely deliveries of merchandise. At present, while monitoring the situation closely, management is unable to quantify the effects of these factors on the Company's results of operations and inventory position for fiscal 2022. Management is monitoring the continuing supply chain issues, particularly with regard to shipping delays and disruptions in the global transportation network.
Gross margin from the construction segment increased 140 basis points of segment net sales.
2021 Compared to 2019
Gross margin as a percentage of net sales increased 1,056 basis points of sales during fiscal 2021 compared to fiscal 2019. Gross margin from retail operations increased 1,033 basis points of segment net sales during the same periods. The increase is primarily due to better inventory management and stronger customer demand leading to decreased markdowns in fiscal 2021.
Gross margin from the construction segment increased 343 basis points of segment net sales.
Selling, General and Administrative Expenses ("SG&A")
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
SG&A:
SG&A as a percentage of segment net sales:
Retail operations segment 24.0 % 29.0 % 28.0 %
Construction segment 5.7 4.3 3.5
Total SG&A as a percentage of net sales 23.7 28.2 27.3
2021 Compared to 2020
SG&A increased $325.1 million, or 26.8%, during fiscal 2021 compared to fiscal 2020 while decreasing 451 basis points of sales. SG&A from retail operations decreased 497 basis points of segment net sales during fiscal 2021 compared to fiscal 2020. The increase in SG&A dollars was primarily due to increases in payroll expense and related payroll taxes.
Payroll expense and related payroll taxes for fiscal 2021 were $1,042.7 million compared to $788.5 million for fiscal 2020, an increase of 32.2%. During fiscal 2020, the Company (a) furloughed store associates as stores temporarily closed due to the COVID-19 pandemic and furloughed associates in certain corporate and support facility functions and (b) reduced payroll expense and related payroll taxes and benefits by $6.1 million through the employee retention credit available under the CARES Act.
With regard to continuing operational staffing needs, management is particularly focused on the existing tight labor market, seeking to hire permanent and seasonal talent across multiple functions at competitive wages.
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2021 Compared to 2019
SG&A decreased $154.5 million, or 9.1%, during fiscal 2021 compared to fiscal 2019 while also decreasing 360 basis points of sales. SG&A from retail operations decreased 401 basis points of segment net sales during fiscal 2021 compared to fiscal 2019. The decrease in SG&A dollars was primarily due to decreases in payroll expense and payroll related taxes. The Company continues to operate with reduced operating hours and fewer associates compared to fiscal 2019.
Depreciation and Amortization
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Depreciation and amortization:
2021 Compared to 2020
Depreciation and amortization expense decreased $14.1 million during fiscal 2021 compared to fiscal 2020, primarily due to the timing and composition of capital expenditures.
Interest and Debt Expense, Net
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Interest and debt expense (income), net:
Construction segment (39) (46) (110)
2021 Compared to 2020
Net interest and debt expense decreased $6.0 million in fiscal 2021 compared to fiscal 2020 primarily due to a decrease of short term borrowings under the credit facility. Total weighted average debt outstanding during fiscal 2021 decreased approximately $148.6 million compared to fiscal 2020 primarily due to a decrease of short term borrowings under the credit facility.
Other Expense
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Other expense:
Construction segment — — —
2021 Compared to 2020
Other expense increased $2.9 million in fiscal 2021 compared to fiscal 2020 primarily due to the write-off of certain deferred financing fees in connection with the amendment and extension of the Company's secured revolving credit facility.
(Gain) Loss on Disposal of Assets
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
(Gain) loss on disposal of assets:
Construction segment (6) (26) 1
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Fiscal 2021
During fiscal 2021, the Company received proceeds of $29.3 million primarily from the sale of three store properties, resulting in a gain of $24.7 million that was recorded in (gain) loss on disposal of assets.
Fiscal 2020
During fiscal 2020, the Company received proceeds of $1.5 million primarily from the sale of one property, resulting in a loss of $2.2 million that was recorded in (gain) loss on disposal of assets.
Asset Impairment and Store Closing Charges
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Asset impairment and store closing charges:
Retail operations segment $ — $ 10,736 $ —
Construction segment — — —
Total asset impairment and store closing charges $ — $ 10,736 $ —
Fiscal 2020
During fiscal 2020, the Company recorded $10.7 million in asset impairment charges related to certain clearance locations.
Income Taxes
The Company's estimated federal and state effective income tax rate was 20.8% in fiscal 2021, 53.3% in fiscal 2020, and 17.0% in fiscal 2019. The Company expects the fiscal 2022 federal and state effective income tax rate to approximate 22%.
Fiscal 2021
During fiscal 2021, income taxes included federal and state tax benefits of $20.1 million due to the deduction related to that portion of the Company's dividends that were paid to the Dillard's, Inc. Investment and Employee Stock Ownership Plan, including the special dividend of $15 per share paid on December 15, 2021.
Fiscal 2020
The Company was in a net operating loss position for the fiscal year ending January 30, 2021. The CARES Act, signed into law on March 27, 2020, allows for net operating loss carryback to years in which the statutory federal income tax rate was 35% rather than 21%. During fiscal 2020, income taxes included tax benefits of approximately $45.2 million related to the rate differential in the carryback year.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's current non-operating priorities for its use of cash are strategic investments to enhance the value of existing properties, stock repurchases and dividend payments to stockholders.
Cash flows for the Company's most recent three fiscal years were as follows:
Percent Change
Operating Activities
The primary source of the Company's liquidity is, and historically has been, cash flows from operations. Due to the seasonality of the Company's business, we have historically realized a significant portion of the cash flows from operating activities during the second half of the fiscal year. Retail operations sales are the key operating cash component, providing 96.2%, 93.8% and 94.8% of total revenues in fiscal 2021, 2020 and 2019, respectively.
