10-K 1 d683930d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2014

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 of incorporation)  

(IRS Employer

Identification No.)

2801 West Tyvola Road, Charlotte, North Carolina   28217-4500
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code:

(704) 357-1000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

 

Title of each class

Class A Common Stock, $0.01 per share
Class B Common Stock, $0.01 per share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x

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    Yes  x    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 file).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 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

 

x

Non-accelerated filer

 

¨  (Do not check if 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  ¨    No  x

The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and directors are “affiliates” of the Registrant) as of August 3, 2013 (based on the price at which the common equity was last sold on June 28, 2013, the date closest to the last business day of the Company’s most recently completed second fiscal quarter) was $615,522,222. 41,204,622 shares of common stock were outstanding as of April 4, 2014, comprised of 40,056,235 shares of the Registrant’s Class A Common Stock, par value $0.01, and 1,148,387 shares of the Registrant’s Class B Common Stock, par value $0.01.

Documents Incorporated By Reference

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 28, 2014 are incorporated herein by reference in Part III.

 

 

 


Table of Contents

BELK, INC.

TABLE OF CONTENTS

 

Item No.

   Page No.  
Part I   

1.

 

Business

     1   

1A.

 

Risk Factors

     8   

1B.

 

Unresolved Staff Comments

     13   

2.

 

Properties

     13   

3.

 

Legal Proceedings

     14   

4.

 

Mine Safety Disclosures

     14   
Part II   

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     15   

6.

 

Selected Financial Data

     15   

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     26   

8.

 

Financial Statements and Supplementary Data

     27   

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     59   

9A.

 

Controls and Procedures

     59   

9B.

 

Other Information

     60   
Part III   

10.

 

Directors, Executive Officers and Corporate Governance

     61   

11.

 

Executive Compensation

     61   

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     61   

13.

 

Certain Relationships and Related Transactions, and Director Independence

     61   

14.

 

Principal Accountant Fees and Services

     62   
Part IV   

15.

 

Exhibits and Financial Statement Schedules

     63   

 

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PART I

 

Item 1. Business

General

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 the fiscal year ended February 1, 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 Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. The fiscal year end dates and number of weeks in fiscal years 2012 – 2015 are reflected in the table below.

 

Fiscal Year

   End Date      Weeks  

2015

     January 31, 2015         52   

2014

     February 1, 2014         52   

2013

     February 2, 2013         53   

2012

     January 28, 2012         52   

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 operates 94 stores that exceed 100,000 square feet in size, although the majority of Belk stores range in size from 60,000 to 100,000 square feet. Most of the Belk stores are anchor tenants in major regional malls or in open-air shopping centers in medium and smaller markets. In the aggregate, the Belk stores occupy approximately 22.6 million square feet of selling space. The Company is making significant investments in its eCommerce business to expand the capabilities of its belk.com website and increase online sales. It has also begun an Omnichannel initiative to expand the inventory available online and in stores and to provide a seamless shopping experience for its customers.

Management of Belk’s store operations is organized into three regional operating divisions, with offices in Raleigh, NC, Atlanta, GA and Birmingham, AL. Each unit is headed by a division chair and a director of stores. Division offices execute centralized initiatives at the individual stores, and their primary activities relate to providing management and support for the personnel, operations and maintenance of the Belk stores in their regions. These divisions are not considered segments for financial reporting purposes.

Belk Stores Services, Inc., a subsidiary of Belk, Inc., and its subsidiary Belk Administration Company, along with Belk International, Inc., a subsidiary of Belk, Inc., and its subsidiary, Belk Merchandising Company, LLC (collectively “BSS”), coordinate the operations of Belk stores on a company-wide basis. BSS provides a wide range of services to the Belk division offices and stores, such as merchandising, merchandise planning and allocation, advertising and sales promotion, information systems, human resources, public relations, accounting, real estate and store planning, credit, legal, tax, distribution and purchasing.

The Company was incorporated in Delaware in 1997. The Company’s principal executive offices are located at 2801 West Tyvola Road, Charlotte, North Carolina 28217-4500, and its telephone number is (704) 357-1000.


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Business Strategy

Belk’s mission is “to satisfy the modern Southern lifestyle like no one else, so that our customers get the fashion they desire and the value they deserve.” The vision is “for the modern Southern woman to count on Belk first. For her, for her family, for life.” Belk is positioning itself for success by providing modern Southern fashion that is aligned with its customers’ lifestyles, by delivering Southern hospitality to deepen customer relationships, and by impacting local communities positively through its charitable contributions. In fiscal year 2013, the Company set a goal to become a $6 billion retailer, supported by key strategies to expand its business online and in stores through compelling assortments, service excellence, technology and real estate investments, talent initiatives and possible future strategic acquisitions.

The Company seeks to maximize its sales opportunities by providing quality merchandise assortments of fashion goods that differentiate its stores from competitors. Belk merchants and buyers monitor fashion merchandising trends, shop domestic and international markets, and leverage relationships with key vendors in order to provide the latest seasonal assortments of most-wanted styles and brands of merchandise. Through merchandise planning and allocation, the Company tailors its assortments to meet the particular needs of customers in each market. The Company conducts customer research and participates in market studies on an ongoing basis in order to obtain information and feedback from customers that will enable it to better understand their merchandise needs and service preferences.

The Company’s marketing and sales promotion strategy seeks to attract customers to shop at Belk by keeping them informed of the latest fashion trends, merchandise offerings, and sales promotions through a combination of advertising and interactive media, including direct mail, circulars, broadcast, Internet, social media (including email, Facebook, Twitter, Pinterest and YouTube) and in-store special events. Belk uses its proprietary database to communicate directly to key customer constituencies with special offers designed to appeal to these specific audiences. The sales promotions are designed to promote desirable merchandise brands and styles at compelling price values with adequate inventories planned and allocated to ensure that stores will be in stock on featured merchandise.

Belk strives to attract and retain talented, well-qualified associates who provide a high level of friendly, personal service to enhance the customer’s shopping experience. Through the Company’s service excellence program, Belk associates are trained to be knowledgeable about the merchandise they sell, approach customers promptly, help when needed, and provide quick checkout. The Company desires to be an inclusive company that embraces diversity among its associates, customers, and vendors. Its ongoing diversity program includes a number of company-wide initiatives aimed at increasing the diversity of its management and associate teams, increasing its spend with diverse vendors, creating awareness of diversity issues, and demonstrating the Company’s respect for, and responsiveness to, the rapidly changing cultural and ethnic diversity in Belk markets.

Strategic Investments

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.

Growth Strategy

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.

 

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The Company will continue to explore new store opportunities within its existing 16-state footprint and in contiguous markets where Belk can leverage its name and reputation to distinguish its stores from the competition. The Company will also consider closing stores in markets where more attractive locations become available or where the Company does not believe there is potential for long term growth and success. In addition, the Company periodically reviews and adjusts its space requirements to create greater operating efficiencies and convenience for the customer.

In fiscal year 2014, the Company completed major remodel projects in nine stores, opened one store in a new market, opened two new stores as replacements for existing stores, and completed expansions of eight stores. In addition, the Company completed 24 shoe and jewelry department remodels. The new store and store expansions include:

New Stores

 

Location

   Size
(Selling Sq. Ft.)
     Opening Date      New or
Existing
Market

New Braunfels, TX

     87,165         10/16/13       New

Morganton, NC

     59,334         10/16/13       Existing

Salisbury, NC

     67,137         10/16/13       Existing

Store Expansions

 

Location

   Expanded Size
(Selling Sq. Ft)
     Completion
Date
 

Mt. Pleasant, SC (Town Center)

     95,893         11/13/13   

Morehead City, NC (Cypress Bay Plaza)

     107,325         10/16/13   

Tifton, GA (Town & Country Plaza)

     42,570         10/16/13   

Paragould, AR (Town West)

     39,400         10/16/13   

Rock Hill, SC (Galleria)

     93,689         10/16/13   

Flowood, MS (Dogwood Festival)

     186,214         10/16/13   

Stuttgart, AR (Stuttgart Square)

     33,809         6/10/13   

Brunswick, GA (Glynn Place Mall)

     76,496         5/15/13   

In fiscal year 2015, the Company plans to open two new stores in new markets, two new stores as replacements of existing stores, two store expansions and two remodels. Five of the eight projects are new or existing flagship locations.

Merchandising

Belk stores and belk.com feature quality name brand and private label merchandise in better and moderate price ranges, providing fashion, selection and value to customers. The merchandise mix is targeted to upper and middle income customers shopping for their families and homes, and includes a wide selection of fashion apparel, accessories and shoes for women, men and children, as well as cosmetics, home furnishings, housewares, gift and guild, jewelry, and other types of department store merchandise. The goal is to position Belk as the leader in providing modern, fashionable assortments with depth in style, selection and value to its store and online customers.

Belk stores and belk.com offer large assortments of many national brands. The Company has enjoyed excellent long-term relationships with many top apparel and cosmetics suppliers and is often the sole distributor of desirable apparel, accessories and cosmetic lines in its markets. Belk stores and belk.com also offer exclusive private brands in selected merchandise categories that are designed and manufactured to provide compelling fashion assortments that meet customers’ needs and set Belk apart from competitors through their styling, quality and price. The Company’s private brands include MADE Cam Newton, CYNTHIA Cynthia Rowley, Crown and Ivy, Chip & Pepper® California, ND-New Directions, Kim Rogers, J. Khaki, Pro Tour, Saddlebred, Red Camel, Nursery Rhyme, Belk Silverworks, Be Inspired, Biltmore™ For Your Home, Home Accents and Cook’s Tools.

 

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The Company introduced three new private brands during fiscal year 2014 — MADE Cam Newton, a modern menswear line, CYNTHIA Cynthia Rowley, a line of apparel, handbags, jewelry, scarves, accessories and small leather goods, and Chip & Pepper® California, a line by denim experts Chip and Pepper Foster featuring trend-setting, premium denim. The Company’s newest private brand, launched in early fiscal year 2015, is Crown and Ivy, an updated, better sportswear line for women offered in stores and on belk.com.

During fiscal year 2014, the Company conducted its second Southern Designer Showcase competition, selecting 13 winners from nearly 300 entrants. The winning fashion designers, whose merchandise reflects the latest in Modern.Southern.Style. will offer exclusive new looks in women’s apparel, jewelry, handbags and children’s apparel to Belk customers. Winning designs will be available for sale in select Belk stores and on belk.com beginning in spring 2014.

The Company established its own fine jewelry business in fiscal year 2007, with buying and administrative offices at the corporate office in Charlotte and a state of the art repair and distribution center located in Ridgeland, Mississippi. The shops replaced the Company’s former leased fine jewelry operations and offer expanded assortments of high quality diamond jewelry, rubies, emeralds and other fine gemstones, and top brands of fine watches and jewelry. During fiscal year 2014, the Company opened six new fine jewelry shops and was operating 159 fine jewelry shops in its stores under the “Belk and Co. Fine Jewelers” name as of the fiscal year end. Belk and Co. Fine Jewelers merchandise is also sold on belk.com.

Marketing and Branding

The Company employs strategic marketing initiatives to develop and enhance the equity of the Belk brand and to create and strengthen “one-to-one” relationships with customers. The Company’s marketing strategy involves a combination of mass media print and broadcast advertising, direct marketing, Internet marketing, social media, mobile advertising, comprehensive store visual merchandising, signing and in-store special events, such as trunk shows, celebrity and designer appearances, Charity Sale, KidFest, Educator Appreciation Day, Healthcare Appreciation Day and Senior Day.

During fiscal year 2012, the Company became the title sponsor of the annual Belk Bowl college football game held at Bank of America Stadium in Charlotte, NC. The game is televised nationally on ESPN and provides a vehicle for the Company to market the Belk brand beyond its geographic footprint. In the fourth quarter of fiscal year 2014, Belk announced an agreement with the Charlotte Sports Foundation that will bring a Southeastern Conference (SEC) team to the Belk Bowl to face an Atlantic Coast Conference (ACC) opponent starting in 2014.

Belk has planned a year of Modern.Southern.Music. celebrations and special events for fiscal year 2015, including a Southern musician showcase competition and a concert sweepstakes, that will pay homage to pop country, Americana, blues, jazz and bluegrass music. Award winning actress Hayden Panettiere will serve as ambassador for the Belk brand during the campaign through ads, special appearances and promoting Belk via social media. Belk also partnered with Lifetime’s Project Runway show to sponsor its accessory wall and conduct a Modern. Southern. Style. design challenge that aired last fall with a Belk executive serving as a guest judge. Belk plans to offer Project Runway merchandise in select stores and online beginning in spring 2014.

Omnichannel

The Company has undertaken a multi-year Omnichannel initiative designed to address customers’ rapidly-changing shopping preferences and service expectations by creating a consistent, compelling and seamless shopping experience in stores and online. In fiscal year 2014, the Company introduced its “Yes, We Have It!” program consisting of an item locator initiative, which generates incremental demand by helping customers order inventory not available in a particular location, and a store fulfillment initiative, which allows certain stores to function as supplemental fulfillment centers. Store fulfillment efforts were launched as a pilot in fiscal year 2014 with a network of 17 store locations that filled both item locator and belk.com orders. The Company plans to expand its item locator and store fulfillment efforts in fiscal year 2015. Future Omnichannel programs include a new digital platform solution and store technology enhancements, such as a new touch-screen sales register with access to belk.com, wireless scanners, new pin pads, and in-store Wi-Fi. In fiscal year 2014, the new store

 

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technology was piloted in one store, and the Company plans to expand the number of trial stores in fiscal year 2015 in preparation for a broader roll-out to all stores.

eCommerce

The Company continues to grow its eCommerce business and expand the capabilities of its belk.com website, which features a wide assortment of fashion apparel, accessories, shoes and cosmetics, plus home and gift merchandise. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands. The website also provides information about the Company, including its history, career opportunities, community involvement, diversity and sustainability initiatives, a Company media room, its Securities and Exchange Commission (“SEC”) filings, and more.

In fiscal year 2014, the Company strengthened its eCommerce business and belk.com website with systems improvements, expansion of merchandise assortments, increased multimedia marketing and implementation of social community engagement strategies. Belk shopping apps for mobile smartphone and tablet devices were also introduced, along with a new Belk mobile website. The Company expanded its eCommerce fulfillment center in Pineville, NC in fiscal year 2011. In fiscal year 2013, Belk began operating a 515,000 square foot fulfillment center in Jonesville, SC, expanding its processing and storage capacity in fiscal year 2014.

Gift Cards

The Company’s gift card program provides a convenient option for customer gift-giving and enables stores to issue electronic credits to customers in lieu of cash refunds for merchandise returned without sales receipts. Several types of gift cards are available, each featuring a distinctive design and appeal. During fiscal year 2013, the Company began allowing redemption of Belk gift cards for purchases made on belk.com. It also continued to expand its efforts to offer Belk gift cards for sale outside of Belk stores, mainly in select grocery store outlets through partnerships with regional and national grocery store chains.

Salons and Spas

As of the end of fiscal year 2014, the Company owned and operated salons and spas in 19 Belk locations that specialize in the latest trends in hair, spa and relaxation services. The salons and spas offer assortments of top brand name beauty products, including Aveda, Bumble and Bumble, Redken and Pureology. The spas offer massage therapy, full skincare, manicure and pedicure services, and specialized body treatments. Eight of the salons and spas operate under the name “Carmen! Carmen! Prestige Salon and Spa at Belk,” two under the name “Richard Joseph Studio Salon/Spa at Belk,” and the balance under the name “Belk Salon and Spa.”

