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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended May 2, 2015

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission file number 000-26207

BELK, INC.

(Exact Name of Registrant as Specified In Its Charter)

 

Delaware		56-2058574
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
2801 West Tyvola Road, Charlotte, NC		28217-4500
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, including Area Code: (704) 357-1000

N/A

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		þ
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    þ  No

At June 2, 2015, the registrant had issued and outstanding 38,300,291 shares of class A common stock and 1,089,974 shares of class B common stock.

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BELK, INC.

Index to Form 10-Q

 

		Page Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the Three Months Ended May  2, 2015 and May 3, 2014			4
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended May 2, 2015 and May 3, 2014			5
Condensed Consolidated Balance Sheets as of May 2, 2015 and January 31, 2015			6
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended May 2, 2015			7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 2, 2015 and May 3, 2014			8
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			16
Item 4. Controls and Procedures			16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			17
Item 1A. Risk Factors			17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3. Defaults Upon Senior Securities			17
Item 4. Mine Safety Disclosures			17
Item 5. Other Information			17
Item 6. Exhibits			17

 

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This Report Contains Forward-Looking Statements

Certain statements made in this report, and other written or oral statements made by or on our behalf, may constitute “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. You can identify these forward-looking statements through our use of words such as “may,” “will,” “intend,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or other similar words.

Forward-looking statements include information concerning possible or assumed future results from merchandising, marketing and advertising in our stores and through the Internet, general economic conditions, our ability to be competitive in the retail industry, our ability to execute profitability and efficiency strategies, our ability to execute growth strategies, anticipated benefits from our belk.com website and our eCommerce fulfillment centers, the expected benefits of new systems and technology, and the anticipated benefits under our Program Agreement with Synchrony Bank. These forward-looking statements are subject to certain risks and uncertainties that may cause our actual results to differ significantly from the results we discuss in such forward-looking statements.

We believe that these forward-looking statements are reasonable. However, you should not place undue reliance on such statements. Any such forward-looking statements are qualified by the following important risk factors and other risks which may be disclosed from time to time in our filings that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made.

Risks and uncertainties that might cause our results to differ from those we project in our forward-looking statements include, but are not limited to:

 

•

Economic, political and business conditions, nationally and in our market areas, including rates of economic growth, interest rates, inflation or deflation, consumer credit availability, levels of consumer debt and bankruptcies, tax rates and policy, unemployment trends, a health pandemic, catastrophic events, potential acts of terrorism and threats of such acts and other matters that influence consumer confidence and spending;

 

•

Our ability to anticipate the demands of our customers for a wide variety of merchandise and services, including our predictions about the merchandise mix, quality, style, service, convenience and credit availability of our customers;

 

•

Unseasonable and extreme weather conditions in our market areas;

 

•

Seasonal fluctuations in quarterly net income due to the significant portion of our revenues generated during the holiday season in the fourth fiscal quarter and the significant amount of inventory we carry during that time;

 

•

Competition from other department and specialty stores and other retailers, including luxury goods retailers, general merchandise stores, Internet retailers, mail order retailers and off-price and discount stores, in the areas of price, merchandise mix, quality, style, service, convenience, credit availability and advertising;

 

•

Any significant damage to our brand or reputation which could negatively impact sales, diminish customer trust and generate negative sentiment;

 

•

Our ability to prevent a security breach that results in the unauthorized disclosure of Company, employee or customer information;

 

•

Loss of key management or qualified employees or an inability to attract, retain and motivate additional highly skilled employees;

 

•

Our ability to successfully implement our new information technology platform that will impact our primary merchandising, planning and core financial process;

 

•

Our ability to manage multiple significant change initiatives simultaneously;

 

•

Our ability to effectively use advertising, marketing and promotional campaigns to generate high customer traffic in our stores and through online sales;

 

•

Variations in the amount of vendor allowances received;

 

•

Our ability to successfully operate our website, and our fulfillment facilities and manage our social community engagement by providing a broader range of our information online, including current sales promotions and special events;

 

•

Our ability to successfully develop and maintain a relevant and reliable Omnichannel experience for our customers;

 

•

Our ability to find qualified vendors from which to source our merchandise and our ability to access products in a timely and efficient manner from a wide variety of domestic and international vendors; and to deliver in a timely and cost-efficient manner;

 

•

Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability;

 

•

The income we receive from, and the timing of receipt of, payments from Synchrony Bank, the operator of our private label credit card business, which depends upon the amount of purchases made through the proprietary credit cards, changes in customers’ credit card use, and Synchrony’s ability to extend credit to our customers;

 

•

Our ability to manage our expense structure;

 

•

Our ability to continue to open new stores, or to remodel or expand existing stores, including the availability of existing retail stores or store sites on acceptable terms and our ability to successfully execute our retailing concept in new markets and geographic regions;

 

•

Our ability to manage risks associated with owning and leasing real estate;

 

•

The efficient and effective operation of our distribution network, and information systems to manage sales, distribution, merchandise planning and allocation functions;

 

•

The effectiveness of third parties in managing our outsourced business;

 

•

Changes in federal, state or local laws and regulations; and

 

•

Our ability to comply with debt covenants, which could adversely affect our capital resources, financial condition and liquidity.

