Belk, Inc., together with its subsidiaries (collectively, the "Company" or
"Belk"), is the nation's largest family owned and operated department store
business in the United States, with 299 stores in 16 states, as of May 3, 2014.
With stores located primarily in the southern United States and with a growing
eCommerce business on its belk.com website, the Company generated revenues of
$4.0 billion for the fiscal year 2014, and together with its predecessors, has
been successfully operating department stores since 1888. Belk is committed to
providing its customers a compelling shopping experience and merchandise that
reflects "Modern. Southern. Style."
The following discussion, which presents the results of the Company, should be
read in conjunction with the Company's consolidated financial statements as of
February 1, 2014 and for the year then ended, and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations, all
contained in the Company's Annual Report on Form 10-K for the year ended
February 1, 2014.
The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to each January 31st. All references to "fiscal year 2014" refer to the
52-week fiscal year ended February 1, 2014, all references to "fiscal year 2015"
refer to the 52-week fiscal year that will end January 31, 2015, and all
references to "fiscal year 2016" refer to the 52-week fiscal year that will end
January 30, 2016.
The Company's revenues slightly decreased by 0.1% in the first quarter of fiscal
year 2015 to $955.1 million. Comparable store revenues decreased 0.2% as a
result of a soft sales environment. Our eCommerce revenues increased by $16.5
million, or 42.4%, and contributed positively to the comparable store revenues
by 1.8% for the period. The Company calculates comparable store revenue as sales
from stores that have reached the one-year anniversary of their opening as of
the beginning of the fiscal year and eCommerce revenues, but excludes closed
stores. Stores undergoing remodeling, expansion or relocation remain in the
comparable store revenue calculation. Definitions and calculations of comparable
store revenue differ among companies in the retail industry.
Operating income decreased to $41.1 million in the first quarter of fiscal year
2015 compared to $54.4 million during the same period in fiscal year 2014. Net
income decreased to $19.3 million or $0.47 per basic and diluted share in the
first quarter of fiscal year 2015 compared to $28.2 million or $0.66 per basic
share and $0.65 per diluted share during the same period in fiscal year 2014.
The decrease in net income was due primarily to higher expenses associated with
the Company's investments in key strategic initiatives.
Belk seeks to provide customers with a convenient and enjoyable shopping
experience both in stores and online at belk.com, by offering an appealing
merchandise mix that includes extensive assortments of brands, styles and sizes.
Belk stores and belk.com sell top national brands of fashion apparel, shoes and
accessories for women, men and children, as well as cosmetics, home furnishings,
housewares, fine jewelry, gifts and other types of quality merchandise. The
Company also sells exclusive private label brands, which offer customers
differentiated merchandise selections. Larger Belk stores may include hair
salons, spas, restaurants, optical centers and other amenities.
The Company seeks to be the leading department store in its markets by selling
merchandise to customers that meet their needs for fashion, selection, value,
quality and service. To achieve this goal, Belk's business strategy focuses on
quality merchandise assortments, effective marketing and sales promotion
strategies, attracting and retaining talented, well-qualified associates to
deliver superior customer service, and operating efficiently with investments in
information technology and process improvement.
The Company operates retail department stores in the highly competitive retail
industry. Management believes that the principal competitive factors for retail
department store operations include merchandise selection, quality, value,
customer service and convenience. The Company believes it faces strong
competitors in all of these areas. The Company's primary competitors are
traditional department stores, mass merchandisers, national apparel chains,
individual specialty apparel stores, direct merchant firms and online retailers,
including Macy's, Inc., Dillard's, Inc., Nordstrom, Inc., Kohl's Corporation,
Target Corporation, Sears Holding Corporation, TJX Companies, Inc., Wal-Mart
Stores, Inc., J.C. Penney Company, Inc., and Amazon.com, Inc.
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The Company has focused its growth strategy on new stores, expanding and
remodeling existing stores, developing new merchandising concepts in targeted
demand centers, and expanding its online capabilities. In addition, in April
2013 the Company announced a strategy to expand the number of Belk flagship
locations. Belk currently operates 18 flagship stores that meet certain
standards based on size, sales volume, location, premium brand assortments and
Belk brand image. Under this strategy, the Company plans to increase the number
of flagship stores over the next five years through expansions and remodels of
existing stores, enhancement of premium brand offerings in existing stores, and
opening new stores that meet the flagship store criteria.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to revenues of certain items in the Company's unaudited condensed
consolidated statements of income, as well as a period comparison of changes in
comparable store revenues.