Belk Gift Registry

The Company’s gift registry offers a wide assortment of bridal merchandise that can be registered for and purchased online at belk.com or in local Belk stores and shipped directly to the customer or gift recipient. Brides and engaged couples can conveniently create their gift registry and make selections through the belk.com website, or they can go to a Belk store where a certified professional bridal consultant can provide assistance using the store’s online gift registry kiosk. In the Belk stores that have kiosks, brides and engaged couples can use a portable scanning device, which enables them to quickly and easily enter information on their gift selections directly into the registry system.

Belk Proprietary Charge Programs

In fiscal year 2014, Belk extended its program agreement with GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance, through December 2017. Together, GECRB and Belk will continue to plan and execute enhanced marketing programs designed to recognize and reward Belk card customers, attract profitable new customers and increase sales from existing card customers. The Company’s customer loyalty program (“Belk Rewards Card Loyalty Program”) issues certificates for discounts on future purchases to Belk Rewards Card customers based on their spending levels. The rewards program is cumulative, issuing a $10 certificate for every 400 points earned in a calendar year. Belk Rewards Card customers whose purchases

 

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total $600 or more in a calendar year qualify for a Belk Premier Rewards Card that entitles them to unlimited free gift wrapping and basic alterations, an interest-free Flex Pay Plan account and notifications of special savings and sales events. Customers who spend more than $1,500 annually at Belk qualify for a Belk Elite Rewards Card that offers additional benefits, including a specially designed black Elite credit card, free shipping for belk.com and store purchases, triple points events, a 20% off birthday shopping pass, points that never expire and quarterly Pick Your Own Sale Days.

Systems and Technology

The Company continued to make substantial investments in technology and information systems during fiscal year 2014 to support sales and merchandising initiatives, reduce costs, improve core business processes and support its overall business strategy. These investments included people, processes and technology. Key systems initiatives included the final deployment of Project SMART, the Company’s strategic merchandising and retail technology program. The final phase of Project SMART incorporated implementation of a merchandise allocation solution, purchase order management, retail stock ledger software and other systems and technology solutions. The Company plans additional investments in these solutions to enhance and build upon its technology and business processes in fiscal year 2015.

The Company also made significant investments in fiscal year 2014 for enhancements to the belk.com website and its fulfillment capabilities. In addition to these customer facing technologies, the Company began deployment of a new workforce management system to more effectively align store staffing with customer traffic patterns and implemented other key systems and technology solutions, including the rollout of a new transportation management system, new talent management tools, and other solutions designed to enhance data security across the Company. Belk expects to continue to making significant investments in its information systems and new technology in fiscal year 2015.

Inventory Management and Logistics

The Company currently operates five distribution facilities that receive and process merchandise for delivery to Belk stores and belk.com customers. A 410,000 square foot distribution center in Blythewood, SC services the stores located in the northern and eastern areas of the Company’s footprint; a 174,000 square foot distribution center at the Greater Jackson Industrial Park in Byram, MS services the central and western areas; an 8,300 square foot distribution center in Ridgeland, MS services the Company’s fine jewelry operations; and a 259,000 square foot fulfillment center in Pineville, NC services orders from the belk.com website. In fiscal year 2013, the Company began operating a 515,000 square foot fulfillment center in Jonesville, SC that also services belk.com orders and expanded its processing and storage capacity in fiscal year 2014. The “store ready” merchandise receiving processes used in the Company’s distribution centers enable stores to receive and process merchandise shipments and move goods to the sales floor quickly and efficiently.

Service Excellence

In fiscal year 2014, the Company began finalizing the first two phases of its Service Excellence initiative and prepared for the launch of a third phase. The first phase has focused on support re-engineering to improve in-store support processes such as increasing dock efficiencies and processing all inbound freight in a timely manner. Phase two seeks to achieve customer service excellence by developing associates’ selling skills and behaviors. In phase three the Company plans to complete the implementation of the new workforce management system in all stores during fiscal year 2015 to better align its workforce with customer traffic patterns.

Strategic Sourcing

The Company continued its strategic sourcing program, started in fiscal year 2011, designed to streamline and institute best practices for its sourcing and procurement processes for non-retail goods and supplies. Strategic sourcing has become a standard business practice for the Company, with sourcing efforts continuing to yield significant savings in many areas of the business including purchases for construction projects and fixtures, software and supplies purchases.

 

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Sustainability

The Company continued implementation of sustainability initiatives aimed at fulfilling its commitment to be a good steward of the environment by eliminating waste, conserving energy, using resources more responsibly and embracing and promoting sustainable practices. Current initiatives include expanding the recycling of cardboard, hangers and plastic; increasing energy efficiency; implementing sustainability in store construction and maintenance; reducing product packaging materials; and using solar energy. During fiscal year 2014, the Company continued to implement energy efficient LED lighting systems, retrofitted stores with other energy efficient lighting, and installed variable frequency drives to reduce energy consumption by mechanical systems. The Company also continued its Employee Environment giving campaign and partnered with EarthShare and the HERproject, which links multinational companies and their factories to create sustainable workplace programs that increase women’s health awareness.

Philanthropy

In fiscal year 2014, the Company and its associates, customers and vendors contributed over $20.9 million to local communities. Of that amount, the Company funded $7.3 million to over 250 nonprofit organizations, with a focus on education, breast cancer research and awareness, and community strengthening. The remainder of the funding included associate, vendor and customer dollars raised in Belk-led charitable initiatives, including the semi-annual Belk Charity Sale, local United Way campaigns, the American Heart Association’s “Our Heart to Yours” campaign, and the Susan G. Komen for the Cure campaign. During fiscal year 2014, in partnership with Charlotte Radiology and Foundation for the Carolinas, Belk announced an approximate $6 million, multi-year investment in the Belk Gives on the Go Mobile Mammography Center. In 2014, the Center will visit more than 100 Southern cities, delivering breast cancer screenings and spreading awareness across the South. As of the fiscal 2014 year end, the Center had screened more than 4,500 women.

Non-Retail Businesses

Several of the Company’s subsidiaries engage in businesses that indirectly or directly support the operations of the retail department stores. The non-retail businesses include United Electronic Services (“UES”), a division of the Company, which provides equipment maintenance services to Belk stores and third parties.

Industry and Competition

The Company operates 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 its stores are 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.

Trademarks and Service Marks

Belk Stores Services, Inc. owns all of the principal trademarks and service marks now used by the Company, including “belk.” These marks are registered with the United States Patent and Trademark Office. The term of each of these registrations is generally ten years, and they are generally renewable indefinitely for additional ten-year periods, so long as they are in use at the time of renewal. Most of the trademarks, trade names and service marks employed by the Company are used in its private brands program. The Company intends to vigorously protect its trademarks and service marks and initiate appropriate legal action whenever necessary.

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

 

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realized during the fourth quarter, which includes the holiday selling season. Working capital requirements also fluctuate during the year, increasing somewhat in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday selling season when the Company carries higher inventory levels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

Associates

As of the end of fiscal year 2014, the Company had approximately 24,700 full-time and part-time associates. Because of the seasonal nature of the retail business, the number of associates fluctuates from time to time and is highest during the holiday shopping period in November and December. The Company as a whole considers its relations with associates to be good. None of the associates of the Company are represented by unions or subject to collective bargaining agreements.

Where You Can Find More Information

The Company makes available free of charge through its website, www.belk.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.

 

Item 1A. Risk Factors

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 GECRB. 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, and we undertake no obligation to update them.

Economic, political and business conditions could negatively affect our financial condition and results of operations.

Economic, political and business conditions, nationally and in our market areas, are beyond our control. These factors influence our forecasts and impact actual performance. Factors include 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. Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. The downturn in the economy during fiscal years 2009 and 2010, and the continuing uncertain economic climate in fiscal years 2011, 2012, 2013 and 2014 have affected, and will

 

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continue to affect for an undetermined period of time, consumer purchases of our merchandise. The precise future impact and duration of these economic conditions are uncertain, but they could continue to adversely impact our financial condition and results of operations.

Our sales and operating results depend on accurately anticipating customer demands.

Our business depends upon the ability to anticipate the demands and expectations of our customers for a wide variety of merchandise and services. We routinely make predictions about the merchandise mix, quality, style, service, convenience and credit availability of our customers. If we do not accurately anticipate changes in buying, charging and payment behavior among our customers, or consumer tastes, preferences, spending patterns and other lifestyle decisions, we may be faced with excess inventories for some products and/or missed opportunities for others. Excess inventories can result in lower gross margins due to greater than anticipated discounts and markdowns that might be necessary to reduce inventory levels. Low inventory levels can adversely affect the fulfillment of customer demand and diminish sales and brand loyalty. Our inability to identify and respond to lifestyle and customer preferences and buying trends could have an adverse impact on our business, and our failure to accurately predict inventory demands could adversely impact our results of operations.

Unseasonable and extreme weather conditions in our market areas may adversely affect our business.

Apparel comprises a majority of our sales. If the weather in our market areas is unseasonably warm or cold for an extended period of time, it can affect the timing of apparel purchases by our customers and result in an inventory imbalance. In addition, frequent or unusually heavy snow or ice storms, hurricanes or tropical rain storms in our market areas may affect our hours of operation, decrease customer traffic in our stores and adversely affect our business.

The seasonal nature of our business could have a material adverse effect on our financial results and cash flows.

We experience seasonal fluctuations in quarterly net income, as is typical in the retail industry. A significant portion of our revenues are generated during the holiday season in the fourth fiscal quarter. Because we order merchandise in advance of our peak season, we carry a significant amount of inventory during that time. A decrease in the availability of working capital needed in the months before the peak period could impact our ability to build up an appropriate level of merchandise in our stores. If we do not order the merchandise mix demanded by our customers or if there is a decrease in customer spending during the peak season due to a downturn in the economy, unseasonable and extreme weather or for any other reason, we may be forced to rely on markdowns or promotional sales to dispose of the inventory, which could have a material adverse effect on our financial results and cash flows. The number of selling days during the peak season between Thanksgiving and Christmas can also affect our results.

The retail industry is highly competitive, which could adversely impact our revenues and profitability.

We face 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 highly competitive retail industry. Although we offer extensive Internet purchasing options and online gift registry for our customers, we rely on in-store sales for the majority of our revenues. Competition is characterized by many factors, including price, merchandise mix, quality, style, service, convenience, credit availability and advertising. We have expanded and continue to expand into new markets served by our competitors. We have also expanded our eCommerce capabilities in the past few years. We face the entry of new competitors into or expansion of existing competitors in our existing markets, all of which further increase the competitive environment and cause downward pressure on prices and reduced margins, which could adversely impact our revenues and profitability. In addition, a significant shift in consumer buying patterns from in-store purchases to Internet purchases could negatively impact our revenues.

 

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Our failure to protect our reputation could have an adverse effect on our business.

We offer our customers quality merchandise at competitive prices and a high level of customer service, resulting in a strong brand and customer loyalty to the Belk name. Any significant damage to our brand or reputation could negatively impact sales, diminish customer trust and generate negative sentiment, any of which could harm our business and results of operation.

A security breach that results in the unauthorized disclosure of Company, employee or customer information could adversely affect our business, reputation and financial condition.

Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our business, customers and employees, including credit card information. Security breaches could expose us to a risk of loss or misuse of this information and potential liability. We may not be able to anticipate or prevent rapidly evolving types of cyber-attacks. Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional personnel and protection technologies, train employees and engage third party experts and consultants. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. Data and security breaches can also occur as a result of non-technical issues including intentional or inadvertent breach by employees or persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

Loss of our key management, or an inability to attract such management and other personnel, could adversely impact our business.

We depend on our senior executive officers and other key associates to run our business. The loss of any of these officers or associates could materially adversely affect our operations. Competition for qualified employees is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could adversely impact our business.

If we do not successfully implement our new information technology platform, our financial performance could be adversely affected.

We have undertaken a process of transforming our technology infrastructure and implementing new systems that will impact our primary merchandising, planning and core financial processes. Implementing new systems carries substantial risk, including implementation delays, cost overruns, disruption of operations, potential loss of data or information, lower customer satisfaction resulting in lost customers or sales, inability to deliver merchandise to our stores or our customers, and the potential inability to meet reporting requirements. If we do not implement these systems successfully, our ability to perform our key business processes could be disrupted and our financial performance could be adversely affected.

Our ability to manage multiple initiatives simultaneously could impact our operating results.

The Company is currently managing a number of significant change initiatives, such as systems and technology enhancements, changes in our merchandising and planning processes, store process improvements, strategic sourcing, store remodels and others. If we are unable to successfully coordinate and execute these initiatives while managing the other areas of our business, our results could be adversely affected.

We may not be able to develop and implement effective advertising, marketing and promotional campaigns.

We spend significant amounts on advertising, marketing and promotional campaigns. Our business depends on effective marketing to generate high customer traffic in our stores and through online sales. If our advertising, marketing and promotional efforts are not effective, it could negatively impact our operating results.

 

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Variations in the amount of vendor allowances received could adversely impact our operating results.

We receive vendor allowances for advertising, payroll and margin maintenance that are a strategic part of our operations. A reduction in the amount of cooperative advertising allowances would likely cause us to consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures and/or revenue. Decreased payroll reimbursements would either cause payroll costs to rise, negatively impacting operating income, or cause us to reduce the number of employees, which may cause a decline in sales. A decline in the amount of margin maintenance allowances would either increase cost of sales, which would negatively impact gross margin and operating income, or cause us to reduce merchandise purchases, which may cause a decline in sales.

If we do not successfully operate our website and our fulfillment facilities, our financial performance could be adversely affected.

In fiscal year 2009, we launched a substantially updated and redesigned website that enhanced customers’ online shopping capabilities, offered expanded merchandise assortments and enabled customers to access a broader range of our information online, including current sales promotions, special events and corporate information. In fiscal year 2011, we expanded our online capabilities, increased multimedia marketing, implemented social community engagement strategies and expanded our Pineville, NC fulfillment facility. In fiscal year 2013, we began operating a fulfillment center in Jonesville, SC that also services orders from the belk.com website. If we do not successfully meet the challenges of successfully operating our website, managing our social community engagement and efficiently operating our fulfillment centers, our financial performance could be adversely affected.

If we are unable to successfully develop and maintain a relevant and reliable Omnichannel experience for our customers, our financial performance could be adversely affected.

The Company introduced a multi-year comprehensive Omnichannel initiative in fiscal year 2014 designed to address customers’ shopping preferences and service expectations by creating a consistent, compelling and seamless shopping experience whether they choose to shop in stores, online or via mobile devices. Our success depends to a large degree on our ability to plan and manage inventory levels and the fulfillment of orders, address operational issues in stores and online and further align both channels to optimize our Omnichannel initiative. In addition, our success also depends on our ability to anticipate and implement innovations in sales and marketing technology to appeal to existing and potential clients who increasingly rely on multiple portals, including mobile technologies, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our clients’ shopping preferences could significantly impair our ability to meet our strategic business and financial goals. If we do not successfully optimize the implementation of our Omnichannel initiative or it does not achieve its intended results, we may experience an adverse impact on our business and financial performance.

Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.

Our merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors, including the vendor’s ability to secure adequate financing and obtain access to products in a timely and efficient manner, could be a significant challenge, especially with respect to goods sourced outside the United States.

Political or financial instability, trade restrictions, tariffs, transport capacity, costs and other factors relating to foreign trade are beyond our control, and we may experience supply problems or untimely delivery of merchandise as a result. If we are not able to source merchandise at an acceptable price and in a timely manner, it could negatively impact our results.

Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of goods and negatively impact our financial results.

We have experienced inflation in some of our merchandise costs due to increases in raw materials, fuel and labor costs. The cost of cotton, which is a key raw material in many of our products, has had the most significant

 

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increases in the recent past. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Inflation has not to date had a material negative impact on our sales or profitability, but an inability to mitigate future cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability; while any related pricing actions might cause a decline in our sales volume. Additionally, any decrease in the availability of raw materials could impair the ability of our suppliers to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

Changes in the income and cash flow from our long-term marketing and servicing alliance related to our proprietary credit cards could impact operating results and cash flows.

In fiscal year 2006, we sold our proprietary credit card business to, and entered into a 10-year strategic alliance with, GECRB to operate our private label credit card business, and we extended that alliance for an additional 18 months to December 2017 in March 2013. Sales of merchandise and services are facilitated by these credit card operations. We receive income from GECRB relating to the credit card operations based on a variety of variables, but primarily from the amount of purchases made through the proprietary credit cards. The income we receive from this alliance and the timing of receipt of payments will vary based on changes in customers’ credit card use, and GECRB’s ability to extend credit to our customers, all of which can vary based on changes in federal and state banking and consumer protection laws and from a variety of economic, legal, social, and other factors that we cannot control.

If we do not manage expenses appropriately, our results of operations could be adversely affected.

Our performance depends on appropriate management of our expense structure, including our selling, general and administrative costs. If we fail to meet our anticipated cost structure based on our anticipated sales level or to appropriately reduce expenses during a weak sales environment, our results of operations could be adversely affected.

Capital investments in store growth and remodels may not produce the returns we anticipate.

Our ability to identify strategic opportunities to open new stores, or to remodel or expand existing stores, will depend in part upon general economic conditions and the availability of existing retail stores or store sites on acceptable terms. It will also depend on our ability to successfully execute our retailing concept in new markets and geographic regions and to design and implement remodeling plans and new merchandising concepts. In addition, we will need to identify, hire and retain a sufficient number of qualified personnel to work in our new and remodeled stores. Increases in real estate, construction and development costs, consolidation or viability of prospective developers and the availability of financing to potential developers could limit our growth opportunities. If consumers are not receptive to us in new markets or regions or to our remodels and expansions in existing markets, our financial performance could be adversely affected.

Our ownership and leasing of real estate could expose us to potential liabilities or losses.

We own or lease 313 store buildings, which subjects us to all the risks associated with owning and leasing real estate. If a store is not profitable and we make the decision to close it, we may remain committed to perform certain obligations under the lease, including the payment of rent, for the balance of the lease term. In addition, as each of the leases expires, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. If an existing owned store is not profitable and we make the decision to close it, we may be required to record an impairment charge and/or exit costs associated with the closing of that store. In addition, lease or other obligations may restrict our right to cease operations of an unprofitable owned or leased store, which may cause us to continue to operate the location at a loss.

 

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If our logistics or distribution processes do not operate effectively, our business could be disrupted.

We currently operate distribution centers in South Carolina and Mississippi that service all of our stores and fulfillment centers in North Carolina and South Carolina that process belk.com customer orders. The efficient operation of our business is dependent on receiving and distributing merchandise in a cost-effective and timely manner. We also rely on information systems to effectively manage sales, distribution, merchandise planning and allocation functions. We are continuing to implement software technology to assist with these functions. If we do not effectively operate the distribution network or if information systems fail to perform as expected, our business could be disrupted.

We rely on third party vendors for certain business support.

Some business support processes are outsourced to third parties. We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, including secure data transfers between us and third-party vendors; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting.

Changes in federal, state or local laws and regulations could expose us to legal risks and adversely affect our results of operations.

Our business is subject to a wide array of laws and regulations. While our management believes that our associate relations are good, significant legislative changes that impact our relationship with our associates could increase our expenses and adversely affect our results of operations. Examples of possible legislative changes impacting our relationship with our associates include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to legal risk, including government enforcement action and class action civil litigation. Changes in the regulatory environment regarding other topics such as privacy and information security, product safety or environmental protection, among others, could also cause our expenses to increase and adversely affect our results of operations.

Covenants in our debt agreements impose some financial restrictions on us.

Our debt agreements contain certain restrictive financial covenants, which include a leverage ratio, consolidated debt to consolidated capitalization ratio and a fixed charge coverage ratio. Our failure to comply with these covenants could adversely affect capital resources, financial condition and liquidity. As of February 1, 2014, we were in compliance with our debt covenants; however, if we fail to comply with our debt covenants, we could be forced to settle outstanding debt obligations, negatively impacting cash flows, and our ability to obtain future financing.

 

Item 1B.    Unresolved Staff Comments

None.

 

Item 2.    Properties

Store Locations

As of the end of fiscal year 2014, the Company operated a total of 299 retail stores, with approximately 22.6 million selling square feet, in the following 16 states:

 

Alabama  –  22

  

Louisiana  –  4

  

Oklahoma – 3

Arkansas  –  7

  

Maryland  –  2

  

South Carolina – 37

Florida  –  26

  

Mississippi  – 16

  

Tennessee  –  23

Georgia  –  45

  

Missouri  –  1

  

Texas  –  14

Kentucky  –  6

  

North Carolina  –  69

  

Virginia  –  20

     

West Virginia  –  4

 

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Belk stores are located in regional malls (147), strip shopping centers (104), “power” centers (27) and “lifestyle” centers (21). Approximately 80% of the gross square footage of the typical Belk store is devoted to selling space to ensure maximum operating efficiencies. New and renovated stores feature the latest in retail design, including updated exteriors and interiors. The interiors are designed to create an exciting, comfortable and convenient shopping environment for customers. They include the latest lighting and merchandise fixtures, as well as quality decorative floor and wall coverings and other special decor. The store layout is designed for ease of shopping, and store signage is used to help customers identify and locate merchandise.

As of the end of fiscal year 2014, the Company owned 75 store buildings, leased 161 store buildings under operating leases and owned 77 store buildings under ground leases. The typical operating lease has an initial term of between 15 and 20 years, with four renewal periods of five years each, exercisable at the Company’s option. The typical ground lease has an initial term of 20 years, with a minimum of four renewal periods of five years each, exercisable at the Company’s option.

Non-Store Facilities

The Company also owns or leases the following distribution and fulfillment centers, division offices and headquarters facilities:

 

Belk Property    Location    Own/Lease

Belk, Inc. Corporate Offices (Two locations)

  

Charlotte, NC

   Lease

Belk Central Distribution Center

  

Blythewood, SC

   Lease

Belk Distribution Center

  

Byram, MS

   Own

Belk, Inc. Fine Jewelry Distribution Center

  

Ridgeland, MS

   Own

Belk, Inc. eCommerce Fulfillment Center

  

Pineville, NC

   Lease

Belk, Inc. eCommerce Fulfillment Center

  

Jonesville, SC

   Lease

Other

The Company owns or leases various other real properties, including primarily former store locations. Such property is not material, either individually or in the aggregate, to the Company’s consolidated financial position or results of operations.

 

Item 3.    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 consolidated financial position or results of operations.

 

Item 4.    Mine Safety Disclosures

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

In fiscal year 2014, there was no established public trading market for either the Belk Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) or the Belk Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”). There were limited and sporadic quotations of bid and ask prices for the Class A Common Stock and the Class B Common Stock on the Over the Counter Bulletin Board and on the OTC Market, in the OTCQB Tier (formally known as the “Pink Sheets”), under the symbols “BLKIA” and “BLKIB,” respectively. As of April 4, 2014, there were approximately 544 holders of record of the Class A Common Stock and 331 holders of record of the Class B Common Stock.

On March 26, 2014, the Company declared a regular dividend of $0.80 on each share of Class A and Class B Common Stock outstanding on that date. On December 11, 2012, the Company declared a regular dividend of $0.75 and a special one-time additional dividend of $0.25 on each share of Class A and Class B Common Stock outstanding on that date. The $0.75 per share regular dividend represented an acceleration of the regular dividend normally paid in April following the end of the fiscal year. On March 28, 2012, the Company declared a regular dividend of $0.75 on each share of the Class A and Class B Common Stock outstanding on that date. The amount of dividends paid out with respect to fiscal year 2015 and each subsequent year will be determined at the sole discretion of the Board of Directors based upon the Company’s results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. For a discussion of the Company’s debt facilities and their restrictions on dividend payments, see “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There were no purchases of issuer equity securities during the fourth quarter of fiscal year 2014.

 

Item 6. Selected Financial Data

The following selected financial data is derived from the consolidated financial statements of the Company. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. All fiscal years for which financial information is set forth below contained 52 weeks, except for the fiscal year ended February 2, 2013, which contained 53 weeks.

 

     Fiscal Year Ended  
     February 1,      February2,      January 28,      January 29,      January 30,  
     2014      2013(1)      2012      2011      2010  
     (in thousands, except per share amounts)  

SELECTED STATEMENT OF INCOME DATA:

              

Revenues

   $ 4,038,118       $ 3,956,866       $ 3,699,592       $ 3,513,275       $ 3,346,252   

Cost of goods sold

     2,722,766         2,636,140         2,461,515         2,353,536         2,271,925   

Depreciation and amortization expense

     137,069         122,622         122,761         140,239         158,388   

Operating income

     288,327         339,937         300,910         245,981         147,441   

Income before income taxes

     243,877         290,504         250,098         195,871         97,190   

Net income

     158,533         188,370         183,148         127,628         67,136   

Basic net income per share

     3.82         4.34         4.04         2.72         1.39   

Diluted net income per share

     3.79         4.31         4.02         2.71         1.39   

Cash dividends per share

             1.75         0.55         0.80         0.20   

 

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     Fiscal Year Ended  
     February 1,     February 2,     January 28,     January 29,     January 30,  
     2014     2013 (1)     2012     2011     2010  
     (in thousands, except per share amounts)  

SELECTED BALANCE SHEET DATA:

          

Accounts receivable, net

     55,340        32,004        39,431        31,119        22,427   

Merchandise inventory

     987,778        1,009,687        887,029        808,503        775,342   

Working capital

     780,652        790,440        845,418        924,450        986,234   

Total assets

     2,564,638        2,478,626        2,514,216        2,389,631        2,582,575   

Long-term debt and capital lease obligations

     393,757        399,824        523,679        539,239        688,856   

Stockholders’ equity

     1,358,245        1,262,621        1,236,230        1,156,272        1,094,295   

SELECTED OPERATING DATA:

          

Number of stores at end of period

     299        301        303        305        305   

Comparable store revenue increase (decrease)(1)

     2.9     6.3     5.5     5.1     (4.6 )% 

 

(1)

Fiscal year 2013 was a 53-week year. On a 53- versus 52-week basis, comparable store net revenues increased 1.7% and 7.5% in fiscal years 2014 and 2013, respectively.

 

Item 7. 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 299 stores in 16 states, as of the fiscal year ended February 1, 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 Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. The comparable store net revenue increase for fiscal year 2013 discussed below is based on 52 weeks. The fiscal year end dates and number of weeks in fiscal years 2012 – 2015 are reflected in the table below.

 

Fiscal Year

   End Date      Weeks  

2015

     January 31, 2015         52   

2014

     February 1, 2014         52   

2013

     February 2, 2013         53   

2012

     January 28, 2012         52   

The Company’s total revenues increased 2.1% in fiscal year 2014 to $4.0 billion. Comparable store revenues increased 2.9% as a result of continued strong eCommerce sales and execution of the Company’s key strategic initiatives. Our eCommerce revenues increased by $57.5 million, or 42.5%, and contributed 1.5% of the 2.9% comparable store revenues 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 $288.3 million in fiscal year 2014 compared to $339.9 million in fiscal year 2013. Net income decreased to $158.5 million or $3.82 per basic share and $3.79 per diluted share in fiscal year 2014 compared to $188.4 million or $4.34 per basic share and $4.31 per diluted share in fiscal year 2013. The decrease in net income was due primarily to a lower margin rate and higher expenses associated with the

 

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Company’s investments in key strategic initiatives, including the launch of a new information technology (“IT”) platform that included a new merchandising system and the replacement of much of the Company’s IT infrastructure.

Management believes that consumers will remain focused on value in fiscal year 2015. The Company intends to continue to be flexible in sales and inventory planning and in expense management in order to react to changes in consumer demand. 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.

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.

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.

eCommerce

The Company continues to grow its eCommerce business and expand the capabilities of its belk.com website, which features a wide assortment of fashion apparel, accessories, shoes and cosmetics, plus home and gift merchandise. Many leading national brands are offered at belk.com along with the Company’s exclusive private brands. The Company generated eCommerce revenues of $192.7 million, $135.2 million and $72.4 million in fiscal years 2014, 2013 and 2012, respectively. On a 52- versus 52-week basis, eCommerce revenues increased 44.6%, 84.0% and 108.1%, and contributed 1.5%, 1.6% and 1.0% to the comparable store revenue increases in fiscal years 2014, 2013 and 2012, respectively.

In fiscal year 2014, the Company strengthened its eCommerce business and belk.com website with systems improvements, expansion of merchandise assortments, increased multimedia marketing and implementation of social community engagement strategies. Belk shopping apps for mobile smartphone and tablet devices were also introduced, along with a new Belk mobile website. The Company expanded its eCommerce fulfillment center in Pineville, NC in fiscal year 2011. In fiscal year 2013, Belk began operating a 515,000 square foot fulfillment center in Jonesville, SC, expanding its processing and storage capacity in fiscal year 2014.

 

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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 consolidated statements of income and other pertinent financial and operating data.

 

     Fiscal Year Ended  
     February 1,
2014
    February 2,
2013
    January 28,
2012
 

SELECTED FINANCIAL DATA:

      

Revenues

     100.0     100.0     100.0

Cost of goods sold

     67.4        66.6        66.5   

Selling, general and administrative expenses

     25.3        24.9        25.4   

Gain on sale of property and equipment

     0.1        0.1        0.1   

Asset impairment and exit costs

     0.2               0.1   

Operating income

     7.1        8.6        8.1   

Interest expense

     1.1        1.3        1.4   

Income tax expense

     2.1        2.6        1.8   

Net income

     3.9        4.8        5.0   

SELECTED OPERATING DATA:

      

Selling square footage (in thousands)

     22,600        22,700        22,800   

Store revenues per selling square foot

   $ 179      $ 174      $ 162   

Comparable store revenue increase(1)

     2.9     6.3     5.5

Number of stores

      

Opened

     3        2        1   

Closed

     (5     (4     (3

Total — end of period

     299        301        303   

 

(1)

Fiscal year 2013 was a 53-week year. On a 53- versus 52-week basis, comparable store net revenues increased 1.7% and 7.5% in fiscal years 2014 and 2013, respectively.

The Company’s store and eCommerce operations have been aggregated into one reporting segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.

The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.