For a detailed description of the risks and uncertainties that might cause our results to differ from those we project in our forward-looking statements, we refer you to the section captioned “Risk Factors” in our annual report on Form 10-K for the fiscal year ended January 31, 2015 that we filed with the SEC on April 14, 2015. Our other filings with the SEC may contain additional information concerning the risks and uncertainties listed above, and other factors you may wish to consider. Upon request, we will provide copies of these filings to you free of charge.

Our forward-looking statements are based on current expectations and speak only as of the date of such statements.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

BELK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

(unaudited)

 

		Three Months Ended
		May 2, 2015				May 3, 2014
Revenues		$	984,979			$	955,142
Cost of goods sold (including occupancy, distribution and buying expenses)			665,501				646,118
Selling, general and administrative expenses			275,247				267,756
Gain on sale of property and equipment			670				587
Asset impairment and exit costs			456				788
Operating income			44,445				41,067
Interest expense, net			(11,942	)			(11,542	)
Income before income taxes			32,503				29,525
Income tax expense			10,703				10,201
Net income		$	21,800			$	19,324
Basic and diluted net income per share		$	0.55			$	0.47
Weighted average shares outstanding:
Basic			39,306,670				41,084,853
Diluted			39,448,715				41,260,122

See accompanying notes to unaudited condensed consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

		Three Months Ended
		May 2, 2015				May 3, 2014
Net income		$	21,800			$	19,324
Other comprehensive income:
Defined benefit plan adjustments, net of $1,187 and $992 income taxes for the three months ended May 2, 2015 and May 3, 2014, respectively.			2,020				1,672
Total other comprehensive income			2,020				1,672
Total comprehensive income		$	23,820			$	20,996

See accompanying notes to unaudited condensed consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

(unaudited)

 

		May 2, 2015				January 31, 2015
Assets
Current assets:
Cash and cash equivalents		$	240,290			$	294,359
Accounts receivable, net			71,852				60,575
Merchandise inventory			1,043,465				959,645
Prepaid income taxes, expenses and other current assets			28,247				27,323
Total current assets			1,383,854				1,341,902
Property and equipment, net of accumulated depreciation and amortization of $1,600,238 and $1,586,423 as of May 2, 2015 and January 31, 2015, respectively.			1,277,568				1,274,146
Other assets			42,424				38,443
Total assets		$	2,703,846			$	2,654,491
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	358,957			$	277,212
Accrued liabilities			247,963				254,084
Accrued income taxes			9,721				26,780
Deferred income taxes			32,142				32,663
Current installments of long-term debt and capital lease obligations			107,169				108,736
Total current liabilities			755,952				699,475
Deferred income taxes			18,194				17,721
Long-term debt and capital lease obligations, excluding current installments			317,849				318,991
Retirement obligations and other noncurrent liabilities			257,423				256,558
Total liabilities			1,349,418				1,292,745
Stockholders’ equity:
Preferred stock			—				—
Common stock, 400 million shares authorized and 39.4 and 39.3 million shares issued and outstanding as of May 2, 2015 and January 31, 2015, respectively.			394				393
Paid-in capital			95,235				94,877
Retained earnings			1,419,197				1,428,894
Accumulated other comprehensive loss			(160,398	)			(162,418	)
Total stockholders’ equity			1,354,428				1,361,746
Total liabilities and stockholders’ equity		$	2,703,846			$	2,654,491

See accompanying notes to unaudited condensed consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

		Common Stock								Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
		Shares				Amount
Balance at January 31, 2015			39,264			$	393			$	94,877			$	1,428,894			$	(162,418	)		$	1,361,746
Net income			—				—				—				21,800				—				21,800
Other comprehensive income			—				—				—				—				2,020				2,020
Cash dividends			—				—				—				(31,497	)			—				(31,497	)
Issuance of stock-based compensation			—				—				(2,867	)			—				—				(2,867	)
Stock-based compensation expense			—				—				3,225				—				—				3,225
Common stock issued			107				1				—				—				—				1
Balance at May 2, 2015			39,371			$	394			$	95,235			$	1,419,197			$	(160,398	)		$	1,354,428