Three Months Ended
May 3, May 4,
SELECTED FINANCIAL DATA
Revenues 100.0 % 100.0 %
Cost of goods sold (including occupancy, distribution and
Selling, general and administrative expenses 28.0 26.8
Gain on sale of property and equipment 0.1 0.1
Asset impairment and exit costs 0.1 0.1
Operating income 4.3 5.7
Interest expense, net 1.2 1.1
Income before income taxes 3.1 4.6
Income tax expense 1.1 1.6
Net income 2.0 2.9
Comparable store net revenue increase (0.2 ) 5.2
The following table gives information regarding the percentage of revenues
contributed by each merchandise area for each of the respective periods. There
were no changes for the periods as reflected in the table below.
Three Months Ended
May 3, May 4,
Merchandise Areas 2014 2013
Women's 35 % 35 %
Cosmetics, Shoes and Accessories 34 34
Men's 16 16
Home 8 8
Children's 7 7
Total 100 % 100 %
Comparison of the Three Months Ended May 3, 2014 and May 4, 2013
Revenues. The Company's revenues for the three months ended May 3, 2014 slightly
decreased 0.1%, or $0.7 million, to $955.1 million from $955.8 million during
the same period in fiscal year 2014. The decrease is primarily attributable to a
0.2% decrease in comparable store revenues, along with a decrease in revenues
from closing stores of $3.4 million. The decrease in comparable store revenues
was generally the result of a soft sales environment, as the number of units
sold and average unit selling price were flat compared to the prior year.
Merchandise categories achieving the highest growth rate included juniors,
women's contemporary and better merchandise categories.
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Cost of goods sold. Cost of goods sold was $646.1 million, or 67.6% of revenues,
for the three months ended May 3, 2014 compared to $645.3 million, or 67.5% of
revenues, for the same period in fiscal year 2014. The slight increase in cost
of goods sold as a percentage of revenues was primarily attributable to the
increased shipping and handling and fulfillment center costs associated with the
42.4% increase in eCommerce sales, offset by slightly lower markdown activity.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were $267.8 million, or 28.0% of revenues, for
the three months ended May 3, 2014, compared to $255.9 million, or 26.8% of
revenues, for the same period in fiscal year 2014. The increase in SG&A expense
of $11.9 million was substantially due to our investments in key strategic
initiatives, consisting of increased payroll and consulting services, as well as
increased depreciation expense resulting from recent system implementations. In
addition, advertising expenses increased in response to the soft sales
environment. The investments in key strategic initiatives and the increased
advertising expenses also increased SG&A as a percentage of revenues.
Income tax expense. Income tax expense for the three months ended May 3, 2014
was $10.2 million, or 34.6% of pre-tax income, compared to $15.5 million, or
35.5% of pre-tax income, for the three months ended May 4, 2013. The decrease in
income tax expense was due primarily to the decrease in income before income
taxes for the three months ended May 3, 2014.
Seasonality and Quarterly Fluctuations
Due to the seasonal nature of the retail business, the Company has historically
experienced and expects to continue to experience seasonal fluctuations in its
revenues, operating income and net income. A disproportionate amount of the
Company's revenues and a substantial amount of operating and net income are
realized during the fourth quarter, which includes the holiday selling season.
If for any reason the Company's revenues were below seasonal norms during the
fourth quarter, the Company's annual results of operations could be adversely
affected. The Company's inventory levels generally reach their highest levels in
anticipation of increased revenues during these months.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand of $219.4 million as
of May 3, 2014, cash flows from operations, and borrowings under debt
facilities, which consist of a $350.0 million credit facility and $375.0 million
in senior notes. The credit facility, which matures in November 2015, allows for
up to $250.0 million of outstanding letters of credit. The credit facility
charges interest based upon certain Company financial ratios and the interest
spread was calculated at May 3, 2014 using LIBOR plus 125 basis points, or
1.40%. The credit facility contains restrictive covenants including leverage and
fixed charge coverage ratios.
