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4-Traders Homepage  >  Shares  >  OTC Bulletin Board - Other OTC  >  Belk Inc    BLKIA

BELK INC (BLKIA)

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BELK : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

06/09/2015 | 12:37pm US/Eastern

Overview

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 297 stores in 16 states, as of May 2, 2015. 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 $4.1 billion for the fiscal year 2015, 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 January 31, 2015 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 January 31, 2015.

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 2015" refer to the 52-week fiscal year ended January 31, 2015, all references to "fiscal year 2016" refer to the 52-week fiscal year that will end January 30, 2016, and all references to "fiscal year 2017" refer to the 52-week fiscal year that will end January 28, 2017.

The Company's revenues increased by 3.1% in the first quarter of fiscal year 2016 to $985.0 million. Comparable store revenues increased 3.3% as a result of continued increasing eCommerce sales and execution of the Company's key initiatives. Our eCommerce revenues increased by $20.3 million, or 36.7%, and contributed to the comparable store revenues by 2.1% for the period. The Company calculates comparable store revenues 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 revenues differ among companies in the retail industry.

Operating income increased to $44.4 million in the first quarter of fiscal year 2016 compared to $41.1 million during the same period in fiscal year 2015. Net income increased to $21.8 million, or $0.55 per basic and diluted share, in the first quarter of fiscal year 2016 compared to $19.3 million, or $0.47 per basic and diluted share, during the same period in fiscal year 2015. The increase in net income was due primarily to continued positive results from initiatives focused on increasing revenues and improving operating margin performance.

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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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 2,           May 3,
                                                                 2015             2014
SELECTED FINANCIAL DATA
Revenues                                                           100.0 %          100.0 %

Cost of goods sold (including occupancy, distribution and buying expenses)

                                                    67.6             67.6
Selling, general and administrative expenses                        27.9             28.0
Gain on sale of property and equipment                               0.1              0.1
Asset impairment and exit costs                                       -               0.1
Operating income                                                     4.5              4.3
Interest expense, net                                                1.2              1.2
Income before income taxes                                           3.3              3.1
Income tax expense                                                   1.1              1.1
Net income                                                           2.2              2.0
Comparable store net revenues increase (decrease)                    3.3             (0.2 )


Revenues

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 2,         May 3,
             Merchandise Areas                    2015           2014
             Women's                                   35 %           35 %
             Cosmetics, Shoes and Accessories          35             34
             Men's                                     16             16
             Home                                       7              8
             Children's                                 7              7

             Total                                    100 %          100 %


Comparison of the Three Months Ended May 2, 2015 and May 3, 2014

Revenues. The Company's revenues for the three months ended May 2, 2015 increased 3.1%, or $29.9 million, to $985.0 million from $955.1 million during the same period in fiscal year 2015. The increase is primarily attributable to a 3.3% increase in comparable store revenues and a $4.3 million increase from new stores, partially offset by a $5.7 million decrease in revenues from closed stores. The number of units sold increased 1.3% and the average unit selling price increased 1.7% compared to the prior year, as our customers accepted our offerings from a style and value perspective. The strongest merchandise categories were men's and women's apparel, especially active wear, across all areas.

Cost of goods sold. Cost of goods sold was $665.5 million, or 67.6% of revenues, for the three months ended May 2, 2015 compared to $646.1 million, or 67.6% of revenues, for the same period in fiscal year 2015. Cost of goods sold as a percentage of revenues, while flat compared to the previous year, increased due to shipping and handling and fulfillment center costs associated with the increase in eCommerce sales, and offset by lower markdown activity.

Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $275.2 million, or 27.9% of revenues, for the three months ended May 2, 2015, compared to $267.8 million, or 28.0% of revenues, for the same period in fiscal year 2015. The increase in SG&A expense of $7.4 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.




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Income tax expense. Income tax expense for the three months ended May 2, 2015 was $10.7 million, or 32.9% of pre-tax income, compared to $10.2 million, or 34.6% of pre-tax income, for the three months ended May 3, 2014. The increase in income tax expense was due primarily to the increase in income before income taxes for the three months ended May 2, 2015. The decrease in the income tax rate was primarily a result of a decrease in the state tax effective rates and higher non-taxable corporate owned life insurance income.