See accompanying notes to unaudited condensed consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Three Months Ended
		May 2, 2015				May 3, 2014
Cash flows from operating activities:
Net income		$	21,800			$	19,324
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairment and exit costs			456				788
Deferred income tax (benefit) expense			(938	)			328
Depreciation and amortization expense			42,093				36,689
Stock-based compensation expense			3,225				2,235
(Gain) loss on sale of property and equipment			(13	)			70
Amortization of deferred gain on sale and leaseback			(657	)			(657	)
Amortization of deferred debt issuance costs			122				207
Increase in:
Accounts receivable, net			(11,277	)			(4,116	)
Merchandise inventory			(83,820	)			(59,977	)
Prepaid income taxes, expenses and other assets			(5,480	)			(5,986	)
Increase (decrease) in:
Accounts payable and accrued liabilities			69,653				32,026
Accrued income taxes			(17,059	)			(4,085	)
Retirement obligations and other liabilities			4,766				809
Net cash provided by operating activities			22,871				17,655
Cash flows from investing activities:
Purchases of property and equipment			(39,955	)			(52,657	)
Proceeds from sales of property and equipment			88				50
Net cash used by investing activities			(39,867	)			(52,607	)
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations			(2,709	)			(2,010	)
Dividends paid			(31,497	)			(32,964	)
Stock compensation tax benefit			455				357
Cash paid for withholding taxes in lieu of stock-based compensation shares			(3,322	)			(6,349	)
Net cash used by financing activities			(37,073	)			(40,966	)
Net decrease in cash and cash equivalents			(54,069	)			(75,918	)
Cash and cash equivalents at beginning of period			294,359				295,334
Cash and cash equivalents at end of period		$	240,290			$	219,416
Supplemental disclosures of cash flow information:
Income taxes paid		$	28,724			$	14,854
Interest paid, net of capitalized interest			4,790				4,492
Supplemental schedule of noncash investing activities:
Increase in property and equipment through accrued purchases			5,491				5,970

See accompanying notes to unaudited condensed consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Belk, Inc. and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q promulgated by the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2015. In the opinion of management, this information is fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods have been included; however, certain items are included in these statements based on estimates for the entire year. Also, operating results for the three months ended May 2, 2015 may not be indicative of the operating results that may be expected for the full fiscal year.

(2) New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“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. The Company adopted this guidance beginning in the first quarter of fiscal year 2016 when it was required. The adoption of this update did not have a material effect on the Company’s condensed consolidated results of operations, financial position or cash flows.

(3) Accumulated Other Comprehensive Loss

As of May 2, 2015 and January 31, 2015, the accumulated other comprehensive loss for defined benefit plans was $160.4 million and $162.4 million, respectively. These amounts are net of income taxes of $96.5 million and $97.7 million at May 2, 2015 and January 31, 2015, respectively.

As of May 2, 2015 and May 3, 2014, the Company reclassified $2.0 million and $1.7 million of amortization of defined benefit plan liabilities from accumulated comprehensive income to selling, general and administrative expenses on the condensed consolidated statements of income, respectively. These amounts are net of income taxes of $1.2 million and $1.0 million at May 2, 2015 and May 3, 2014, respectively.

(4) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company has equity and fixed income investments related to its company-owned life insurance. The fair value of the investments is the estimated amount that the Company would receive if the policy was terminated, taking into consideration the current creditworthiness of the insurer. The fair value of the company-owned life insurance is considered Level 2, as it is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the change in the fair value of the company-owned life insurance is marked to market through income.

As of May 2, 2015 and January 31, 2015, the Company held company-owned life insurance measured at fair value on a recurring basis of $33.0 million and $28.6 million, respectively. These amounts are presented net of loans that are secured by some of these policies of $161.6 million and $164.1 million at May 2, 2015 and January 31, 2015, respectively. Total gross company-owned life insurance assets were $194.6 million and $192.7 million at May 2, 2015 and January 31, 2015, respectively.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Certain long-lived assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The fair value measurements related to long-lived assets are determined using expected future cash flow analyses. The Company estimates future cash flows based on historical experience and its expectation of future performance. The analyses use discounted cash flows and take into consideration any anticipated salvage value or sales price for the store. The analyses also assume available option periods through 20 years unless there is a real estate related event which would either increase or decrease the time period. The Company classifies these measurements as Level 3. There were no significant impairments of long-lived assets for the three months ended May 2, 2015 and May 3, 2014.