 

Merchandise Areas

   Fiscal Year
2014
    Fiscal Year
2013
    Fiscal Year
2012
 

Women’s

     32     33     34

Cosmetics, Shoes and Accessories

     34     34     34

Men’s

     18     17     17

Home

     9     10     9

Children’s

     7     6     6
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Comparison of Fiscal Years Ended February 1, 2014 and February 2, 2013

Revenues.    The Company’s total revenues increased 2.1%, or $81.3 million, in fiscal year 2014 to $4.0 billion. The increase was primarily attributable to an increase in revenues from comparable stores of 2.9%. This increase in revenues was offset by the 53rd week revenues in the prior fiscal year of $44.4 million, and

 

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by an $11.4 million decrease in revenues due to closed stores. The increase in revenues from comparable stores was generally the result of general economic conditions and the acceptance by our customers of our merchandise offerings from both a style and value perspective. Primarily as the result of a shorter holiday selling season and a softening sales environment in the latter half of this year, the number of units sold were flat compared to the prior year. Additionally, markdowns increased as a result of the softening sales environment, which led to our average unit selling price only increasing 1% compared to the prior year. Merchandise categories achieving the highest growth rate included activewear, ladies contemporary, resort and bridge fashions, ladies suits, men’s better sportswear and clothing, and kids apparel and shoes.

Cost of Goods Sold.    Cost of goods sold was $2.7 billion, or 67.4% of revenues in fiscal year 2014 compared to $2.6 billion, or 66.6% of revenues in fiscal year 2013. The 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 42.5% increase in eCommerce sales, and increased markdown activity due to a softening sales environment in the latter half of the year.

Selling, General and Administrative Expenses.    Selling, general and administrative (“SG&A”) expenses were $1.0 billion, or 25.3% of revenues in fiscal year 2014, compared to $985.2 million, or 24.9% of revenues for fiscal year 2013. The increase in SG&A expense of $38.0 million was substantially due to our investment in key strategic initiatives. These investments also increased the SG&A rate as a percentage of revenues and was partially offset by decreased store payroll and advertising expenses as a percentage of revenues.

Gain on property and equipment.    Gain on property and equipment was $2.3 million for fiscal year 2014 compared to $4.2 million for fiscal year 2013. The fiscal year 2014 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, offset by losses primarily due to the abandonment of property. The fiscal year 2013 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods.

Asset Impairment and Exit Costs.    Asset impairment and exit costs were $6.1 million for fiscal year 2014 compared to $0.3 million for fiscal year 2013. In fiscal year 2014, the Company recorded $5.0 million in impairment charges primarily to adjust two retail locations’ net book value to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. The Company also recorded $1.1 million in charges for real estate holding costs primarily due to a $0.7 million early termination fee for one retail location and $0.3 million to relocate two retail locations. In fiscal year 2013, the Company recorded a $0.7 million rent adjustment due to space reductions at two stores, partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book value to fair value and a $0.2 million charge for exit costs primarily associated with the closing of two stores.

Interest Expense.    In fiscal year 2014, the Company’s interest expense decreased $4.9 million to $44.6 million from $49.5 million for fiscal year 2013. The decrease in interest expense was primarily due to the maturity of the $80.0 million floating rate senior note and associated interest rate swap, the maturity of the $20.0 million 5.05% fixed rate senior note, and the extinguishment of the $17.8 million state bond facility in fiscal year 2013.

Income tax expense.    Income tax expense for fiscal year 2014 was $85.3 million, or 35.0%, compared to $102.1 million, or 35.2%, for fiscal year 2013. The decrease in income tax expense was primarily due to the decrease in pre-tax income of $46.6 million in fiscal year 2014 compared to fiscal year 2013.

Comparison of Fiscal Years Ended February 2, 2013 and January 28, 2012

Revenues.    In fiscal year 2013, the Company’s revenues increased 7.0%, or $0.3 billion, to $4.0 billion from $3.7 billion in fiscal year 2012. The increase was primarily attributable to the 53- versus 52-week increase in revenues from comparable stores of 7.5% of which the 53rd week revenues of $44.4 million contributed 1.2%

 

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of the 7.5% comparable store revenue increase. The increase in revenues from comparable stores was the result of general economic conditions and the acceptance by our customers of our merchandise offerings from both a style and value perspective as we invested in key strategic merchandising, marketing, branding and service excellence initiatives. This resulted in an increase in the number of units sold of 2% and reduced markdowns reflecting the acceptance of our offerings by our customers which led to the average selling price per unit increasing 5% as compared to the prior year. Merchandise categories achieving the highest growth rate included women’s accessories, children’s, men’s and home. These factors were partially offset by an $11.8 million decrease in revenues due to closed stores.

Cost of Goods Sold.    Cost of goods sold was $2.6 billion, or 66.6% of revenues in fiscal year 2013 compared to $2.5 billion, or 66.5% of revenues in fiscal year 2012. The increase in cost of goods sold of $174.6 million was primarily due to the increase in revenues. Cost of goods sold as a percentage of revenues slightly decreased as the level of markdowns based on our promotional activity was slightly reduced as compared to the prior year offset by higher shipping and handling costs associated with the increase in our eCommerce revenues.

Selling, General and Administrative Expenses.    SG&A expenses were $985.2 million, or 24.9% of revenues in fiscal year 2013, compared to $938.0 million, or 25.4% of revenues for fiscal year 2012. A substantial portion of our payroll related costs and our advertising costs are generally managed as a percent of revenues, and therefore, will generally increase or decrease based on revenues both historically and in the future. The increase in SG&A expense for fiscal year 2013 was primarily due to an increase in payroll and benefits of approximately $32 million and an increase in advertising expense of approximately $12 million. These expense increases had a minimal effect on the SG&A expense rate. Some costs are more fixed in nature and these costs as a percent of revenues do have an impact on our expense leverage. The SG&A expense rate decreased due to our fixed cost leveraging (principally depreciation) as a result of the 7.5% increase in comparable store revenues partially offset by a slight increase due to the increase in payroll and benefits mentioned above.

Gain on property and equipment.    Gain on property and equipment was $4.2 million for fiscal year 2013 compared to $3.1 million for fiscal year 2012. The fiscal year 2013 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods. The fiscal year 2012 gain was primarily due to the $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as a $1.2 million gain on the nonmonetary exchange of a retail location.

Asset Impairment and Exit Costs.    In fiscal year 2013, the Company recorded a $0.7 million rent adjustment due to space reductions at two stores, partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book value to fair value and a $0.2 million charge for exit costs primarily associated with the closing of two stores. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. In fiscal year 2012, the Company recorded a $3.5 million charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date.

Interest Expense.    In fiscal year 2013, the Company’s interest expense decreased $0.7 million to $49.5 million from $50.2 million for fiscal year 2012. The decrease was primarily due to a decrease in total debt for a majority of fiscal year 2013 as a result of the $125.0 million discretionary payment to extinguish the term loan outstanding under the credit facility in the fourth quarter of fiscal year 2012 and the payment of $100.0 million of senior notes upon maturity in the second quarter of fiscal year 2013, partially offset by $100.0 million in new private placement notes issued by the Company in the fourth quarter of fiscal year 2012.

 

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Income tax expense.    Income tax expense for fiscal year 2013 was $102.1 million, or 35.2%, compared to $67.0 million, or 26.8%, for the same period in fiscal year 2012. The effective tax rate increased primarily as a result of the release of the $20.2 million deferred state tax valuation allowance during fiscal year 2012.

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.

The following table illustrates the seasonality of revenues by quarter as a percentage of the full year for the fiscal years indicated.

 

     2014     2013     2012  

First quarter .

     23.7     23.0     22.9

Second quarter

     22.3        21.9        22.5   

Third quarter

     21.3        21.2        21.4   

Fourth quarter

     32.7        33.9        33.2   

The Company’s quarterly results of operations could also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, expansions and remodels.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash on hand of $295.3 million as of February 1, 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 February 1, 2014 using LIBOR plus 125 basis points, or 1.41%. 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 February 1, 2014, the maximum leverage ratio allowed under the credit facility was 4.0, and the calculated leverage ratio was 1.92. The Company was in compliance with all covenants as of February 1, 2014 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future. As of February 1, 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 February 1, 2014:

 

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                

 

 

              

On January 30, 2013, the Company paid the $17.8 million, 20-year variable rate state bond facility, which bore interest at 0.20%, and would have matured in October 2025. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.1 million related to the state bond facility and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income. Associated with this bond was an $18.0 million standby letter of credit outstanding under the credit facility, which was canceled upon payment of the $17.8 million state bond facility.

On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note and $20.0 million of its 5.05% fixed rate senior note. The $80.0 million floating rate senior note had an associated interest rate swap, with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments.

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.

The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. As of February 1, 2014, the Company did not have any interest rate swaps outstanding. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. Previous swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt.

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 $295.3 million as of February 1, 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 $367.5 million for fiscal year 2014 compared to $300.1 million for fiscal year 2013. The increase in cash provided by operating activities for fiscal year 2014 was principally due to a $120.6 million decrease in inventory, net of merchandise payables, offset by a $29.8 million decrease in net income and a $20.3 million increase in vendor receivables.

Net cash used by investing activities increased $45.3 million to $223.6 million for fiscal year 2014 from $178.3 million for fiscal year 2013. The increase in cash used by investing activities primarily resulted from increased purchases of property and equipment of $41.5 million. The Company’s capital expenditures of $224.2 million during fiscal year 2014 were comprised primarily of amounts related to the new merchandising system and

 

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replacement of much of our IT infrastructure, as well as the addition of one store in a new market, two new stores as replacements for existing stores, and store remodeling and expansion projects.

Net cash used by financing activities decreased $191.1 million to $117.7 million for fiscal year 2014 from $308.8 million for fiscal year 2013. The decrease in cash used by financing activities primarily relates to the $100.0 million payment of senior notes in fiscal year 2013, a $76.6 million decrease in dividends paid from fiscal year 2013 to fiscal year 2014, and the $17.8 million extinguishment of the state bond facility in fiscal year 2013.

Contractual Obligations and Commercial Commitments

To facilitate an understanding of the Company’s contractual obligations and commercial commitments, the following data is provided:

 

     Payments Due by Period  
      Total      Within 1
Year
     1 - 3 Years      3 - 5 Years      After 5 Years  
     (dollars in thousands)  

Contractual Obligations

              

Long-Term Debt

   $ 375,000       $       $ 100,000       $ 125,000       $ 150,000   

Estimated Interest Payments on Debt(a)

     97,854         21,894         34,620         20,641         20,699   

Capital Lease Obligations

     18,757         8,084         8,270         1,778         625   

Operating Leases(b)

     560,854         75,298         132,073         103,840         249,643   

Purchase Obligations(c)

     110,645         84,816         24,558         1,257         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Cash Obligations

   $ 1,163,110       $ 190,092       $ 299,521       $ 252,516       $ 420,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Amount of Commitment Expiration per Period  
      Total
Amounts
Committed
     Within 1
Year
     1 - 3 Years      3 - 5 Years      After 5 Years  
     (dollars in thousands)  

Other Commercial Commitments

              

Standby Letters of Credit

   $ 13,318       $ 13,318       $       $       $   

Import Letters of Credit

     428         428                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial Commitments

   $ 13,746       $ 13,746       $       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Interest rates used to compute estimated interest payments utilize the stated rate.

 

(b)

Lease payments consist of base rent only and do not include amounts for percentage rents, real estate taxes, insurance and other expenses related to those locations.

 

(c)

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty, such as merchandise purchase orders, have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts.

Obligations under the deferred compensation and postretirement benefit plans are not included in the contractual obligations table. The Company’s deferred compensation and postretirement plans are not funded in advance. Deferred compensation and other non-qualified plan payments during fiscal years 2014 and 2013 totaled $8.7 million and $8.1 million, respectively. Postretirement benefit payments totaled $2.1 million each during the fiscal years 2014 and 2013.

Obligations under the Company’s defined benefit pension plan are not included in the contractual obligations table. Under the current requirements of the Pension Protection Act of 2006 (“PPA”), the Company is

 

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required to fund the net pension liability over the subsequent seven years. The net pension liability under PPA is calculated based on certain assumptions at January 1 of each year that are subject to change based on economic conditions (and any regulatory changes) in the future. The Company expects to contribute sufficient amounts to the pension plan so that the PPA guidelines are exceeded.

As of February 1, 2014, the total uncertain tax position liability was approximately $22.5 million, including tax, penalty and interest. The Company is not able to reasonably estimate the timing of these tax related future cash flows and has excluded these liabilities from the table. At this time, the Company does not expect a material change to its gross unrecognized tax benefit during fiscal year 2015.

Also excluded from the contractual obligations table are payments the Company may make for employee medical costs and workers compensation, general liability and automobile claims.

Off-Balance Sheet Arrangements

The Company has not provided any financial guarantees as of February 1, 2014. 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 July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force),” which requires presentation in the financial statements of an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance will be effective at the beginning of fiscal year 2015. The Company does not expect the adoption to have a material impact on the consolidated financial statements.

In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force),” which requires measurement of obligations within the scope of this guidance to be the sum of the amount agreed to pay on the basis of arrangement among co-obligors and any additional amounts expected to pay on behalf of co-obligors, in addition to disclosure of the nature and amount of the obligation. This guidance will be effective at the beginning of fiscal year 2015. The Company does not expect the adoption to have a material impact on the 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.

Critical Accounting Policies

Management’s discussion and analysis discusses the results of operations and financial condition as reflected in the Company’s consolidated financial statements, which have been prepared in accordance with

 

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GAAP. As discussed in the Company’s notes to the consolidated financial statements, the preparation of the consolidated financial statements in conformity with GAAP 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 consolidated financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation, recoverability of long-lived assets, the calculation of pension and postretirement obligations, self-insurance reserves, and income taxes.

Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See the Company’s notes to the consolidated financial statements for a discussion of the Company’s significant accounting policies.

While the Company believes that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the Company cannot guarantee that its estimates and assumptions will be accurate, which could require the Company to make adjustments to these estimates in future periods.

The following critical accounting policies are used in the preparation of the consolidated financial statements:

Inventory Valuation.    Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), 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. RIM is an averaging method that is widely used in the retail industry due to its practicality. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate markdowns currently can result in an overstatement of inventory under the lower of cost or market principle.

Recoverability of Long-Lived Assets.    In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.

Pension and Postretirement Obligations.    The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate and investment earnings. The Company calculates the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.

Self-Insurance Reserves.    The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. Management believes that the Company’s loss reserves are adequate but actual losses may differ from the amounts provided.

 

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The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with industry accepted loss analysis standards are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided.

Income Taxes.    Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. In accordance with ASC 740, “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates on its variable rate debt. The Company has used interest rate swaps to manage the interest rate risk associated with its borrowings and to manage the Company’s allocation of fixed and variable rate debt. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged derivative instruments. The Company’s net exposure to interest rate risk is based on the difference between the outstanding variable rate debt and the notional amount of its designated interest rate swaps. On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note, which had an associated interest rate swap with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments. At February 1, 2014, the Company had no variable rate debt or interest rate swaps.

A discussion of the Company’s accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements.