Net cash flows from operations increased $1.0 billion during fiscal 2021 compared to fiscal 2020 due to significant increases in net income, primarily due to increases in gross margin from stronger consumer demand and better inventory management following last year's net loss from the impact of the COVID-19 pandemic. Net cash flows from operations increased $914.9 million during fiscal 2021 compared to fiscal 2019.
Operating cash inflows also include the Company's income and reimbursements from the Wells Fargo Alliance and cash distributions from joint ventures (excluding returns of investments), if any. Operating cash outflows include payments to vendors for inventory, services and supplies, payments to employees and payments of interest and taxes.
Wells Fargo owns and manages the Dillard's private label cards under the Wells Fargo Alliance. Under the Wells Fargo Alliance, Wells Fargo establishes and owns private label card accounts for our customers, retains the benefits and risks associated with the ownership of the accounts, provides key customer service functions, including new account openings, transaction authorization, billing adjustments and customer inquiries, receives the finance charge income and incurs the bad debts associated with those accounts.
Pursuant to the Wells Fargo Alliance, we receive on-going cash compensation from Wells Fargo based upon the portfolio's earnings. The compensation 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 November 2024.
The Company recognized income of $74.8 million, $78.6 million and $91.2 million from the Wells Fargo Alliance during fiscal 2021, 2020 and 2019, respectively.
During fiscal 2021 and 2020, the Company received proceeds from insurance of $2.9 million and $7.7 million, respectively, for claims filed for merchandise losses related to storm damage incurred at two stores.
At January 29, 2022, the Company had purchase obligations of $1,550.5 million outstanding for merchandise and store construction commitments, all of which are expected to be paid during fiscal 2022.
Investing Activities
Cash inflows from investing activities generally include proceeds from sales of property and equipment. Investment cash outflows generally include payments for capital expenditures such as property and equipment.
Capital expenditures increased $43.9 million for fiscal 2021 compared to fiscal 2020. The increase in capital expenditures was primarily related to the continued construction of two new stores during fiscal 2021. During fiscal 2021, the Company opened a new store at Mesa Mall in Grand Junction, Colorado (100,000 square feet). On March 11, 2022, the Company opened a new 160,000 square foot location at University Place in Orem, Utah which will replace Provo Towne
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Centre in the same market (200,000 square feet). The Company will replace a leased building at Westgate Mall in Amarillo, Texas with a newly remodeled owned facility in the fall of 2022. During fiscal 2020, the Company opened an 85,000 square foot expansion at Columbia Mall in Columbia, Missouri (dual-anchor location totaling 185,000 square feet). Additionally, the Company replaced a 100,000 square foot leased facility at Richland Fashion Mall in Waco, Texas with a 125,000 square foot owned facility (dual-anchor location totaling 190,000 square feet).
During fiscal 2021, the Company received cash proceeds of $29.3 million and recorded a related gain of $24.7 million, primarily related to the sale of three store properties: (1) a 120,000 square foot location at Cortana Mall in Baton Rouge, Louisiana, which was permanently closed and sold; (2) a 200,000 square foot location at Paradise Valley Mall in Phoenix, Arizona, which was permanently sold and closed and (3) a non-operating store property in Knoxville, Tennessee. During fiscal 2021, the Company also closed its leased clearance center at Valle Vista Mall in Harlingen, Texas (100,000 square feet). The Company has announced the upcoming closure of its leased clearance center at University Square Mall in Tampa, Florida (80,000 square feet). There were no material costs associated or expected with any of these store closures. We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to such stores when they close.
During fiscal 2020, the Company received cash proceeds of $1.5 million and recorded a related loss of $2.2 million, primarily for the sale of one store property in Slidell, Louisiana. During fiscal 2020, we also permanently closed the locations at Central Mall in Lawton, Oklahoma (100,000 square feet); Crossroads Center in Waterloo, Iowa (150,000 square feet); and North Plains Mall in Clovis, New Mexico (62,000 square feet).
During fiscal 2021 and 2020, the Company received proceeds from insurance of $3.1 million and $6.1 million, respectively, for claims filed for building losses related to storm damage incurred at two stores.
During fiscal 2021, the Company received proceeds from life insurance of $0.7 million related to one policy. During fiscal 2020, the Company received life insurance proceeds of $4.3 million related to four policies.
Financing Activities
Our primary source of cash inflows from financing activities is generally borrowings from our $800 million senior secured revolving credit facility. Financing cash outflows generally include the repayment of borrowings under the revolving credit facility, the repayment of long-term debt, finance lease obligations, the payment of dividends and the purchase of treasury stock.
Cash used in financing activities increased to $853.8 million in fiscal 2021 from $121.3 million in fiscal 2020. This increase was primarily due to increases in treasury stock purchases and cash dividends paid during 2021 (primarily related to the special $15 per share dividend paid in fiscal 2021).
Stock Repurchase. In March 2018, the Company's Board of Directors authorized the Company to repurchase up to $500 million of the Company's Class A Common Stock under an open-ended plan ("March 2018 Stock Plan"). In May 2021, the Company announced that its Board of Directors approved the Company to repurchase up to $500 million of the Company's Class A Common Stock under an open ended plan ("May 2021 Stock Plan"). As of January 29, 2022, the Company had completed the authorized purchases under the March 2018 Stock Plan, and $112.0 million of authorization remained under the May 2021 Stock Plan.