As of May 2, 2015 and January 31, 2015, the fair value of fixed rate long-term debt, including the current portion and excluding capitalized leases, was $399.3 million and $400.9 million, respectively. The Company classifies these measurements as Level 2. The fair value of the Company’s fixed rate long-term debt is estimated based on the current rates offered for debt of the same remaining maturities and credit ratings. The total carrying value of long-term debt, including the current portion and excluding capitalized leases, was $375.0 million as of May 2, 2015 and January 31, 2015.

(5) Income Taxes

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.

(6) Pension, SERP and Postretirement Benefits

The Company has a defined benefit pension plan, the Belk Pension Plan, which prior to fiscal year 2010 had been partially frozen and closed to new participants. Pension benefits were suspended for fiscal year 2010, and effective December 31, 2009, the Pension Plan was frozen for those remaining participants whose benefits were not previously frozen.

The Company has a non-qualified defined benefit Supplemental Executive Retirement Plan, (“Old SERP”), which provides retirement and death benefits to certain qualified executives. Old SERP has been closed to new executives and has been replaced by the 2004 Supplemental Executive Retirement Plan (“2004 SERP”), a non-qualified defined contribution plan.

The Company also provides postretirement medical and life insurance benefits to certain employees, and was closed to new participants in 2002. The Company accounts for postretirement benefits by recognizing the cost of these benefits over an employee’s estimated term of service with the Company, in accordance with ASC 715, “Compensation – Retirement Benefits.”

The components of net periodic benefit expense for these plans are as follows:

 

		Three Months Ended
		Pension Plan								Old SERP Plan								Postretirement Plan
		May 2, 2015				May 3, 2014				May 2, 2015				May 3, 2014				May 2, 2015				May 3, 2014
										(in thousands)
Service cost		$	—			$	—			$	50			$	39			$	20			$	19
Interest cost			5,466				5,986				142				133				167				206
Expected return on plan assets			(6,824	)			(7,530	)			—				—				—				—
Amortization of net loss (gain)			2,965				2,547				242				127				—				(10	)
Net periodic benefit expense		$	1,607			$	1,003			$	434			$	299			$	187			$	215

The Company does not expect to make contributions to the Pension Plan during fiscal year 2016 and did not make any contributions during fiscal year 2015.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(7) Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. The diluted EPS calculation includes the effect of contingently issuable stock-based compensation awards with remaining service vesting conditions as being outstanding at the beginning of the period in which all vesting conditions are met.

If all necessary conditions have not been satisfied by the end of the period, the contingently issuable shares included in diluted EPS are based on the number of dilutive shares that would be issuable at the end of the contingency period. Contingently-issuable non-vested share awards are included in the diluted EPS calculation as of the beginning of the period (or as of the date of the contingent share agreement, if later).

The reconciliation of basic and diluted shares for the three months ended May 2, 2015 and May 3, 2014, are as follows:

 

		Three Months Ended
		May 2, 2015				May 3, 2014
Basic Shares			39,306,670				41,084,853
Dilutive contingently-issuable non-vested share awards			141,277				174,601
Dilutive contingently-issuable vested share awards			768				668
Diluted Shares			39,448,715				41,260,122

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2015				May 3, 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
Merchandise Areas		May 2, 2015				May 3, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company’s quantitative and qualitative market risk disclosures during the three months ended May 2, 2015 from the disclosures contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

Item 4. Controls and Procedures

The Company’s management conducted an evaluation pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, the Company is subject to various legal proceedings and claims. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on its condensed consolidated financial position, cash flows or results of operations.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K filed on April 14, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

 

(a)

Exhibits

 

3.1		Form of Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to pages B-24 to B-33 of the Company’s Registration Statement on Form S-4, filed on March 5, 1998 (File No. 333-42935)), as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed on June 5, 2012).
3.2		Form of Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004), as amended by the First Amendment to the Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K, filed on June 5, 2012).
4.1		Articles Fourth, Fifth and Seventh of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to pages B-24 to B-33 of the Company’s Registration Statement on Form S-4, filed on March 5, 1998 (File No. 333-42935)), as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed on June 5, 2012).
4.2		Articles I and IV of the Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K, filed on April 15, 2004).
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.

 

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31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements 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.

 

				BELK, INC.
Dated: June 9, 2015				By:		/s/ Ralph A. Pitts
						Ralph A. Pitts
						Executive Vice President, General Counsel and
						Corporate Secretary
						(Authorized Officer of the Registrant)
				By:		/s/ Adam M. Orvos
						Adam M. Orvos
						Executive Vice President and Chief Financial Officer
						(Principal Financial Officer)

 

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