 

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Item 8. Financial Statements and Supplementary Data

 

     Page  

Report of Independent Registered Public Accounting Firm

     28   

Consolidated Statements of Income

     29   

Consolidated Statements of Comprehensive Income

     30   

Consolidated Balance Sheets

     31   

Consolidated Statements of Changes in Stockholders’ Equity

     32   

Consolidated Statements of Cash Flows

     33   

Notes to Consolidated Financial Statements

     34   

 

27


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Belk, Inc.:

We have audited the accompanying consolidated balance sheets of Belk, Inc. and subsidiaries as of February 1, 2014 and February 2, 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended February 1, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belk, Inc. and subsidiaries as of February 1, 2014 and February 2, 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended February 1, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Belk, Inc. and subsidiaries’ internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 15, 2014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/    KPMG LLP

Charlotte, North Carolina

April 15, 2014

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

 

     Fiscal Year Ended  
     February 1,
2014
    February 2,
2013
    January 28,
2012
 

Revenues

   $ 4,038,118      $ 3,956,866      $ 3,699,592   

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

     2,722,766        2,636,140        2,461,515   

Selling, general and administrative expenses

     1,023,266        985,225        938,008   

Gain on sale of property and equipment

     2,349        4,168        3,143   

Asset impairment and exit costs

     6,108        (268     2,302   
  

 

 

   

 

 

   

 

 

 

Operating income

     288,327        339,937        300,910   

Interest expense

     (44,604     (49,481     (50,218

Interest income

     154        175        328   

Loss on extinguishment of debt

            (127     (922
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     243,877        290,504        250,098   

Income tax expense

     85,344        102,134        66,950   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 158,533      $ 188,370      $ 183,148   
  

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 3.82      $ 4.34      $ 4.04   
  

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 3.79      $ 4.31      $ 4.02   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

      

Basic

     41,541,176        43,435,314        45,355,941   

Diluted

     41,812,750        43,712,263        45,579,987   

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     Fiscal Year Ended  
     February 1,
2014
     February 2,
2013
     January 28,
2012
 

Net income

   $ 158,533       $ 188,370       $ 183,148   

Other comprehensive income (loss):

        

Unrealized gain on interest rate swap, net of $740 and $1,379 income taxes for the fiscal years ended February 2, 2013 and January 28, 2012, respectively.

             945         2,323   

Defined benefit plan adjustments, net of $18,200, $3,794 and $20,952 income taxes for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012, respectively.

     30,659         6,391         (35,296
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

     30,659         7,336         (32,973
  

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 189,192       $ 195,706       $ 150,175   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

     February 1,
2014
    February 2,
2013
 

Assets

  

Current Assets:

    

Cash and cash equivalents

   $ 295,334      $ 269,177   

Accounts receivable, net

     55,340        32,004   

Merchandise inventory

     987,778        1,009,687   

Prepaid income taxes, expenses and other current assets

     28,964        28,460   
  

 

 

   

 

 

 

Total current assets

     1,367,416        1,339,328   

Property and equipment, net

     1,158,066        1,055,944   

Deferred income taxes

            43,292   

Other assets

     39,156        40,062   
  

 

 

   

 

 

 

Total assets

   $ 2,564,638      $ 2,478,626   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity   

Current liabilities:

    

Accounts payable

   $ 291,948      $ 255,763   

Accrued liabilities

     239,658        224,367   

Accrued income taxes

     13,652        22,334   

Deferred income taxes

     33,422        36,710   

Current installments of long-term debt and capital lease obligations

     8,084        9,714   
  

 

 

   

 

 

 

Total current liabilities

     586,764        548,888   

Deferred income taxes

     16,613          

Long-term debt and capital lease obligations, excluding current installments

     385,673        390,110   

Retirement obligations and other noncurrent liabilities

     217,343        277,007   
  

 

 

   

 

 

 

Total liabilities

     1,206,393        1,216,005   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock

              

Common stock, 400 million shares authorized and 41.0 and 42.7 million shares issued and outstanding as of February 1, 2014 and February 2, 2013, respectively.

     410        427   

Paid-in capital

     178,362        271,913   

Retained earnings

     1,315,796        1,157,263   

Accumulated other comprehensive loss

     (136,323     (166,982
  

 

 

   

 

 

 

Total stockholders’ equity

     1,358,245        1,262,621   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,564,638      $ 2,478,626   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY

(in thousands)

 

     Common Stock     Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
       
     Shares     Amount           Total  

Balance at January 29, 2011

     46,344      $ 463      $ 409,201      $ 887,953      $ (141,345   $ 1,156,272   

Net income

                          183,148               183,148   

Other comprehensive loss

                                 (32,973     (32,973

Cash dividends

                          (25,592            (25,592

Issuance of stock-based compensation

                   (2,212                   (2,212

Stock-based compensation expense

                   11,981                      11,981   

Common stock issued

     204        2        600                      602   

Repurchase and retirement of common stock

     (1,632     (16     (54,980                   (54,996
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 28, 2012

     44,916        449        364,590        1,045,509        (174,318     1,236,230   

Net income

                          188,370               188,370   

Other comprehensive income

                                 7,336        7,336   

Cash dividends

                          (76,616            (76,616

Issuance of stock-based compensation

                   (4,352                   (4,352

Stock-based compensation expense

                   12,827                      12,827   

Common stock issued

     303        3        870                      873   

Repurchase and retirement of common stock

     (2,501     (25     (102,022                   (102,047
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 2, 2013

     42,718        427        271,913        1,157,263        (166,982     1,262,621   

Net income

                          158,533               158,533   

Other comprehensive income

                                 30,659        30,659   

Issuance of stock-based compensation

                   (397                   (397

Stock-based compensation expense

                   7,967                      7,967   

Common stock issued

     311        3        770                      773   

Repurchase and retirement of common stock

     (2,038     (20     (101,891                   (101,911
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 1, 2014

     40,991      $ 410      $ 178,362      $ 1,315,796      $ (136,323   $ 1,358,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Fiscal Year Ended  
     February 1,
2014
    February 2,
2013
    January 28,
2012
 

Cash flows from operating activities:

      

Net income

   $ 158,533      $ 188,370      $ 183,148   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Asset impairment and exit costs

     6,108        (268     2,302   

Deferred income tax expense

     43,320        40,479        30,458   

Depreciation and amortization expense

     137,069        122,622        122,761   

Stock-based compensation expense

     11,021        17,572        16,849   

Loss (gain) on sale of property and equipment

     280        (1,539     (514

Amortization of deferred gain on sale and leaseback

     (2,629     (2,629     (2,629

Amortization of deferred debt issuance costs

     819        833        1,025   

(Increase) decrease in:

      

Accounts receivable, net

     (23,335     7,427        (8,245

Merchandise inventory

     21,909        (122,658     (78,526

Prepaid income taxes, expenses and other assets

     (2,824     (16,193     (3,062

Increase (decrease) in:

      

Accounts payable and accrued liabilities

     38,074        73,091        39,620   

Accrued income taxes

     (8,682     1,650        9,758   

Retirement obligations and other liabilities

     (12,177     (8,700     (61,013
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     367,486        300,057        251,932   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (224,228     (182,773     (143,844

Proceeds from sales of property and equipment

     610        4,441        2,780   

Proceeds from sales of short-term investments

                   6,150   
  

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (223,618     (178,332     (134,914
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from issuance of long-term debt

                   100,000   

Principal payments on long-term debt and capital lease obligations

     (8,474     (126,105     (130,817

Dividends paid

            (76,616     (25,592

Repurchase and retirement of common stock

     (101,911     (102,047     (54,996

Stock compensation tax benefit

     1,644        1,858        816   

Cash paid for withholding taxes in lieu of stock-based compensation shares

     (8,970     (6,210     (3,301

Deferred financing costs

                   (509

Proceeds from financing costs

            300        250   
  

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     (117,711     (308,820     (114,149
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     26,157        (187,095     2,869   

Cash and cash equivalents at beginning of period

     269,177        456,272        453,403   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 295,334      $ 269,177      $ 456,272   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

      

Income taxes paid

   $ 48,417      $ 59,536      $ 26,476   

Interest paid, net of capitalized interest

     27,115        30,458        30,453   

Supplemental schedule of noncash investing and financing activities:

      

Increase in property and equipment through accrued purchases

     17,199        2,589        5,205   

Increase in property and equipment through assumption of capital leases

     2,479        2,249        14,321   

See accompanying notes to consolidated financial statements.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Belk, Inc. and its subsidiaries (collectively, the “Company” or “Belk”) operate retail department stores in 16 states primarily in the southern United States. All intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to each January 31st. The fiscal year end dates and number of weeks in fiscal years 2012 – 2015 are reflected in the table below.

 

Fiscal Year

   End Date    Weeks

2015

   January 31, 2015    52

2014

   February 1, 2014    52

2013

   February 2, 2013    53

2012

   January 28, 2012    52

Certain prior period amounts have been reclassified to conform with current year presentation. Previously, the Company presented amounts due from certain vendors on a gross basis. In the current year, the Company has presented amounts due from those certain vendors on a net basis. Accordingly, the Company has revised amounts presented on the 2013 fiscal year consolidated cash flow and balance sheet statements for comparability purposes. The revision had no impact on net income, cash flows from operating activities, or stockholders’ equity, and an insignificant impact on working capital for the 2013 fiscal year consolidated cash flow and balance sheet statements.

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. Actual results could differ from those estimates.

Significant estimates are required as part of determining stock-based compensation, depreciation, amortization and recoverability of long-lived and intangible assets, valuation of inventory, establishing store closing and other reserves, self-insurance reserves and calculating retirement obligations and expense.

Revenues

The Company’s store and eCommerce operations have been aggregated into one reporting segment due to their similar economic characteristics, products, customers and methods of distribution. These operations are expected to continue to have similar characteristics and long-term financial performance in future periods.

The following table gives information regarding the percentage of revenues contributed by each merchandise area for each of the last three fiscal years. There were no material changes between fiscal years, as reflected in the table below.

 

Merchandise Areas

   Fiscal Year 2014   Fiscal Year 2013   Fiscal Year 2012

Women’s

   32%   33%   34%

Cosmetics, Shoes and Accessories

   34%   34%   34%

Men’s

   18%   17%   17%

Home

   9%   10%   9%

Children’s

   7%   6%   6%
  

 

 

 

 

 

Total

   100%   100%   100%
  

 

 

 

 

 

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Revenues include sales of merchandise and the net revenue received from leased departments of $2.2 million each for fiscal years 2014 and 2013, and $2.3 million for fiscal year 2012. Sales from retail operations are recorded at the time of delivery and reported net of sales taxes and merchandise returns. The reserve for returns is calculated as a percentage of sales based on historical return percentages.

The Company utilizes a customer loyalty program that issues certificates for discounts on future purchases to proprietary charge card customers based on their spending levels. The certificates are classified as a reduction to revenue as they are earned by the customers. The Company maintains a reserve liability for the estimated future redemptions of the certificates.

Cost of Goods Sold

Cost of goods sold is comprised principally of the cost of merchandise as well as occupancy, distribution and buying expenses. Occupancy expenses include rent, utilities and real estate taxes. Distribution expenses include all costs associated with distribution facilities and eCommerce fulfillment centers. Buying expenses include payroll and travel expenses associated with the merchandise buying function.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses are comprised principally of payroll and benefits for retail and corporate employees, depreciation, advertising and other administrative expenses. SG&A expenses are reduced by proceeds from the 10-year credit card program agreement (“Program Agreement) between Belk and GE Capital Retail Bank (“GECRB”), an affiliate of GE Consumer Finance. In March 2013, the Program Agreement was amended, extending the expiration date from June 30, 2016 to December 31, 2017. This Program Agreement sets forth among other things the terms and conditions under which GECRB will issue credit cards to Belk’s customers. The Company is paid a percentage of net credit sales, as defined by the Program Agreement. Belk is required to perform certain duties, including receiving and remitting in-store payments on behalf of GECRB and receiving fees for these activities. These amounts totaled $90.2 million, $85.9 million and $78.8 million in fiscal years 2014, 2013 and 2012, respectively.

Gift Cards

The Company issues gift cards which do not contain provisions for expiration or inactivity fees. At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the gift card. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise and/or services. The estimated values of gift cards expected to go unused are recognized as a reduction to SG&A expenses in proportion to actual gift card redemptions as the remaining gift card values are redeemed, when there is no requirement for remitting balances to government agencies under unclaimed property laws.

Advertising

Advertising costs, net of co-op recoveries from merchandise vendors, are expensed in the period in which the advertising event takes place and amounted to $162.3 million, $164.1 million and $152.0 million in fiscal years 2014, 2013 and 2012, respectively.

Recoverability of Long-Lived Assets

In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment,” long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

asset. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows based upon the future highest and best use of the asset.

Cash Equivalents

Cash equivalents include liquid investments with an original maturity of 90 days or less.

Merchandise Inventory

Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), 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. RIM is an averaging method that is widely used in the retail industry due to its practicality. Also, it is recognized that the use of the retail inventory method will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate markdowns can result in an overstatement of inventory under the lower of cost or market principle.

Property and Equipment, Net

Property and equipment owned by the Company are stated at cost less accumulated depreciation and amortization. Property and equipment leased by the Company under capital leases are stated at an amount equal to the present value of the minimum lease payments less accumulated amortization. Depreciation and amortization are recorded utilizing straight-line and in certain circumstances accelerated methods, typically over the shorter of estimated asset lives or related lease terms. The Company amortizes leasehold improvements over the shorter of the estimated asset life or expected lease term that would include cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the date the assets are placed in service, to be reasonably assured. The Company makes judgments in determining the estimated useful lives of its depreciable long-lived assets which are included in the consolidated financial statements. The estimate of useful lives is typically determined by the Company’s historical experience with the type of asset purchased.

Intangibles

Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.” Leasehold intangibles, which represent the excess of fair value over the carrying value (assets) or the excess of carrying value over fair value (liabilities) of acquired leases, are amortized on a straight-line basis over the remaining terms of the lease agreements. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears to be reasonably assured. The lease intangibles are included in other current assets and accrued liabilities for the current portions and other assets and other noncurrent liabilities for the noncurrent portions. Customer relationships, which represent the value of customer relationships obtained in acquisitions or purchased, are amortized on a straight-line basis over their estimated useful life and are included in other assets. The carrying value of intangible assets is reviewed by the Company’s management to assess the recoverability of the assets when facts and circumstances indicate that the carrying value may not be recoverable.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Rent Expense

The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Developer incentives are recognized as a reduction to occupancy costs over the lease term. The lease term commences on the date when the Company gains control of the property.

Vendor Allowances

The Company receives allowances from its vendors through a variety of programs and arrangements, including markdown reimbursement programs. These vendor allowances are generally intended to offset the Company’s costs of selling the vendors’ products in our stores. Allowances are recognized in the period in which the Company completes its obligations under the vendor agreements. Most incentives are deducted from amounts owed to the vendor at the time the Company completes its obligations to the vendor or shortly thereafter.

The following summarizes the types of vendor incentives and the Company’s applicable accounting policies:

 

  Ÿ  

Advertising allowances — Represents reimbursement of advertising costs initially funded by the Company. Amounts are recognized as a reduction to SG&A expenses in the period that the advertising expense is incurred.

 

  Ÿ  

Markdown allowances — Represents reimbursement for the cost of markdowns to the selling price of the vendor’s merchandise. Amounts are recognized as a reduction to cost of goods sold in the later of the period that the merchandise is marked down or the reimbursement is negotiated. Amounts received prior to recognizing the markdowns are recorded as a reduction to the cost of inventory.

 

  Ÿ  

Payroll allowances — Represents reimbursement for payroll costs. Amounts are recognized as a reduction to SG&A expenses in the period that the payroll cost is incurred.

Pension and Postretirement Obligations

The Company utilizes significant assumptions in determining its periodic pension and postretirement expense and obligations that are included in the consolidated financial statements. These assumptions include determining an appropriate discount rate and investment earnings. The Company calculates the periodic pension and postretirement expense and obligations based upon these assumptions and actual employee census data.

Stock Based Compensation

The Company accounts for stock based compensation under the guidelines of ASC 718, “Compensation — Stock Compensation.” ASC 718 requires the Company to account for stock based compensation by using the grant date fair value of share awards and the estimated number of shares that will ultimately be issued in conjunction with each award.