During fiscal 2021, the Company repurchased 3.2 million shares of Class A Common Stock for $561.1 million (including the accrual of $16.2 million of share repurchases that had not settled as of January 29, 2022) at an average price of $175.06 per share. During fiscal 2020, the Company repurchased 2.2 million shares of Class A Common Stock for $95.6 million at an average price of $42.83 per share. The ultimate disposition of the repurchased stock has not been determined.
Revolving Credit Agreement. The Company maintains a credit facility (“credit agreement”) 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 credit agreement provides a borrowing capacity of $800 million, subject to certain limitations as outlined in the credit agreement, with a $200 million expansion option ("credit agreement").
As part of the Company's liquidity strategy during the COVID-19 pandemic, in March 2020, the company borrowed $779 million under the credit agreement.
In April 2020, the Company amended its credit agreement (the "2020 amendment"). Pursuant to the 2020 amendment, the credit agreement became secured by certain deposit accounts of the Company and certain inventory of certain subsidiaries.The borrowings of $779 million were repaid concurrent with the execution of the 2020 amendment.During fiscal 2020, the
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Company paid $3.2 million in issuance costs related to the 2020 amendment, which were recorded in other assets on the consolidated balance sheet.
In April 2021, the Company further amended the credit agreement (the "2021 amendment").Pursuant to the 2021 amendment, the Company pays a variable rate of interest on borrowings under the credit agreement and a commitment fee to the participating banks.The rate of interest on borrowings is LIBOR plus 1.75% if average quarterly availability is less than 50% of the total commitment, as defined in the 2021 amended credit agreement ("total commitment"), and the rate of interest on borrowings is LIBOR plus 1.50% if average quarterly availability is greater than or equal to 50% of the total commitment.The commitment fee for unused borrowings is 0.30% per annum if average borrowings are less than 35% of the total commitment and 0.25% if average borrowings are greater than or equal to 35% of the total commitment.As long as availability exceeds $80 million and certain events of default have not occurred and are not continuing, there are no financial covenant requirements under the credit agreement. The credit agreement, as amended by the 2021 amendment, matures on April 28, 2026.
During fiscal 2021, the Company paid $3.0 million in issuance costs related to the 2021 amendment, which were recorded in other assets on the consolidated balance sheet, and the Company recognized a loss on early extinguishment of debt of $2.8 million for the write-off of certain remaining deferred financing fees related to the 2020 amendment.This charge was recorded in other expense on the consolidated statement of operations.
No borrowings were outstanding at January 29, 2022. Letters of credit totaling $20.1 million were issued under the credit agreement leaving unutilized availability under the facility of $700.6 million at January 29, 2022. The Company had no borrowings during fiscal 2021, and the Company had weighted-average borrowings of $148.6 million and $76.9 million during fiscal 2020 and 2019, respectively.
Long-term Debt. At January 29, 2022, the Company had $366.0 million of long-term debt, including the current portion, comprised of unsecured notes. The unsecured notes bear interest at rates ranging from 7.000% to 7.875% with due dates from fiscal 2022 through fiscal 2028.
Long-term debt maturities over the next five years are (in millions):
Fiscal Year Long-Term Debt Maturities
During fiscal 2021 and 2020, the Company made finance lease payments of $0.7 million and $1.2 million, respectively, and no debt matured.
During fiscal 2022, the Company expects to accrue interest expense of $27.0 million on its long-term debt.
Subordinated Debentures. As of January 29, 2022, the Company had $200 million outstanding of its 7.5% subordinated debentures due August 1, 2038. All of these subordinated debentures were held by Dillard's Capital Trust I, a 100% owned, unconsolidated finance subsidiary of the Company. The Company has the right to defer the payment of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters; however, the Company has no present intention of exercising this right to defer interest payments.
During fiscal 2022, the Company expects to accrue interest expense of $15.0 million on its subordinated debentures.
Dividends. During fiscal 2021, in addition to our typical quarterly dividends, the Board of Directors declared a special dividend of $15.00 per share that was paid on the Class A and Class B Common Stock of the Company.
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Fiscal 2022 Outlook
The Company expects to finance its operations during fiscal 2022 from cash on hand, cash flows generated from operations and, if necessary, utilization of our revolving 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.
LIBOR
On March 5, 2021, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative: (a) immediately after December 31, 2021, in the case of the 1-week and 2-month U.S. dollar settings; and (b) immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. The 2021 amendment to our credit agreement included an approach to replace LIBOR with a SOFR-based rate. We have not yet transitioned to a SOFR-based rate and will continue to monitor, assess and plan for the replacement of LIBOR with an alternative rate. We also intend to work with the Wells Fargo Alliance and any other applicable agreements to determine a suitable alternative reference rate.
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.
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COMMERCIAL COMMITMENTS
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
$800 million line of credit, none outstanding(1) $ — $ — $ — $ — $ —
Import letters of credit — — — — —
Total commercial commitments $ 20,083 $ 20,083 $ — $ — $ —
___________________________________
(1)At January 29, 2022, letters of credit totaling $20.1 million were issued under the credit agreement.
NEW ACCOUNTING PRONOUNCEMENTS
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 in the "Notes to Consolidated Financial Statements" in Item 8 hereof.