The Company's calculated leverage ratio dictates the LIBOR spread that will be
charged on outstanding borrowings in the subsequent quarter. The leverage ratio
is calculated by dividing adjusted debt, which is the sum of the Company's
outstanding debt and last four quarters of rent expense multiplied by a factor
of eight, by the last four quarters of pre-tax income plus net interest expense,
rent expense, and non-cash items, such as depreciation, amortization, and
impairment expense. At May 3, 2014, the maximum leverage ratio allowed under the
credit facility was 4.0, and the calculated leverage ratio was 1.96. The Company
was in compliance with all covenants as of May 3, 2014 and expects to remain in
compliance with all debt covenants for the next twelve months and foreseeable
future. As of May 3, 2014, the Company had $13.3 million of standby letters of
credit outstanding under the credit facility, and availability under the credit
facility was $336.7 million.
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The senior notes have restrictive covenants that are similar to the Company's
credit facility, and had the following terms as of May 3, 2014:
(in millions) Type of Rate Rate Maturity Date
$ 100.0 Fixed 5.31 % July 2015
125.0 Fixed 6.20 % August 2017
50.0 Fixed 5.70 % November 2020
100.0 Fixed 5.21 % January 2022
The debt facilities place certain restrictions on mergers, consolidations,
acquisitions, sales of assets, indebtedness, transactions with affiliates,
leases, liens, investments, dividends and distributions, exchange and issuance
of capital stock and guarantees, and require maintenance of minimum financial
ratios, which include a leverage ratio, consolidated debt to consolidated
capitalization ratio and a fixed charge coverage ratio. These ratios are
calculated exclusive of non-cash charges, such as fixed assets, goodwill and
other intangible asset impairments.
Belk has planned investments totaling approximately $700 million over a
three-year period that began in fiscal year 2014 in key strategic initiatives
focused on information technology that delivers new business capabilities;
excelling in customer service; creating compelling shopping environments through
new stores and remodels and an expanded flagship strategy; supply chain
initiatives that align distribution capabilities to maximize sales and service;
and a comprehensive Omnichannel initiative.
Management believes that cash on hand of $219.4 million as of May 3, 2014, cash
flows from operations and existing credit facilities will be sufficient to cover
working capital needs, stock repurchases, dividends, capital expenditures,
pension contributions and debt service requirements for the next twelve months
and foreseeable future.
Net cash provided by operating activities was $17.7 million for the three months
ended May 3, 2014 compared to $16.1 million for the same period in fiscal year
2014. The slight increase in cash flows from operating activities for the three
months ended May 3, 2014 was principally due to a $25.0 million decrease in
pension contributions, an $8.5 million decrease in accrued income taxes, and an
increase in depreciation expense of $4.5 million, offset by a $43.9 million
increase in inventory, net of merchandise payables.
Net cash used by financing activities was $41.0 million for the three months
ended May 3, 2014 compared to $9.4 million for the same period in fiscal year
2014. The increase in cash used by financing activities was primarily due to a
$33.0 million increase in dividends paid in the first three months of fiscal
year 2015 compared to the same period in fiscal year 2014, as the regular
dividend normally paid in April following the end of the fiscal year was
accelerated in the prior year and paid in fiscal year 2013.
Contractual Obligations and Commercial Commitments
A table representing the scheduled maturities of the Company's contractual
obligations and commercial commitments as of February 1, 2014 was included under
the heading "Contractual Obligations and Commercial Commitments" of the
Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2014.
There have been no material changes from the information included in the Form
Off-Balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt or
operating the Company's business. The Company does not have any arrangements or
relationships with entities that are not consolidated into the financial
statements that are reasonably likely to materially affect the Company's
liquidity or the availability of capital resources.
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New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic
606)," which implements a five step process of how an entity should recognize
revenue in order to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. This guidance
will be effective at the beginning of fiscal year 2018, and early application is
not permitted. The standard permits the use of either the retrospective or
cumulative effect transition method. The Company is currently evaluating the
impact that the adoption will have on the condensed consolidated financial
statements and related disclosures. The Company has not yet selected a
transition method nor has it determined the effect of the standard on its
ongoing financial reporting.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08,
"Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity," which changes the definition of a
discontinued operation and the requirements for reporting discontinued
operations. This guidance will be effective at the beginning of fiscal year
2016, and the Company does not expect the adoption to have a material impact on
the condensed consolidated financial statements.
Impact of Inflation or Deflation
Although the Company expects that operations will be influenced by general
economic conditions, including rising food, fuel and energy prices, management
does not believe that inflation has had a material effect on the Company's
results of operations. However, there can be no assurance that our business will
not be affected by such factors in the future.