Self-Insurance Reserves

The Company is responsible for the payment of workers’ compensation, general liability and automobile claims under certain dollar limits. The Company purchases insurance for workers’ compensation, general liability and automobile claims for amounts that exceed certain dollar limits. The Company records a liability for its obligation associated with incurred losses utilizing historical data and industry accepted loss analysis standards to estimate the loss development factors used to project the future development of incurred losses. Management believes that the Company’s loss reserves are adequate but actual losses may differ from the amounts provided.

 

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The Company is responsible for the payment of medical and dental claims and records a liability for claims obligations in excess of amounts collected from associate premiums. Historical data on incurred claims along with industry accepted loss analysis standards are used to estimate the loss development factors to project the future development of incurred claims. Management believes that the Company’s reserves are adequate but actual claims liabilities may differ from the amounts provided.

Income Taxes

Income taxes are accounted for under the asset and liability method. The annual effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Significant judgment is required in determining annual tax expense and in evaluating tax positions. In accordance with ASC 740, “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The reserves (including the impact of the related interest and penalties) are adjusted in light of changing facts and circumstances, such as the progress of a tax audit.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company accrues interest related to unrecognized tax benefits in interest expense, while accruing penalties related to unrecognized tax benefits in income tax expense (benefit).

New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred the requirement to present on the face of the financial statements items that are reclassified from other comprehensive income to net income. In February 2013, the Financial Accounting Standards Board issued Accounting Standard Update No. 2013-02,” which finalized the reporting requirements of reclassifications out of accumulated other comprehensive income. The Company adopted this guidance beginning in the first quarter of fiscal year 2014 when it was required. The adoption of this update did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” which requires disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to agreements similar to a master netting arrangements. In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarified the scope of Accounting Standards Update No. 2011-11. The Company adopted this guidance beginning in the first quarter of fiscal year 2014 when it was required. The adoption of this update did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.

 

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(2)    Intangibles

Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.”

Amortizing intangibles are comprised of the following:

 

     February 1,
2014
    February 2,
2013
 
     (in thousands)  

Amortizing intangible assets:

    

Favorable lease intangibles

   $ 9,960      $ 9,960   

Accumulated amortization — favorable lease intangibles

     (5,431     (4,743

Credit card and customer list intangibles

     18,746        18,746   

Accumulated amortization — credit card and customer list intangibles

     (16,413     (15,246

Other intangibles

     5,277        5,652   

Accumulated amortization — other intangibles

     (4,717     (4,722
  

 

 

   

 

 

 

Net amortizing intangible assets

   $ 7,422      $ 9,647   
  

 

 

   

 

 

 

Amortizing intangible liabilities:

    

Unfavorable lease intangibles

   $ (23,825   $ (25,558

Accumulated amortization — unfavorable lease intangibles

     9,869        9,928   
  

 

 

   

 

 

 

Net amortizing intangible liabilities

   $ (13,956   $ (15,630
  

 

 

   

 

 

 

The Company recorded net amortization expense related to amortizing intangibles of $0.6 million in fiscal year 2014 and $0.3 million in fiscal years 2013 and 2012, respectively.

(3)    Asset Impairment and Exit Costs

In fiscal year 2014, the Company recorded $5.0 million in impairment charges primarily to adjust two retail locations’ net book value to fair value. The Company determines fair value of its retail locations primarily based on the present value of future cash flows. The Company also recorded $1.1 million in charges for real estate holding costs primarily due to a $0.7 million early termination fee for one retail location and $0.3 million to relocate two retail locations.

In fiscal year 2013, the Company recorded a $0.7 million rent adjustment due to space reductions at two stores. These adjustments were partially offset by $0.3 million in asset impairment charges primarily to adjust two retail locations’ net book value to fair value, and a $0.2 million charge for exit costs primarily associated with the closing of two stores.

In fiscal year 2012, the Company recorded a $3.5 million net charge for exit costs associated with the closing of one store, a $1.3 million charge for real estate holding costs, and $0.4 million in asset impairment charges primarily to adjust a retail location’s net book value to fair value. These charges were partially offset by a $2.9 million reversal of previously estimated exit cost reserves due to the termination of the leases prior to their end date.

As of February 1, 2014 and February 2, 2013, the remaining reserve balance for post-closing real estate lease obligations was $0.7 million and $1.4 million, respectively. These balances are presented within accrued liabilities and other noncurrent liabilities on the consolidated balance sheets. The Company does not anticipate

 

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incurring significant additional exit costs in connection with the store closings. The following is a summary of post-closing real estate lease obligations activity:

 

     February 1,
2014
    February 2,
2013
 
     (in thousands)  

Balance, beginning of year

   $ 1,422      $ 2,458   

Charges and adjustments

     1,210        (11

Utilization / payments

     (1,946     (1,025
  

 

 

   

 

 

 

Balance, end of year

   $ 686      $ 1,422   
  

 

 

   

 

 

 

(4)    Accumulated Other Comprehensive Loss

As of February 1, 2014 and February 2, 2013, the accumulated other comprehensive loss for defined benefit plans was $136.3 million and $167.0 million, respectively. These amounts are net of income taxes of $82.3 million and $100.5 million at February 1, 2014 and February 2, 2013, respectively.

In fiscal year 2014, the Company reclassified $8.2 million of amortization of defined benefit plan liabilities, net of $4.9 million in income taxes, from accumulated comprehensive income to selling, general and administrative expenses on the consolidated statements of income.

(5)    Accounts Receivable, Net

Accounts receivable, net consists of:

 

     February 1,
2014
     February 2,
2013
 
     (in thousands)  

Accounts receivable from vendors

   $ 34,902       $ 14,591   

Credit card accounts receivable

     16,759         14,357   

Other receivables

     3,679         3,056   
  

 

 

    

 

 

 

Accounts receivable, net

   $ 55,340       $ 32,004   
  

 

 

    

 

 

 

(6)    Property and Equipment, net

Details of property and equipment, net are as follows:

 

     Estimated
Lives
     February 1,
2014
    February 2,
2013
 
     (in years)      (in thousands)  

Land

      $ 47,255      $ 46,688   

Buildings

     primarily 15-31.5         1,198,149        1,150,959   

Furniture, fixtures and equipment

     3-20         1,286,992        1,162,660   

Property under capital leases

     5-20         80,075        76,236   

Construction in progress

        32,735        38,278   
     

 

 

   

 

 

 
        2,645,206        2,474,821   

Less accumulated depreciation and amortization

        (1,487,140     (1,418,877
     

 

 

   

 

 

 

Property and equipment, net

      $ 1,158,066      $ 1,055,944   
     

 

 

   

 

 

 

 

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The Company recorded depreciation and amortization related to property and equipment of $136.5 million, $122.3 million, and $122.5 million in fiscal years 2014, 2013, and 2012, respectively. Accumulated amortization of assets under capital lease was $61.1 million and $52.9 million as of February 1, 2014 and February 2, 2013, respectively.

(7)    Gain on Property and Equipment

During fiscal year 2014, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, offset by losses primarily due to the abandonment of property.

During fiscal year 2013, the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, a $1.4 million gain associated with the sale of two former store locations and a parcel of land the Company owned, and a $1.0 million gain for insurance proceeds in excess of the net book value of property damaged by floods.

During fiscal year 2012 the Company recognized $2.6 million of amortization of the deferred gain on the sale and leaseback of the Company’s headquarters building located in Charlotte, NC, as well as a $1.2 million gain on the nonmonetary exchange of a retail location.

(8)    Accrued Liabilities

Accrued liabilities are comprised of the following:

 

     February 1,
2014
     February 2,
2013
 
     (in thousands)  

Salaries, wages and employee benefits

   $ 45,752       $ 54,785   

Gift card liability

     42,721         38,524   

Advertising

     26,421         14,249   

Accrued capital expenditures

     25,584         11,332   

Sales returns allowance

     23,293         24,274   

Taxes, other than income

     20,405         26,177   

Rent

     7,306         8,034   

Interest

     7,285         7,430   

Self insurance reserves

     6,126         6,899   

Belk Reward Card Loyalty Program

     4,546         4,660   

Information Technology

     4,109         3,366   

Store closing reserves

     686         1,086   

Other

     25,424         23,551   
  

 

 

    

 

 

 

Accrued Liabilities

   $ 239,658       $ 224,367   
  

 

 

    

 

 

 

 

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(9)    Borrowings

Long-term debt and capital lease obligations consist of the following:

 

     February 1,
2014
    February 2,
2013
 
     (in thousands)  

Senior notes

   $ 375,000      $ 375,000   

Capital lease agreements through August 2020

     18,757        24,824   
  

 

 

   

 

 

 
     393,757        399,824   

Less current installments

     (8,084     (9,714
  

 

 

   

 

 

 

Long-term debt and capital lease obligations, excluding current installments

   $ 385,673      $ 390,110   
  

 

 

   

 

 

 

As of February 1, 2014, the annual maturities of long-term debt and capital lease obligations over the next five years are $8.1 million, $106.1 million, $2.2 million, $126.2 million, and $0.6 million, respectively. The Company made interest payments of $27.1 million, $30.5 million and $30.5 million, net of $2.0 million, $1.7 million and $0.6 million which was capitalized into property and equipment during fiscal years 2014, 2013 and 2012, respectively.

The Company’s borrowings consist primarily 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 February 1, 2014 using LIBOR plus 125 basis points, or 1.41%. 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 February 1, 2014, the maximum leverage ratio allowed under the credit facility was 4.0, and the calculated leverage ratio was 1.92. The Company was in compliance with all covenants as of February 1, 2014 and expects to remain in compliance with all debt covenants for the next twelve months and foreseeable future. As of February 1, 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.

On January 25, 2012, the Company made a $125.0 million discretionary payment to extinguish the term loan outstanding under the credit facility, utilizing $25.0 million of cash on hand, and $100.0 million from 5.21% fixed rate, 10-year notes issued by the Company on January 25, 2012. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.9 million related to the term loan and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income.

 

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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 February 1, 2014:

 

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           

 

 

         

On January 30, 2013, the Company paid the $17.8 million, 20-year variable rate state bond facility, which bore interest at 0.20%, and would have matured in October 2025. In connection with the debt extinguishment, the Company expensed unamortized fees of $0.1 million related to the state bond facility and recognized this charge as a loss on extinguishment of debt in the consolidated statement of income. Associated with this bond was an $18.0 million standby letter of credit outstanding under the credit facility, which was canceled upon payment of the $17.8 million state bond facility.

On July 12, 2012, the Company paid, upon maturity, $80.0 million of its floating rate senior note and $20.0 million of its 5.05% fixed rate senior note. The $80.0 million floating rate senior note had an associated interest rate swap, with a fixed interest rate of 5.2%, designated as a cash flow hedge of variable interest payments.

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 asset, goodwill and other intangible asset impairments.

The Company may utilize derivative financial instruments (interest rate swap agreements) to manage the interest rate risk associated with its borrowings. As of February 1, 2014, the Company does not have any interest rate swaps outstanding. The Company has not historically traded, and does not anticipate prospectively trading, in derivatives. Previous swap agreements were used to reduce the potential impact of increases in interest rates on variable rate debt.

 

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(10)    Retirement Obligations and Other Noncurrent Liabilities

Retirement obligations and other noncurrent liabilities are comprised of the following:

 

     February 1,
2014
     February 2,
2013
 
     (in thousands)  

Pension liability

   $ 17,814       $ 76,078   

Deferred compensation plans

     33,904         33,606   

Post-retirement benefits

     17,548         21,270   

Supplemental executive retirement plans

     25,911         26,311   

Deferred gain on sale/leaseback

     15,554         18,183   

Unfavorable lease liability

     13,956         15,630   

Deferred rent

     31,223         30,691   

Self-insurance reserves

     14,468         13,950   

Developer incentive liability

     16,869         11,054   

Income tax reserves

     21,389         17,384   

Other noncurrent liabilities

     8,707         12,850   
  

 

 

    

 

 

 

Retirement obligations and other noncurrent liabilities

   $ 217,343       $ 277,007   
  

 

 

    

 

 

 

(11)    Leases

The Company leases some of its stores, warehouse facilities and equipment. The majority of these leases have initial terms that will expire over the next 15 years. The leases usually contain renewal options at the lessee’s discretion and provide for payment by the lessee of real estate taxes and other expenses and, in certain instances, contingent rentals determined on the basis of a percentage of sales in excess of stipulated minimums.

Future minimum lease payments under non-cancelable leases, net of future minimum sublease rental income under non-cancelable subleases, as of February 1, 2014 were as follows:

 

Fiscal Year

   Capital     Operating  
     (in thousands)  

2015

   $ 8,877      $ 75,298   

2016

     6,552        69,780   

2017

     2,438        62,293   

2018

     1,334        56,712   

2019

     696        47,128   

After 2019

     664        249,643   
  

 

 

   

 

 

 

Total

     20,561        560,854   

Less sublease rental income

            (6,033
  

 

 

   

 

 

 

Net rentals

     20,561      $ 554,821   
    

 

 

 

Less imputed interest

     (1,804  
  

 

 

   

Present value of minimum lease payments

     18,757     

Less current portion

     (8,084  
  

 

 

   

Noncurrent portion of the present value of minimum lease payments

   $ 10,673     
  

 

 

   

 

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Sublease rental income primarily relates to the portion of the Company’s headquarters building located in Charlotte, NC that was sold and leased back by the Company during fiscal year 2008, a portion of which was subsequently subleased by the Company to other third parties.

Net rental expense for all operating leases consists of the following:

 

     Fiscal Year Ended  
     February 1,
2014
    February 2,
2013
    January 28,
2012
 
     (in thousands)  

Buildings:

      

Minimum rentals

   $ 74,811      $ 73,940      $ 73,102   

Contingent rentals

     4,468        4,598        3,844   

Sublease rental income

     (1,898     (2,121     (2,144

Equipment

     2,035        1,768        1,773   
  

 

 

   

 

 

   

 

 

 

Total net rental expense

   $ 79,416      $ 78,185      $ 76,575   
  

 

 

   

 

 

   

 

 

 

(12)    Income Taxes

Federal and state income tax expense (benefit) was as follows:

 

     Fiscal Year Ended  
     February 1,
2014
     February 2,
2013
    January 28,
2012
 
     (in thousands)  

Current:

       

Federal

   $ 40,273       $ 59,152      $ 28,413   

State

     1,751         2,503        8,079   
  

 

 

    

 

 

   

 

 

 
     42,024         61,655        36,492   
  

 

 

    

 

 

   

 

 

 

Deferred:

       

Federal

     38,213         35,045        58,274   

State

     5,107         5,824        (7,584

Valuation allowance release

             (390     (20,232
  

 

 

    

 

 

   

 

 

 
     43,320         40,479        30,458   
  

 

 

    

 

 

   

 

 

 

Income taxes

   $ 85,344       $ 102,134      $ 66,950   
  

 

 

    

 

 

   

 

 

 

 

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A reconciliation between income taxes and income tax expense computed using the federal statutory income tax rate of 35% is as follows:

 

     Fiscal Year Ended  
     February 1,     February 2,     January 28,  
     2014     2013     2012  
     (in thousands)  

Income tax at the statutory federal rate

   $ 85,356      $ 101,677      $ 87,534   

State income taxes, net of federal

     3,816        5,261        3,195   

Increase in cash surrender value of officers’ life insurance

     (4,938     (4,552     (4,624

Net increase (decrease) in uncertain tax positions

     746        1,206        1,285   

Change in valuation allowances for prior years

            (390     (20,232

Other

     364        (1,068     (208
  

 

 

   

 

 

   

 

 

 

Income taxes

   $ 85,344      $ 102,134      $ 66,950   
  

 

 

   

 

 

   

 

 

 

Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consist of:

 

     February 1,
2014
    February 2,
2013
 
     (in thousands)  

Deferred tax assets:

    

Pension liability

   $ 4,839      $ 16,922   

Benefit plan costs

     32,405        33,744   

Store closing and other reserves

     24,675        27,462   

Inventory capitalization

     7,641        7,850   

Tax carryovers

     14,428        14,744   

Prepaid rent

     12,330        11,882   

Goodwill

     36,343        42,528   

Intangibles

     5,778        5,795   

Other

     10,086        12,721   
  

 

 

   

 

 

 

Gross deferred tax assets

     148,525        173,648   

Deferred tax liabilities

    

Property and equipment

     135,390        96,930   

Intangibles

     3,366        3,655   

Inventory

     59,804        66,481   
  

 

 

   

 

 

 

Gross deferred tax liabilities

     198,560        167,066   
  

 

 

   

 

 

 

Net deferred tax (liabilities) assets

   $ (50,035   $ 6,582   
  

 

 

   

 

 

 

Due to economic conditions prior to fiscal year 2012, the Company believed that it was more likely than not that the benefit from state net operating loss and credit carryforwards, and net deferred tax assets for state income tax purposes, would not be realized, and established a valuation allowance on these deferred tax assets in fiscal year 2009. Based upon operating results over recent years, as well as an assessment of expected future results of operations during the quarter ended January 28, 2012, it was determined that it is more likely than not that certain deferred tax assets would be utilized. As a result, the majority of our valuation allowance was released during

 

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fiscal year 2012, recognizing a tax benefit of $20.2 million. During the quarter ended February 2, 2013, it was determined that the remaining valuation allowance would also be realized, and as a result recognized a benefit of $0.4 million. The release of the valuation allowance was determined in accordance with the provisions of ASC 740, “Income Taxes,” which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable.