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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 those statements included under the headings "2022 Guidance" and "Fiscal 2022 Outlook" included in this Management's Discussion and Analysis and other statements regarding management's expectations and forecasts for the remainder of fiscal 2022 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements regarding our competitive position, statements concerning capital expenditures and sources of liquidity, statements regarding the expected impact of the COVID-19 pandemic and related government responses, including the CARES Act and other subsequently-enacted COVID-19 stimulus packages, statements concerning share repurchases, statements concerning pension contributions, statements concerning changes in loss trends, settlements and other costs related to our self-insurance programs, statements regarding the expected phase out of LIBOR, statements concerning expectations regarding the payment of dividends, statements regarding the impacts of inflation in fiscal 2022 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 including inflation and changes in traffic at malls and shopping centers; 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 and interest rates on 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 the Company's ability to meet labor needs amid nationwide labor shortages and an intense competition for talent; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; high levels of unemployment; 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; global conflicts (including the recent conflict in Ukraine) and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature, and other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the SEC, particularly those set forth under the caption "Item 1A, Risk Factors" in this Annual Report.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The table below provides information about the Company's obligations that are sensitive to changes in interest rates. The table presents maturities of the Company's long-term debt and subordinated debentures along with the related weighted-average interest rates by expected maturity dates.
Expected Maturity Date(fiscal year)
Average fixed interest rate 7.9 % — % — % — % 7.8 % 7.3 % 7.5 %
Average interest rate — — — — — 7.5 % 7.5 %
The Company is exposed to market risk from changes in the interest rates under its $800 million credit agreement, which is secured by certain deposit accounts of the Company and certain inventory of certain subsidiaries. The credit agreement provides a borrowing capacity of $800 million, subject to certain limitations as outlined in the credit agreement, with a $200 million expansion option. The rate of interest on borrowings under the credit agreement is LIBOR plus 1.75% if average quarterly availability is less than 50% of the total commitment and the rate of interest on borrowings is LIBOR plus 1.50% if average quarterly availability is greater than or equal to 50% of the total commitment. The commitment fee for unused borrowings is 0.30% per annum if average borrowings are less than 35% of the total commitment and 0.25% if average borrowings are greater than or equal to 35% of the total commitment. The Company had no weighted average borrowings under this facility during fiscal 2021.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and notes thereto required by this item are included in this report beginning on page F-1, which immediately follows the signature page to this report, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company has established and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). The Company's management, with the participation of our Principal Executive Officer and Co-Principal Financial Officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the fiscal year covered by this annual report, and based on that evaluation, the Company's Principal Executive Officer and Co-Principal Financial Officers have concluded that these disclosure controls and procedures were effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Co-Principal Financial Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in 2013 Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 29, 2022.
Our independent registered public accounting firm, KPMG LLP ("KPMG"), has audited our consolidated financial statements included in this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting as of January 29, 2022. Please refer to KPMG's "Report of Independent Registered Public Accounting Firm" on page F-2 of this Annual Report.
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Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended January 29, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
A. Directors of the Company
The information called for by this item regarding directors of the Company is incorporated herein by reference from the information under the headings "Proposal No. 1. Election of Directors", "Audit Committee Report", "Information Regarding the Board and Its Committees" and "Delinquent Section 16(a) Reports" in the Proxy Statement.
B. Executive Officers of the Company
Information regarding executive officers of the Company is included in Part I of this report under the heading "Information About Our Executive Officers." Reference additionally is made to the information under the heading "Delinquent Section 16(a) Reports" in the Proxy Statement, which information is incorporated herein by reference.
The Company's Board of Directors ("Board") has adopted a Code of Conduct that applies to all Company employees, including the Company's executive officers, and, when appropriate, the members of the Board. As stated in the Code of Conduct, there are certain limited situations in which the Company may waive application of the Code of Conduct to employees or members of the Board. For example, since non-employee members of the Board rarely, if ever, deal financially with vendors and other suppliers of the Company on the Company's behalf, it may not be appropriate to seek to apply the Code of Conduct to their dealings with these vendors and suppliers on behalf of other organizations which have no relationship to the Company. To the extent that any such waiver applies to an executive officer or a member of the Board, the waiver requires the express approval of the Board, and the Company intends to satisfy the disclosure requirements of Form 8-K regarding any such waiver from, or an amendment to, any provision of the Code of Conduct, by posting such waiver or amendment on the Company's website. The current version of the Code of Conduct is available free of charge on the Company's investor relations website, investor.dillards.com, and is available in print to any stockholder who requests copies by contacting Julie J. Guymon, Director of Investor Relations, at the Company's corporate executive offices at 1600 Cantrell Road, Little Rock, AR 72201.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is incorporated herein by reference from the information under the headings "2021 Director Compensation", "Compensation Discussion and Analysis", "Compensation Committee Report" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information
Equity compensation plans approved by stockholders* — $ — 8,279,892
___________________________________
* Included in this category are the following equity compensation plans, which have been approved by the Company's stockholders:
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Equity compensation plan Number of securities available for future issuance
1990 Incentive and Nonqualified Stock Option Plan 5,125,417
1998 Incentive and Nonqualified Stock Option Plan 1,760,905
2000 Incentive and Nonqualified Stock Option Plan 382,705
Dillard's, Inc. Stock Bonus Plan 702,267
Dillard's, Inc. Stock Purchase Plan 174,412
Dillard's, Inc. 2005 Non-Employee Director Restricted Stock Plan 134,186
There are no non-stockholder approved plans. Balances presented in the table above are as of January 29, 2022.
Additional information called for by this item is incorporated herein by reference from the information under the headings "Security Ownership of Certain Beneficial Holders" and "Security Ownership of Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information called for by this item is incorporated herein by reference from the information under the headings "Certain Relationships and Transactions" and "Information Regarding the Board and Its Committees" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information called for by this item is incorporated herein by reference from the information under the heading "Independent Accountant Fees" in the Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) and (2) Financial Statements
An "Index of Financial Statements" has been filed as a part of this report beginning on page F-1 hereof.