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 $240.3 million as of May 2, 2015, cash flows from operations, and borrowings under debt facilities, which consist of a $500.0 million credit facility and $375.0 million in senior notes. The credit facility, which matures in October 2019, allows for up to $100.0 million of outstanding letters of credit. As of May 2, 2015, the Company had $14.0 million of standby letters of credit outstanding under the credit facility, and availability under the credit facility was $486.0 million.

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 rent expense multiplied by a factor of eight, by pre-tax income plus net interest expense and non-cash items, such as depreciation, amortization, and impairment expense. The maximum leverage ratio of 4:1 remains the same as under the previous facility. At the Company's discretion, amounts outstanding under the credit facility bear interest based on either (1) current LIBOR plus the applicable spread which ranges from 0.875% to 1.75%, or (2) the greater of the prime rate, the federal funds rate plus 0.50% or the one-month LIBOR plus 1.0% (the "Base Rate"), plus the applicable spread which ranges from 0.0% to 0.75%. The current applicable spread of 1.125% is based upon the calculated leverage ratio of 1.92 as of May 2, 2015. Previous dividend, share repurchase, and acquisition limitations were removed and changed under the new credit facility to pro forma covenant compliance. Pro forma covenant compliance would be reflective of the covenant calculations after giving effect for the applicable transaction. The Company was in compliance with all covenants as of May 2, 2015 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future.

The senior notes have restrictive covenants that are similar to the Company's credit facility, and had the following terms as of May 2, 2015:



                   Amount
                (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

               $         375.0


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.




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Belk intends to invest approximately $450 million, the majority of which will be capital expenditures, over the three-year period beginning in fiscal year 2016 on key strategic initiatives. Based on our current plan, approximately $230 million will be focused on our comprehensive Omnichannel initiative, $110 million on creating compelling shopping environments through new stores, expansions, remodels, and an expanded flagship strategy, $45 million on information technology that delivers new business capabilities, and $65 million on supply chain initiatives that align distribution capabilities to support our Omnichannel initiative.

Management believes that cash on hand of $240.3 million as of May 2, 2015, 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 $22.9 million for the three months ended May 2, 2015 compared to $17.7 million for the same period in fiscal year 2015. The increase in cash flows from operating activities was principally due to less cash utilized for inventory purchases of $34.7 million, offset by a $20.9 million decrease in accrued expenses and a $13.0 million decrease in accrued income taxes.

Net cash used by investing activities was $39.9 million for the three months ended May 2, 2015 compared to $52.6 million for the same period in fiscal year 2015. The decrease in cash used by investing activities was due to a $12.7 million decrease in capital expenditures in the first three months of fiscal year 2016 compared to the same period in fiscal year 2015.

Net cash used by financing activities was $37.1 million for the three months ended May 2, 2015 compared to $41.0 million for the same period in fiscal year 2015. The decrease in cash used by financing activities was primarily due to a $3.0 million decrease in cash paid for withholding taxes in lieu of stock-based compensation shares in the first three months of fiscal year 2016 compared to the same period in fiscal year 2015.

Contractual Obligations and Commercial Commitments

A table representing the scheduled maturities of the Company's contractual obligations and commercial commitments as of January 31, 2015 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 January 31, 2015. There have been no material changes from the information included in the Form 10-K.

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.

New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. This guidance will be effective at the beginning of fiscal year 2017, and the Company does not expect the adoption to have a material impact on the condensed consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-04, "Compensation - Retirement Benefits (Topic 715)," which provides a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. This guidance will be effective at the beginning of fiscal year 2018, and the Company does not expect the adoption to have a material impact on the condensed consolidated financial statements.




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In April 2015, the FASB issued Accounting Standards Update No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)," which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This guidance will be effective at the beginning of fiscal year 2017, and the Company does not expect the adoption to have a material impact on the condensed consolidated financial statements.

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 255-20)," which eliminates from GAAP the concept of extraordinary items. This guidance will be effective at the beginning of fiscal year 2017, and the Company does not expect the adoption to have an impact on the condensed consolidated financial statements or related disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)," which requires disclosure of uncertainties about an entity's ability to continue as a going concern. This guidance will be effective at the beginning of fiscal year 2018, and the Company does not expect the adoption to have an impact on the condensed consolidated financial statements or related disclosures.

In May 2014, the 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 but does not believe it will have a material impact. The Company has not yet selected a transition method.

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.

© Edgar Online, source Glimpses

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