The analysis performed to assess the realizability of the state deferred tax asset included an evaluation, as of February 1, 2014, of the level of historical pre-tax income for the affected subsidiaries, after adjustment for non-recurring items, in recent years; the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable state laws; and the amount and timing of future taxable income. This analysis indicated it is more likely than not that the deferred tax asset recorded will be realized.

The valuation allowance was $21.0 million at January 29, 2011. The $21.0 million beginning of year balance was reduced by the release of $20.2 million, with the remaining $0.4 million relating to expired net operating losses and other items recorded as a reduction of income tax expense.

As of February 1, 2014, the Company had net operating loss carryforwards for state income tax purposes of approximately $317.4 million. The state carryforwards expire at various intervals through fiscal year 2034, but primarily in fiscal years 2024 through 2028. The Company also has state job credits of approximately $1.2 million, which are available to offset future taxable income, in the applicable states, if any. These credits expire between fiscal years 2016 and 2029.

The state net operating loss carryforwards from filed returns included uncertain tax positions taken in prior years. State net operating loss carryforwards as shown on the Company’s tax returns are larger than the state net operating losses for which a deferred tax asset is recognized for financial statement purposes.

As of February 1, 2014, the total gross unrecognized tax benefit was $21.9 million. Of this total, $6.8 million represents the amount of unrecognized tax benefits (net of the federal benefit on state issues) that, if recognized, would favorably affect the effective income tax rate in a future period. A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:

 

     February 1,
2014
    February 2,
2013
 
     (in thousands)  

Balance, beginning of year

   $ 17,761      $ 22,756   

Additions for tax positions from prior years

     783        898   

Reductions for tax positions from prior years

     (773     (7,165

Additions for tax positions related to the current year

     4,135        1,857   

Settlements

            (585
  

 

 

   

 

 

 

Balance, end of year

   $ 21,906      $ 17,761   
  

 

 

   

 

 

 

The Company reports interest related to unrecognized tax benefits in interest expense, and penalties related to unrecognized tax benefits in income tax expense. Total accrued interest and penalties for unrecognized tax benefits (net of tax benefit) as of February 1, 2014 was $1.1 million, after recognition of a $0.3 million benefit during fiscal year 2014. At this time, the Company does not expect a material change to its gross unrecognized tax benefit over the next 12 months.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax matters with the IRS and all material state and local income tax matters for tax years through 2009.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(13)    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 change in the projected benefit obligation, change in plan assets, funded status, amounts recognized and unrecognized, net periodic benefit cost and actuarial assumptions are as follows:

 

     Pension Benefits     Old SERP Benefits     Postretirement Benefits  
     February 1,
2014
    February 2,
2013
    February 1,
2014
    February 2,
2013
    February 1,
2014
    February 2,
2013
 
     (in thousands)  

Change in projected benefit obligation:

            

Benefit obligation at beginning of year

   $ 566,428      $ 549,431      $ 12,890      $ 13,189      $ 23,279      $ 25,628   

Service cost

                   163        153        119        116   

Interest cost

     22,762        23,418        514        557        911        1,064   

Actuarial (gains) losses

     (12,177     22,636        (142     411        (2,884     (1,405

Benefits paid

     (29,793     (29,057     (1,169     (1,420     (2,050     (2,124
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

     547,220        566,428        12,256        12,890        19,375        23,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

            

Fair value of plan assets at beginning of year

     490,350        453,088                               

Actual return on plan assets

     43,849        48,319                               

Contributions to plan

     25,000        18,000        1,169        1,420        2,050        2,124   

Benefits paid

     (29,793     (29,057     (1,169     (1,420     (2,050     (2,124
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

     529,406        490,350                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded Status

   $ (17,814   $ (76,078   $ (12,256   $ (12,890   $ (19,375   $ (23,279
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Actuarial gains and losses are generally amortized over the average remaining service life of the Company’s active employees. Due to the pension plan freeze in the third quarter of fiscal year 2010, the Company began using the average remaining life of the participants in the pension plan rather than the average remaining service life of the Company’s active employees.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Amounts recognized in the consolidated balance sheets consist of the following:

 

     Pension Benefits     Old SERP Benefits     Postretirement Benefits  
     February 1,
2014
    February 2,
2013
    February 1,
2014
    February 2,
2013
    February 1,
2014
    February 2,
2013
 
     (in thousands)  

Accrued liabilities

   $      $      $ 1,144      $ 1,146      $ 1,827      $ 2,009   

Deferred income tax assets

     81,086        98,220        1,248        1,499        (26     790   

Retirement Obligations and other noncurrent liabilities

     17,814        76,078        11,112        11,745        17,548        21,270   

Accumulated other comprehensive income (loss)

     (134,209     (163,072     (2,306     (2,727     192        (1,183

Obligation and funded status are as follows:

 

     Pension Benefits      Old SERP Plan      Postretirement Benefits  
     February 1,
2014
     February 2,
2013
     February 1,
2014
     February 2,
2013
     February 1,
2014
     February 2,
2013
 
     (in thousands)  

Projected benefit obligation

   $ 547,220       $ 566,428       $ 12,256       $ 12,890       $ 19,375       $ 23,279   

Accumulated benefit obligation

     547,220         566,428         11,414         11,856         N/A         N/A   

Fair value of plan assets

     529,406         490,350                                   

Activity related to plan assets and benefit obligations recognized in accumulated other comprehensive loss are as follows:

 

     Pension Benefits     Old SERP Benefits     Postretirement Benefits  
     February 1,
2014
     February 2,
2013
    February 1,
2014
     February 2,
2013
    February 1,
2014
     February 2,
2013
 
     (in thousands)  

Adjustment to minimum liability

   $ 24,808       $ (2,058   $ 89       $ (258   $ 1,298       $ 883   

Amortization of unrecognized items:

               

Net transition obligation

                                           123   

Net gain/(loss)

     4,055         7,132        332         299        77         270   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 28,863       $ 5,074      $ 421       $ 41      $ 1,375       $ 1,276   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The weighted-average assumptions used to determine benefit obligations at the February 1, 2014 and February 2, 2013 measurement dates were as follows:

 

     Pension Plan     Old SERP Plan     Postretirement Plan  
     Measurement Date     Measurement Date     Measurement Date  
     February 1,
2014
    February 2,
2013
    February 1,
2014
    February 2,
2013
    February 1,
2014
    February 2,
2013
 

Discount rates

     4.500     4.125     4.500     4.125     4.500     4.125

Rates of compensation increase

     N/A        N/A        4.0        4.0        N/A        N/A   

The following weighted-average assumptions were used to determine net periodic benefit cost for the fiscal years shown:

 

    Pension Plan     Old SERP Plan     Postretirement Plan  
    February 1,
2014
    February 2,
2013
    January 28,
2012
    February 1,
2014
    February 2,
2013
    January 28,
2012
    February 1,
2014
    February 2,
2013
    January 28,
2012
 

Discount rates

    4.125     4.375     5.500     4.125     4.375     5.500     4.125     4.375     5.500

Rates of compensation increase

    N/A        N/A        N/A        4.0        4.0        4.0        N/A        N/A        N/A   

Return on plan assets

    6.75     7.25     7.50     N/A        N/A        N/A        N/A        N/A        N/A   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company developed the discount rate by matching the projected future cash flows of the plan to a modeled yield curve consisting of over 500 Aa-graded, noncallable bonds. Based on this analysis, management selected a 4.125% discount rate, which represented the calculated yield curve rate rounded up to the nearest eighth of a point. The pension plan’s expected return assumption is based on the weighted average aggregate long-term expected returns of various actively managed asset classes corresponding to the plan’s asset allocation. The pension plan assets are allocated approximately 54% to fixed income securities and 44% to equity securities, with the remaining assets allocated to cash and cash equivalents.

For measurement purposes, a 7.6% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for fiscal year 2014; the rate was assumed to decrease to 5.0% gradually over the next six years and remain at that level for fiscal years thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing or decreasing the assumed health care cost trend rates by one percentage point would increase or decrease the accumulated postretirement benefit obligation as of February 1, 2014 by $0.4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended February 1, 2014 by $0.1 million.

The Company maintains policies for investment of pension plan assets. The policies set forth state objectives and a structure for managing assets, which includes various asset classes and investment management styles that, in the aggregate, are expected to produce a sufficient level of diversification and investment return over time and provide for the availability of funds for benefits as they become due. The policies also provide guidelines for each investment portfolio that control the level of risk assumed in the portfolio and ensure that assets are managed in accordance with stated objectives. The policies set forth criteria to monitor and evaluate the performance results achieved by the investment managers. In addition, managing the relationship between plan assets and benefit obligations within the policy objectives is achieved through periodic asset and liability studies required by the policies.

The asset allocation for the pension plan is as follows:

 

           Percentage of Plan Assets at Measurement Date  
     Target Allocation     February 1, 2014     February 2, 2013     January 28, 2012  

Equity securities and funds

     40%-50     44     56     56

Fixed income

     50%-60     54     42     43

Cash and cash equivalents

     0%-5     2     2     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

As of February 1, 2014 and February 2, 2013, the pension plan assets were required to be measured at fair value. These assets included equity securities, private equity funds, fixed income securities, and cash and cash equivalents. These categories can cross various asset allocation strategies as reflected in the preceding table.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Fair values of the pension plan assets were as follows:

 

          Fair Value Measurement at Reporting Date Using           Fair Value Measurement at Reporting Date Using  

Description

  February 1,
2014
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable
Outputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    February 2,
2013
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable
Outputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
          (in thousands)           (in thousands)  

Equity securities

               

U.S. companies(a)

  $ 59,486      $ 59,486      $      $      $ 105,203      $ 105,203      $      $   

U.S. Mutual Funds

    109,622               109,622               81,518               81,518          

International mutual funds

    51,362        51,362                      63,451        63,451                 

International companies

    9,000        9,000                      16,939        16,939                 

Private equity

    5,436                      5,436        5,534                      5,534   

Fixed income securities

               

Corporate bonds

    100,806               100,806               73,472               73,472          

Government securities

    86,016               86,016               70,000               70,000          

Mutual funds

    72,026               72,026               41,962          41,962          

Mortgage backed securities

    17,102               17,102               13,016               13,016          

Municipals

    9,580               9,580               6,847               6,847          

Cash and cash equivalents

    8,970               8,970               12,408               12,408          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $ 529,406      $ 119,848      $ 404,122      $ 5,436      $ 490,350      $ 185,593      $ 299,223      $ 5,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The U.S. equity securities consist of $59.2 million of large cap companies and $0.3 million of mid cap companies in in fiscal year 2014. The U.S. equity securities consisted of $67.9 million of large cap companies, $17.6 million of mid cap companies and $19.7 million of small cap companies in fiscal year 2013.

The pension plan corporate bonds, government securities, mortgage backed securities, municipal bonds, cash and cash equivalents, and the majority of mutual funds in fiscal years 2014 and 2013, respectively, have been classified as Level 2:

Corporate and municipal bonds, and mortgage backed and government securities — fair values of corporate and municipal bonds, and mortgage backed and government securities are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instruments (maturity and coupon interest rate) considering the counterparty credit rating; external broker bids where available; or by discounting estimated cash flows.

Cash equivalents and mutual funds — fair values of cash equivalents and mutual funds are largely provided by independent pricing services. Where independent pricing services provide fair values, the Company has obtained an understanding of the methods, models and inputs used in pricing, and has procedures in place to validate that amounts provided represent current fair values.

The private equity pension plan investments are considered Level 3 assets as there is not an active market for identical assets from which to determine fair value or current market information about similar assets to use as observable inputs. The fair value of private equity investments is determined using pricing models, which requires significant management judgment.

 

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BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table provides a reconciliation of the fiscal year 2014 and 2013 beginning and ending balances of the pension plan’s private equity funds (Level 3):

 

(in thousands)       

Balance as of January 28, 2012

   $ 4,906   

Calls of private equity investments

     1,120   

Total gains/(losses) realized/unrealized included in plan earnings

     349   

Distributions of private equity investments

     (841
  

 

 

 

Balance as of February 2, 2013

     5,534   
  

 

 

 

Calls of private equity investments

     810   

Total gains/(losses) realized/unrealized included in plan earnings

     (202

Distributions of private equity investments

     (706
  

 

 

 

Balance as of February 1, 2014

   $ 5,436   
  

 

 

 

The Company expects to have the following benefit payments related to its pension, Old SERP and postretirement plans in the coming years:

 

Fiscal Year

   Pension Plan      Old SERP Plan      Postretirement Plan  
     (in thousands)  

2015

   $ 30,641       $ 1,169       $ 1,868   

2016

     30,481         1,125         2,092   

2017

     30,380         1,082         2,019   

2018

     30,463         1,041         1,940   

2019

     30,631         1,002         1,860   

2020 — 2024

     157,588         7,287         7,885   

The Company elected to contribute $25.0 million and $18.0 million to its Pension Plan in fiscal years 2014 and 2013, respectively. The Company currently exceeds the Pension Protection Act of 2006 guidelines, and expects to be in excess of the guidelines in the near future, therefore, no future contributions are anticipated. The Company expects to contribute $1.2 million to its non-qualified defined benefit Supplemental Executive Retirement Plan in fiscal year 2015, and contributed $1.2 million and $1.4 million in fiscal years 2014 and 2013, respectively. The Company expects to contribute $1.9 million to its postretirement plan in fiscal year 2015, and contributed $2.0 million and $2.1 million in fiscal years 2014 and 2013, respectively.