(a)(3) Exhibits and Management Compensatory Plans
The "Exhibit Index" beginning on page 40 hereof identifies exhibits incorporated herein by reference or filed with this report.
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Exhibit Index
Number Description
21 Subsidiaries of Registrant.
23 Consent of Independent Registered Public Accounting Firm.
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Number Description
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
___________________________________
* Incorporated by reference as indicated.
+ A management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dillard's, Inc.
By: /s/ Phillip R. Watts
Phillip R. Watts
By: /s/ Chris B. Johnson
Chris B. Johnson
Senior Vice President and Co-Principal FinancialOfficer
Date: March 29, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ William Dillard, II /s/ Chris B. Johnson
/s/ Alex Dillard /s/ Phillip R. Watts
/s/ Mike Dillard /s/ Drue Matheny
/s/ Denise Mahaffy /s/ William Dillard, III
/s/ Robert C. Connor /s/ James I. Freeman
Robert C. ConnorDirector James I. FreemanDirector
/s/ H. Lee Hastings, III /s/ Rob C. Holmes
H. Lee Hastings, IIIDirector Rob C. HolmesDirector
/s/ Frank R. Mori /s/ Reynie Rutledge
Frank R. MoriDirector Reynie RutledgeDirector
/s/ Warren A. Stephens /s/ J. C. Watts, Jr.
Warren A. StephensDirector J. C. Watts, Jr.Director
/s/ Nick White
Nick WhiteDirector
Date: March 29, 2022
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INDEX OF FINANCIAL STATEMENTS
DILLARD'S, INC. AND SUBSIDIARIES
Year Ended January 29, 2022
Page
Consolidated Balance Sheets—January 29, 2022 and January 30, 2021 F-4
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Dillard’s, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Dillard's, Inc. and subsidiaries (the Company) as of January 29, 2022 and January 30, 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended January 29, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended January 29, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Pension Plan projected benefit obligation
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company had an unfunded, non-qualified defined benefit plan (Pension Plan) with a projected benefit obligation of $226.3 million as of January 29, 2022. The Pension Plan’s costs are accounted for using actuarial valuations. The discount rate that the Company utilizes for determining the projected benefit obligation is based on the FTSE Above Median Pension yield curve as of the end of each fiscal year.
We identified the evaluation of the Company’s measurement of the Pension Plan projected benefit obligation as a critical audit matter. Subjective auditor judgment was required to evaluate the discount rate used to determine the projected benefit obligation, as minor changes in the rate could have a significant impact on the projected benefit obligation. Additionally, the assessment of the discount rate required specialized actuarial skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s benefit obligation process, including a control related to the actuarial determination of the discount rate used in the measurement of the projected benefit obligation. Additionally, we involved an actuarial professional with specialized skills and knowledge, who assisted in the evaluation of the Company’s discount rate by:
•assessing changes in the discount rate from the prior year against changes in published indices
•evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the projected benefit obligation
•evaluating the selected yield curve and its consistency with the prior year and spot rate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Dallas, Texas
March 29, 2022
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Consolidated Balance Sheets
Dollars in Thousands
Assets
Current assets:
Federal and state income taxes — 118,439
Property and equipment:
Buildings and equipment under finance leases — 14,556
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable and accrued expenses $ 886,233 $ 758,363
Current portion of long-term debt 44,800 —
Current portion of finance lease liabilities — 695
Current portion of operating lease liabilities 11,712 13,819
Federal and state income taxes 23,441 —
Commitments and contingencies
Stockholders' equity:
Accumulated other comprehensive loss (22,798) (34,935)
See notes to consolidated financial statements.
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Consolidated Statements of Operations
Dollars in Thousands, Except Per Share Data
Years Ended
Asset impairment and store closing charges — 10,736 —
Earnings (loss) per common share:
See notes to consolidated financial statements.
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Consolidated Statements of Comprehensive Income (Loss)
Dollars in Thousands
Years Ended
Other comprehensive income (loss):
See notes to consolidated financial statements.
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Consolidated Statements of Stockholders' Equity
Dollars in Thousands, Except Share and Per Share Data
Common Stock AccumulatedOtherComprehensiveLoss
AdditionalPaid-inCapital RetainedEarnings TreasuryStock
Class A Class B Total
Other comprehensive loss — — — (18,250) — — (18,250)
Cash dividends declared:
Other comprehensive loss — — — (3,876) — — (3,876)
Cash dividends declared:
Cash dividends declared:
See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
Dollars in Thousands
Years Ended
Operating activities:
Gain from insurance proceeds — (548) —
Loss on early extinguishment of debt 2,830 — —
Asset impairment and store closing charges — 10,736 —
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,084) 9,467 3,693
Investing activities:
Financing activities:
Issuance cost of line of credit (3,009) (3,230) —
Non-cash transactions:
Accrued purchases of treasury stock 16,234 — 7,323
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business—Dillard's, Inc. ("Dillard's" or the "Company") operates retail department stores, located primarily in the southeastern, southwestern and midwestern areas of the United States, and a general contracting construction company based in Little Rock, Arkansas. The Company's fiscal year ends on the Saturday nearest January 31 of each year. Fiscal 2021, 2020 and 2019 ended on January 29, 2022, January 30, 2021 and February 1, 2020, respectively, and contained 52 weeks each.
Consolidation—The accompanying consolidated financial statements include the accounts of Dillard's, Inc. and its wholly owned subsidiaries (excluding Dillard's Capital Trust I; see Note 7 for more information). Intercompany accounts and transactions are eliminated in consolidation. Investments in and advances to joint ventures are accounted for by the equity method where the Company does not have control.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include inventories, self-insured accruals, future cash flows and real estate values for impairment analysis, pension discount rate and taxes. Actual results could differ from those estimates.
Seasonality—The Company's business is highly seasonal, and historically the Company has realized a significant portion of its sales, net income and cash flow in the last quarter of our fiscal year. Due to holiday buying patterns, sales for the fourth quarter average approximately one-third of annual sales. Additionally, working capital requirements fluctuate during the year, increasing in the third quarter in anticipation of the holiday season.
Cash Equivalents—The Company considers all highly liquid investments with an original maturity of 3 months or less when purchased or certificates of deposit with no early withdrawal penalty to be cash equivalents. The Company considers receivables from charge card companies as cash equivalents because they settle the balances within 2 to 3 days.
Accounts Receivable—Accounts receivable primarily consists of construction receivables of the Company's general contracting construction company, CDI Contractors, LLC ("CDI"), and the monthly settlement with Wells Fargo for Dillard's share of earnings from the long-term marketing and servicing alliance. Construction receivables are based on amounts billed to customers. The Company provides any allowance for doubtful accounts considered necessary based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Accounts that are past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Merchandise Inventories—All of the Company’s inventories are valued at the lower of cost or market using the last-in, first-out (“LIFO”) inventory method. Approximately 95% of the Company's inventories are valued using the LIFO retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost to retail ratio to the retail value of inventories. The retail inventory method is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the retail inventory method calculation are certain significant management judgments including, among others, merchandise markon, markups and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. During periods of deflation, inventory values on the first-in, first-out ("FIFO") retail inventory method may be lower than the LIFO retail inventory method. Additionally, inventory values at LIFO cost may be in excess of net realizable value. At January 29, 2022 and January 30, 2021, merchandise inventories valued at LIFO, including adjustments as necessary to record inventory at the lower of cost or market, approximated the cost of such inventories using the FIFO retail inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales for fiscal 2021, 2020 or 2019.
The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of merchandise inventory. Complete physical inventories of all of the Company's stores and warehouses are performed no less frequently than annually, with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts.
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Property and Equipment—Property and equipment owned by the Company is stated at cost, which includes related interest costs incurred during periods of construction, less accumulated depreciation and amortization. Interest capitalized during fiscal 2021, 2020 and 2019 was $1.1 million, $0.4 million and $0.4 million, respectively. For financial reporting purposes, depreciation is computed by the straight-line method over estimated useful lives:
Buildings and leasehold improvements 20 - 40 years
Furniture, fixtures and equipment 3 - 10 years
Properties leased by the Company under lease agreements which are determined to be finance leases are stated at an amount equal to the present value of the minimum lease payments during the lease term, less accumulated amortization. The assets under finance leases and leasehold improvements under operating leases are amortized on the straight-line method over the shorter of their useful lives or the related lease terms. The provision for amortization of assets under finance leases is included in depreciation and amortization expense.
Included in property and equipment as of January 29, 2022 are assets held for sale in the amount of $9.6 million. During fiscal 2021, the Company received cash proceeds of $29.3 million and realized a gain of $24.7 million primarily related to the sale of three store properties. During fiscal 2020, the Company received cash proceeds of $1.5 million and realized a loss of $2.2 million primarily related to the sale of one store property. During fiscal 2019, the Company received cash proceeds of $30.6 million and realized a gain of $20.3 million primarily related to the sale of six store properties.
Depreciation expense on property and equipment was approximately $199 million, $213 million and $222 million for fiscal 2021, 2020 and 2019, respectively.
Long-Lived Assets—Fair value measurements of long-lived assets used in operations are required when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. In the evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. This analysis is performed at the store unit level. If the carrying value of the related asset exceeds the fair value, the carrying value is reduced to its fair value. Various factors including future sales growth, profit margins and real estate values are included in this analysis. Management believes at this time that the carrying values and useful lives continue to be appropriate.
During fiscal 2021 and 2019, no asset impairment and store closing charges were recorded. During fiscal 2020, the Company recorded $10.7 million in asset impairment charges related to certain clearance locations.
Other Assets—Other assets include investments accounted for by the equity and cost methods, capitalized software and cash surrender value of life insurance policies.
Vendor Allowances—The Company receives concessions from its vendors through a variety of programs and arrangements, including cooperative advertising and margin maintenance programs. The Company has agreements in place with each vendor setting forth the specific conditions for each allowance or payment. These agreements range in periods from a few days to up to a year. If the payment is a reimbursement for costs incurred, it is offset against those related costs; otherwise, it is treated as a reduction to the cost of the merchandise. Amounts of vendor concessions are recorded only when an agreement has been reached with the vendor and the collection of the concession is deemed probable.
For cooperative advertising programs, the Company generally offsets the allowances against the related advertising expense when incurred. Many of these programs require proof-of-advertising to be provided to the vendor to support the reimbursement of the incurred cost. Programs that do not require proof-of-advertising are monitored to ensure that the allowance provided by each vendor is a reimbursement of costs incurred to advertise for that particular vendor. If the allowance exceeds the advertising costs incurred on a vendor-specific basis, then the excess allowance from the vendor is recorded as a reduction of merchandise cost for that vendor.
Margin maintenance allowances are credited directly to cost of purchased merchandise in the period earned according to the agreement with the vendor. Under the retail method of accounting for inventory, a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory.