The components of net periodic benefit expense are as follows:

 

    Fiscal Year Ended  
    Pension Plan     Old SERP Plan     Postretirement Plan  
    February 1,
2014
    February 2,
2013
    January 28,
2012
    February 1,
2014
    February 2,
2013
    January 28,
2012
    February 1,
2014
    February 2,
2013
    January 28,
2012
 
    (in thousands)  

Service cost

  $      $      $      $ 163      $ 153      $ 103      $ 119      $ 116      $ 106   

Interest cost

    22,762        23,418        25,492        514        557        620        911        1,064        1,201   

Expected return on assets

    (28,553     (28,962     (28,066                                          

Amortization of unrecognized items:

                 

Net transition obligation

                                                     196        262   

Net losses (gains)

    18,525        11,367        7,867        528        477        256        (692     430        (137
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Annual benefit expense

  $ 12,734      $ 5,823      $ 5,293      $ 1,205      $ 1,187      $ 979      $ 338      $ 1,806      $ 1,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal year 2015 are as follows:

 

     Pension Benefits      Old SERP Plan      Postretirement
Benefits
 
     (in thousands)  

Amortization of actuarial loss (gain)

   $ 10,190       $ 508       $ (41
  

 

 

    

 

 

    

 

 

 

Total recognized from other comprehensive income

   $ 10,190       $ 508       $ (41
  

 

 

    

 

 

    

 

 

 

(14)    Other Employee Benefits

The Belk Employees’ Health Care Plan provides medical and dental benefits to substantially all full-time employees. This plan for medical and dental benefits is administered through a 501(c)(9) Trust. The Group Life Insurance Plan and The Belk Employees Short Term Disability Insurance Plan provide insurance to substantially all full-time employees and are fully insured through contracts issued by insurance companies. Expense recognized by the Company under these plans amounted to $55.2 million, $52.4 million and $48.6 million in fiscal years 2014, 2013 and 2012, respectively.

The Belk 401(k) Savings Plan, a defined contribution plan, provides benefits for substantially all employees. The cost of the plan was $8.9 million, $8.8 million and $8.2 million in fiscal years 2014, 2013 and 2012, respectively. Employer match contributions are calculated at 100% of the first 4% of employees’ contributions, plus 50% on the next 2% of employees’ contributions, up to a total 5% employer match on eligible compensation.

The Company has a non-qualified 401(k) Restoration Plan for highly compensated employees, as defined by the Employee Retirement Income Security Act (“ERISA”). The cost of the plan to the Company in fiscal years 2014, 2013 and 2012 was $0.9 million, $1.0 million and $0.2 million, respectively. The plan provides a contribution equal to 5% of a participant’s compensation, except for those who are participants in the 2004 SERP plan, in excess of the limit set forth in Code section 401(a)(17), as adjusted. The Company accrues each participant’s return on investment based on an asset investment model of their choice.

The 2004 SERP Plan, a non-qualified defined contribution retirement benefit plan for certain qualified executives, provides a contribution equal to 5% of a participant’s compensation in excess of the limit set forth in Code section 401(a)(17), as adjusted. The contribution and interest costs charged to operations were $1.2 million in fiscal year 2014, and $1.3 million in each of the fiscal years 2013 and 2012.

Certain eligible employees participate in a non-qualified Deferred Compensation Plan (“DCP”). Participants in the DCP have elected to defer a portion of their regular compensation subject to certain limitations proscribed by the DCP. The Company is required to pay interest on the employees’ deferred compensation at various rates that have historically been between 5% and 15%. Interest cost related to the plan and charged to interest expense was $3.8 million, $3.9 million, and $4.0 million in fiscal years 2014, 2013, and 2012, respectively.

The Company has a Pension Restoration Plan, a non-qualified defined contribution plan. The plan provides benefits for certain officers, whose pension plan benefit accruals were frozen, that would have been otherwise grandfathered in their pension participation based on age and vesting. Effective January 1, 2009, the Company suspended accruals to this plan for one year and subsequently permanently froze future contributions as of December 31, 2009. The Company incurred an expense of $0.1 million in each of the fiscal years 2014, 2013 and 2012, to provide benefits under this plan.

(15)    Stock-Based Compensation

Under the Belk, Inc. 2010 Incentive Stock Plan (the “2010 Incentive Plan”), the Company is authorized to award up to 2.5 million shares of class B common stock for various types of equity incentives to key executives

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

of the Company. The Company recognized compensation expense, net of tax, under the 2010 Incentive Plan of $6.9 million, $11.0 million and $10.6 million for fiscal years 2014, 2013 and 2012, respectively.

Performance Based Stock Award Programs

The Company has a performance based stock award program (the “Long Term Incentive Plan” or “LTI Plan”), which the Company grants, under its 2010 Incentive Plan, stock awards to certain key executives. Shares awarded under the LTI Plan vary based on Company results versus specified performance targets and generally vest at the end of the performance period. Beginning with fiscal year 2009, the LTI Plan began using a one-year performance period and a two-year service period. One-half of any shares earned during the performance period will be issued after the end of the performance period with the remaining shares issued at the end of the service period.

LTI Plan compensation costs are computed using the fair value of the Company’s stock on the grant date based on a third-party valuation and the estimated expected attainment of performance goals. The unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the LTI Plan was $2.4 million, $4.9 million and $5.1 million for fiscal years 2014, 2013 and 2012, respectively.

The weighted-average grant-date fair value of shares granted under the LTI Plans during fiscal years 2014, 2013 and 2012 was $50.00, $40.80 and $33.70, respectively. The total fair value of stock grants issued under the LTI Plans during fiscal year 2014 was $12.8 million. The fiscal year 2014 performance targets were met, however the plan does not vest until fiscal years 2015 and 2016. The fiscal year 2013 performance targets were met, and the plan vests in fiscal years 2014 and 2015. The fiscal year 2012 performance targets were met, and the plan vested in fiscal years 2013 and 2014.

Activity under the LTI Plan during the year ended February 1, 2014 is as follows:

 

     Shares
(in  thousands)
    Weighted-Average
Grant Date Fair  Value
per Share
 

Non-vested at February 2, 2013

     481      $ 38.11   

Granted

     255        50.00   

Changes in Performance Estimates

     (140     50.00   

Vested

     (343     37.06   

Forfeited

     (14     47.26   
  

 

 

   

Non-vested at February 1, 2014

     239      $ 44.68   
  

 

 

   

In fiscal year 2011, the Company established a performance-based long term incentive plan (the “Stretch Incentive Plan” or “SIP 11”), under its 2010 Incentive Plan, in which certain key executive officers are eligible to participate. The performance period began on the first day of the third quarter of fiscal year 2011 and ended on the last day of fiscal year 2013. The target award level for all eligible employees was set at one times target total cash compensation. Executives could earn up to a maximum of 150% of the target award for achievement equal to or greater than 110% of the cumulative earnings before interest and taxes goal and 103% of the sales goal. The SIP 11 award was denominated in cash and settled in shares of class B common stock. The SIP 11 performance targets were met and one-half of the SIP 11 award earned was granted and issued during the first quarter of fiscal year 2014. The balance of the award earned was granted and issued during the first quarter of fiscal year 2015. The actual number of shares issued in fiscal year 2014 was determined based on the Company’s stock price on the date the shares were granted; 138,631 shares at a share price of $50.00. The unrecognized compensation cost related to non-vested compensation arrangements granted under the SIP 11 Plan was $0.3 million and $2.6 million in fiscal years 2014 and 2013, respectively.

 

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In fiscal year 2014, the Company established a similar performance-based long term incentive plan (“SIP 14”), under its 2010 Incentive Plan, in which certain key executive officers are eligible to participate. The performance period began on the first day of fiscal year 2014 and ends on the last day of fiscal year 2016. One-half of any SIP 14 award earned will be granted and issued after the end of the performance period, which is during the first quarter of fiscal year 2017. The balance of the award earned will be granted and issued during the first quarter of fiscal year 2018. The actual number of shares that will be issued in fiscal year 2017 will be determined based on the Company’s stock price on the date the shares are granted. There were no SIP 14 shares granted or issued during fiscal year 2014. As of February 1, 2014 the unrecognized compensation cost related to non-vested compensation arrangements granted under the SIP 14 Plan was $2.4M.

The Company granted service-based stock awards to certain associates in fiscal year 2013. The service-based awards granted 25,000 shares in fiscal year 2013; 12,500 will be issued in the second quarter of fiscal year 2018, and the remaining 12,500 will be issued at the end of the service period, fiscal year 2019. The Company granted a service-based stock award to an associate in fiscal year 2011. The service-based award granted 10,000 shares in fiscal year 2011; 5,000 were issued and vested during the second quarter of fiscal year 2011, and the remaining 5,000 were issued in fiscal year 2014. The weighted-average grant-date fair value of shares granted under the service-based plans during fiscal years 2013 and 2011 was $40.80 and $26.00, respectively. The total fair value of service-based stock grants vested during fiscal year 2011 was $0.3 million. The unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the service-based plan as of February 1, 2014 was $0.6 million.

In fiscal year 2007, the Company established a five-year performance-based incentive stock plan for the Chief Financial Officer at the time (the “CFO Incentive Plan”). Up to 11,765 shares were awarded under the plan at the end of each fiscal year if an annual Company performance goal was met. Performance goals were established annually for each of the five one-year performance periods, which resulted in five separate grant dates. The participant had the option to receive 30% of the award in cash (liability portion) at the end of each of the five one-year periods. The annual cash award was based on the number of shares earned during the annual period times the fair value of the Company’s stock as of the fiscal year end. The amounts under the liability portion of the award vested ratably at the end of each fiscal year. The remaining 70% of the award (equity portion) was granted in the Company’s stock. Shares granted under the equity portion vested at the end of the five-year period. The award also included a cumulative five-year look-back feature whereby previously unearned one-year awards were earned based on cumulative performance. The shares that were awarded based on the fiscal year 2011 performance goal had a grant date fair value of $26.00. The total fair value of stock grants issued during fiscal year 2012 was $0.8 million. The CFO Incentive Plan resulted in compensation cost of $0.9 million in fiscal year 2011. The final share payout for the CFO Incentive Plan occurred in fiscal 2012.

(16)    Purchase Obligations

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty have been excluded. Purchase obligations relate primarily to purchases of property and equipment, information technology contracts, maintenance agreements and advertising contracts.

The annual amount and due dates of purchase obligations as of February 1, 2014 are $84.8 million due within one year, $24.6 million due within one to three years, and $1.3 million due within three to five years.

(17)    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

 

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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 fiscal years 2014, 2013 and 2012 is as follows:

 

     February 1,
2014
     February 2,
2013
     January 28,
2012
 

Basic Shares

     41,541,176         43,435,314         45,355,941   

Dilutive contingently-issuable non-vested share awards

     269,925         272,862         192,125   

Dilutive contingently-issuable vested share awards

     1,649         4,087         31,921   
  

 

 

    

 

 

    

 

 

 

Diluted Shares

     41,812,750         43,712,263         45,579,987   
  

 

 

    

 

 

    

 

 

 

(18)    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 February 1, 2014 and February 2, 2013, the Company held company-owned life insurance measured at fair value on a recurring basis of $27.3 million and $24.5 million, respectively. These amounts are presented net of loans that are secured by some of these policies of $157.9 million and $147.4 million at February 1, 2014 and February 2, 2013, respectively. Total gross company-owned life insurance assets were $185.2 million and $171.9 million at February 1, 2014 and February 2, 2013, respectively.

The Company has in the past entered into interest rate swap agreements with financial institutions to manage the exposure to changes in interest rates. When doing so, the fair value of the interest rate swap agreements is the estimated amount that the Company would pay or receive to terminate the swap agreement, taking into account the current credit worthiness of the swap counterparties. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all periods presented. Additionally, the change in the fair value of a swap designated as a cash flow hedge is marked to market through accumulated other comprehensive income.

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

 

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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. In fiscal year 2014, the Company recorded $5.0 million in impairment charges primarily to adjust two retail locations’ net book value to fair market value.

 

     Property and Equipment  
     (in thousands)  

Measured as of February 1, 2014:

  

Carrying amount

   $ 7,182   

Fair value measurement

     2,222   
  

 

 

 

Impairment charge recognized

   $ (4,960
  

 

 

 

Measured as of February 2, 2013:

  

Carrying amount

   $ 266   

Fair value measurement

       
  

 

 

 

Impairment charge recognized

   $ (266
  

 

 

 

Measured as of January 28, 2012:

  

Carrying amount

   $ 1,537   

Fair value measurement

     1,178   
  

 

 

 

Impairment charge recognized

   $ (359
  

 

 

 

As of February 1, 2014 and February 2, 2013, the fair value of fixed rate long-term debt including the current portion and excluding capitalized leases, was $393.1 million and $397.9 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 February 1, 2014 and February 2, 2013.

(19)     Stockholders’ Equity

Authorized capital stock of Belk, Inc. includes 200 million shares of Class A common stock, 200 million shares of Class B common stock and 20 million shares of preferred stock, all with par value of $0.01 per share. At February 1, 2014, there were 40,063,026 shares of Class A common stock outstanding, 927,890 shares of Class B common stock outstanding, and no shares of preferred stock outstanding.

Class A shares are convertible into Class B shares on a 1 for 1 basis, in whole or in part, at any time at the option of the holder. Class A and Class B shares are identical in all respects, with the exception that Class A stockholders are entitled to 10 votes per share and Class B stockholders are entitled to one vote per share. There are restrictions on transfers of Class A shares to any person other than a Class A permitted holder. Each Class A share transferred to a non-Class A permitted holder automatically converts into one share of Class B.

On March 26, 2014, the Company declared a regular dividend of $0.80 on each share of Class A and Class B Common Stock outstanding on that date. On December 11, 2012, the Company declared a regular dividend of $0.75 and a special one-time additional dividend of $0.25 on each share of Class A and Class B Common Stock outstanding on that date. The $0.75 per share regular dividend represented an acceleration of the

 

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regular dividend normally paid in April following the end of the fiscal year. On March 28, 2012, the Company declared a regular dividend of $0.75 on each share of the Class A and Class B Common Stock outstanding on that date.

On March 26, 2014, the Company’s Board of Directors approved a self-tender offer to purchase up to 1,500,000 shares of Class A and 580,000 shares of Class B common stock at a price of $48.10 per share. On March 27, 2013, the Company’s Board of Directors approved a self-tender offer to purchase up to 1,500,000 shares of Class A and 500,000 shares of Class B common stock at a price of $50.00 per share. The tender offer was initiated on April 25, 2013 and completed on May 22, 2013 when the Company accepted for purchase 1,741,669 shares of Class A and 296,560 shares of Class B common stock for $101.9 million. In accordance with the offer to purchase and SEC rules, the Company accepted for purchase 241,669 additional shares of Class A common stock that were tendered by stockholders, which is less than 2.0% of the outstanding shares of Class A stock that were subject to the offer.

(20)    Selected Quarterly Financial Data (unaudited)

The following table summarizes the Company’s unaudited quarterly results of operations for fiscal years 2014 and 2013:

 

     Three Months Ended  
     February 1,
2014
     November 2,
2013
     August 3,
2013
     May 4,
2013
 
     (in thousands, except per share amounts)  

Revenues

   $ 1,322,083       $ 860,743       $ 899,458       $ 955,834   

Gross profit(1)

     436,172         271,021         297,593         310,566   

Net income

     96,261         3,560         30,521         28,191   

Basic income per share

     2.35         0.09         0.74         0.66   

Diluted income per share

     2.33         0.09         0.73         0.65