Insurance Accruals—The Company's consolidated balance sheets include liabilities with respect to self-insured workers' compensation and general liability claims. The Company's self-insured retention is insured through a wholly-owned captive insurance subsidiary. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, the Company's historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per
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incident (severity). As of January 29, 2022 and January 30, 2021, insurance accruals of $39.9 million and $37.9 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities on the consolidated balance sheets.
Operating Leases—The Company leases retail stores, office space and equipment under operating leases. The Company records right-of-use assets and operating lease liabilities for operating leases with lease terms exceeding twelve months. The right-of-use assets are adjusted for lease incentives, including construction allowances and prepaid rent. The Company recognizes minimum rent expense on a straight-line basis over the lease term. Many leases contain contingent rent provisions. Contingent rent is expensed as incurred.
The lease term used for lease evaluation includes renewal option periods only in instances in which the exercise of the option period is reasonably certain.
Revenue Recognition—The Company's retail operations segment recognizes merchandise revenue at the "point of sale". An allowance for sales returns is recorded as a component of net sales in the period in which the related sales are recorded. Sales taxes collected from customers are excluded from revenue and are recorded in trade accounts payable and accrued expenses until remitted to the taxing authorities.
Wells Fargo Bank, N.A. ("Wells Fargo") owns and manages Dillard's private label cards under a 10-year agreement ("Wells Fargo Alliance") which expires in November 2024. Pursuant to the Wells 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. The Company's share of income under the Wells Fargo Alliance is included as a component of service charges and other income. The Company recognized income of $74.8 million, $78.6 million and $91.2 million from the Wells Fargo Alliance in fiscal 2021, 2020 and 2019, respectively. The Company participates in the marketing of the private label credit cards, which includes the cost of customer reward programs. Through the reward programs, customers earn points that are redeemable for discounts on future purchases. The Company defers a portion of its net sales upon the sale of merchandise to its customer reward program members that is recognized in net sales when the reward is redeemed or expired at a future date.
Revenue from CDI construction contracts is generally measured based on the ratio of costs incurred to total estimated contract costs (the "cost-to-cost method"). The length of each contract varies but is typically nine to eighteen months. The progress towards completion is determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. When the estimate on a contract indicates a loss, the entire loss is recorded in the current period.
Gift Card Revenue Recognition—The Company establishes a liability upon the sale of a gift card. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise. Gift card breakage income is determined based upon historical redemption patterns. The Company uses a homogeneous pool to recognize gift card breakage and will recognize income over the period in proportion to the pattern of rights exercised by the customer when the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdiction as abandoned property. At that time, the Company will recognize breakage income over the performance period for those gift cards (i.e. 60 months) and will record it in service charges and other income. As of January 29, 2022 and January 30, 2021, gift card liabilities of $67.9 million and $58.2 million, respectively, were included in trade accounts payable and accrued expenses and other liabilities.
Advertising—Advertising and promotional costs, which include newspaper, magazine, Internet, broadcast and other media advertising, are expensed as incurred and were approximately $32.0 million, $18.4 million and $39.2 million, net of cooperative advertising reimbursements of $7.8 million, $6.4 million and $13.9 million for fiscal 2021, 2020 and 2019, respectively. The Company records net advertising expenses in selling, general and administrative expenses.
Income Taxes—Income taxes are recognized for the amount of taxes payable for the current year and deferred tax assets and liabilities for the future tax consequence of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes. Tax positions are analyzed to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For those tax positions where it is not "more likely than not" that a tax benefit will be sustained, no tax benefit is recognized. The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements as income tax expense.
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Shipping and Handling—The Company records shipping and handling reimbursements in service charges and other income. The Company records shipping and handling costs in cost of sales.
Defined Benefit Retirement Plans—The Company's defined benefit retirement plan costs are accounted for using actuarial valuations. The Company recognizes the funded status of its defined benefit pension plans on the consolidated balance sheet and recognizes changes in the funded status that arise during the period but that are not recognized as components of net periodic benefit cost, within other comprehensive income, net of income taxes.
Comprehensive Income (Loss)—Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It consists of the net income or loss and other gains and losses affecting stockholders' equity that, under GAAP, are excluded from net income or loss. One such exclusion is the amortization of retirement plan and other retiree benefit adjustments, which is the only item impacting our accumulated other comprehensive loss.
Supply Concentration—The Company purchases merchandise from many sources and does not believe that the Company was dependent on any one supplier during fiscal 2021.
Reclassifications—Certain items have been reclassified from their prior year classifications to conform to the current year presentation. These reclassifications had no effect on net income or stockholders' equity as previously reported.
Recently Adopted Accounting Pronouncements
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments within ASU No. 2019-12 are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and early adoption is permitted. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
Facilitation of the Effects of Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. This guidance is optional for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. More specifically, the amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This guidance is effective from March 12, 2020 through December 31, 2022. Entities may elect to adopt the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
Management believes there is no other accounting guidance issued but not yet effective that would be relevant to the Company's current financial statements.
2. Business Segments
The Company operates in two reportable segments: the operation of retail department stores and a general contracting construction company.
For the Company's retail operations reportable segment, the Company determined its operating segments on a store by store basis. Each store's operating performance has been aggregated into one reportable segment. The Company's operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics, class of consumer, nature of products and distribution methods. Revenues from external customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue. Across all stores, the Company operates one store format under the Dillard's name where each store offers the same general mix of merchandise with
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similar categories and similar customers. The Company believes that disaggregating its operating segments would not provide meaningful additional information.
The following table summarizes the percentage of net sales by segment and major product line:
Percentage of Net Sales
Retail operations segment:
Ladies' accessories and lingerie 15 17 15
Juniors' and children's apparel 10 9 9
Men's apparel and accessories 19 18 18
Home and furniture 4 5 4
Construction segment 2 3 3
The following tables summarize certain segment information, including the reconciliation of those items to the Company's consolidated operations.
(in thousands of dollars) Retail Operations Construction Consolidated
(in thousands of dollars) Retail Operations Construction Consolidated
Asset impairment and store closing costs 10,736 — 10,736
(in thousands of dollars) Retail Operations Construction Consolidated
Intersegment construction revenues of $38.2 million, $26.0 million and $33.6 million were eliminated during consolidation and have been excluded from net sales for fiscal 2021, 2020 and 2019, respectively.
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The retail operations segment gives rise to contract liabilities through the loyalty program and through the issuances of gift cards. The loyalty program liability and a portion of the gift card liability is included in trade accounts payable and accrued expenses, and a portion of the gift card liability is included in other liabilities on the consolidated balance sheets. Our retail operations segment contract liabilities are as follows:
Retail
During fiscal 2021 and 2020, the Company recorded $42.7 million and $45.9 million, respectively, in revenue that was previously included in the retail operations contract liability balances of $68.0 million and $75.2 million, at January 30, 2021 and February 1, 2020, respectively.
Construction contracts give rise to accounts receivable, contract assets and contract liabilities. We record accounts receivable based on amounts billed to customers. We also record costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) in other current assets and trade accounts payable and accrued expenses in the consolidated balance sheets, respectively. The amounts included in the consolidated balance sheets are as follows:
Construction
During fiscal 2021 and 2020, the Company recorded $4.3 million and $5.5 million, respectively, in revenue that was previously included in billings in excess of costs and estimated earnings on uncompleted contracts of $4.7 million and $5.7 million at January 30, 2021 and February 1, 2020, respectively.
The remaining performance obligations related to executed construction contracts totaled $93.9 million and $76.2 million at January 29, 2022 and January 30, 2021, respectively.
3. Revolving Credit Agreement
The Company maintains a credit facility (“credit agreement”) 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 credit agreement provides a borrowing capacity of $800 million, subject to certain limitations as outlined in the credit agreement, with a $200 million expansion option ("credit agreement").
As part of the Company's liquidity strategy during the COVID-19 pandemic, in March 2020, the company borrowed $779 million under the credit agreement.
In April 2020, the Company amended its credit agreement (the "2020 amendment"). Pursuant to the 2020 amendment, the credit agreement became secured by certain deposit accounts of the Company and certain inventory of certain subsidiaries. The borrowings of $779 million were repaid concurrent with the execution of the 2020 amendment. During fiscal 2020, the Company paid $3.2 million in issuance costs related to the 2020 amendment, which were recorded in other assets on the consolidated balance sheet.
In April 2021, the Company further amended the credit agreement (the "2021 amendment"). Pursuant to the 2021 amendment, the Company pays a variable rate of interest on borrowings under the credit agreement and a commitment fee to the participating banks. The rate of interest on borrowings is LIBOR plus 1.75% if average quarterly availability is less than 50% of the total commitment, as defined in the 2021 amended credit agreement ("total commitment"), and the rate of interest on borrowings is LIBOR plus 1.50% if average quarterly availability is greater than or equal to 50% of the total commitment. The commitment fee for unused borrowings is 0.30% per annum if average borrowings are less than 35% of the total commitment and 0.25% if average borrowings are greater than or equal to 35% of the total commitment. As long as availability exceeds $80 million and certain events of default have not occurred and are not continuing, there are no financial covenant
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requirements under the credit agreement. The credit agreement, as amended by the 2021 amendment, matures on April 28, 2026.
No borrowings were outstanding at January 29, 2022. Letters of credit totaling $20.1 million were issued under the credit agreement leaving unutilized availability under the facility of $700.6 million at January 29, 2022. The Company had no borrowings during fiscal 2021, and the Company had weighted-average borrowings of $148.6 million and $76.9 million during fiscal 2020 and 2019, respectively.
4. Long-Term Debt
Long-term debt, including the current portion, of $366.0 million and $365.8 million was outstanding at January 29, 2022 and January 30, 2021, respectively. The debt outstanding at January 29, 2022 consisted of unsecured notes, bearing interest rates ranging from 7.000% to 7.875% and maturing during fiscal 2022 through fiscal 2028. There are no financial covenants under any of the debt agreements.
Long-term debt maturities over the next five years are (in millions):
Fiscal Year Long-Term Debt Maturities
Net interest and debt expense consists of the following:
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Interest on finance lease obligations 31 209 462
Other interest 5 10 4
Interest paid during fiscal 2021, 2020 and 2019 was approximately $44.8 million, $48.4 million and $42.8 million, respectively.
5. Trade Accounts Payable and Accrued Expenses
Trade accounts payable and accrued expenses consist of the following:
Accrued expenses:
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6. Income Taxes
The provision for federal and state income taxes is summarized as follows:
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Current:
Deferred:
The Company was in a net operating loss position for the fiscal year ending January 30, 2021. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law on March 27, 2020, allows for net operating loss carryback to years in which the statutory federal income tax rate was 35% rather than 21%. During fiscal 2020, income taxes included tax benefits of approximately $45.2 million related to the rate differential in the carryback year. A reconciliation between the Company’s income tax provision and income taxes using the federal statutory income tax rate of 21% is presented below:
(in thousands of dollars) Fiscal 2021 Fiscal 2020 Fiscal 2019
Changes in cash surrender value of life insurance policies (387) (373) (404)
Tax benefit of dividends paid to ESOP (18,912) (919) (684)