10-K 1 tenk2003.txt FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2004 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 January 31, 2004 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 1-79 THE MAY DEPARTMENT STORES COMPANY (Exact name of registrant as specified in its charter) Delaware 43-1104396 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 611 Olive Street, St. Louis, Missouri 63101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 342-6300 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value $.50 per share New York Stock Exchange Preferred stock purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No Aggregate market value of the registrant's common stock held by non-affiliates as of March 1, 2004: $10,487,233,644 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 290,047,907 shares of common stock, $.50 par value, as of March 1, 2004. 1 Documents incorporated by reference: 1. Registrant's Proxy Statement for the 2004 Annual Meeting of Shareowners (to be filed with the commission under Rule 14A within 120 days after the end of registrant's fiscal year-end and, upon such filing, to be incorporated by reference into Part III). PART I Items 1 and 2. Business and Description of Property The May Department Stores Company ("May"), a corporation organized under the laws of the State of Delaware in 1976, became the successor to The May Department Stores Company, a New York corporation ("May NY") in a reincorporation from New York to Delaware pursuant to a statutory share exchange accomplished in 1996. As a result of the share exchange, May NY became a wholly-owned subsidiary of May. May NY was organized under the laws of the State of New York in 1910, as the successor to a business founded by David May, who opened his first store in Leadville, Colorado, in 1877. Information required by this item is also included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. Department Stores May operates six quality regional department store divisions nationwide under 11 long-standing and widely recognized trade names. Each department store division holds a leading market position in its region. At fiscal year-end 2003, May operated 444 department stores in 36 states and the District of Columbia. The department store divisions and the markets served are shown in the table below. Store Company Markets Served Lord & Taylor 30 markets, including New York/New Jersey Metro; Chicago; Boston; Philadelphia Metro; Washington, D.C., Metro; and Detroit Filene's and 39 markets, including Boston Metro, Pittsburgh, Kaufmann's Cleveland, Southern Connecticut, Providence Metro, Hartford, Buffalo, Rochester, and Columbus Robinsons-May and 15 markets, including Los Angeles/Orange County, Meier & Frank Riverside/San Bernardino, Phoenix, San Diego, Las Vegas, Portland/Vancouver Metro, and Salt Lake City Hecht's and 19 markets, including Washington, D.C., Metro; Strawbridge's Philadelphia Metro; Baltimore; Norfolk; Nashville; Richmond; Charlotte; Greensboro; and Raleigh-Durham Foley's 22 markets, including Houston, Dallas/Fort Worth, Denver, San Antonio, Austin, and Oklahoma City Famous-Barr, 24 markets, including St. Louis Metro, Kansas L.S. Ayres, and City Metro, and Indianapolis The Jones Store 2 We plan to open eight department stores in 2004 in the following cities: Filene's Hecht's Dartmouth, Mass. Wilmington, N.C. Nashville, Tenn. Robinsons-May Foley's Rancho Cucamonga, Calif. El Paso, Texas Houston, Texas Meier & Frank The Jones Store Portland, Ore. Kansas City, Kan. Bridal Group David's Bridal, Inc. is the nation's largest retailer of bridal gowns and bridal-related merchandise and offers a variety of special occasion dresses and accessories. At fiscal year-end 2003, David's Bridal operated 210 stores in 44 states and Puerto Rico. After Hours Formalwear, Inc. is the largest tuxedo rental and sales retailer in the United States. During 2003, After Hours acquired 225 stores, including 125 Gingiss Formalwear and Gary's Tux Shop stores, 64 Desmond's Formalwear stores, and 25 Modern Tuxedo stores. At fiscal year-end 2003, After Hours operated 460 stores in 30 states. Priscilla of Boston, Inc. is one of the most highly recognized upscale bridal retailers in the United States. At fiscal year-end 2003, Priscilla of Boston operated 10 stores in 9 states. We plan to open 30 David's Bridal, 20 After Hours, and two Priscilla of Boston stores in 2004. A. Associates May employs approximately 58,000 full-time and 52,000 part-time associates in 46 states, the District of Columbia, Puerto Rico and 10 offices overseas. B. Property Ownership The following summarizes the property ownership of department stores and the Bridal Group at January 31, 2004: % of Gross Number of Building Stores* Sq. Footage Department Department Stores Bridal Group Stores Bridal Group Entirely or mostly owned 262 2 62% 1% Entirely or mostly leased 112 678 25 99 Owned on leased land 70 - 13 0 444 680 100% 100% * Includes three department stores subject to financing. 3 C. Credit Sales Sales at May's stores are made for cash or credit, including May's 30-day charge accounts and open-end credit plans for department store divisions, which include revolving charge accounts and revolving installment accounts. During the fiscal year ended January 31, 2004, 35.3% of net sales were made through May's department store credit plans. May National Bank of Ohio ("MBO") is an indirectly wholly-owned and consolidated subsidiary of May. MBO extends credit to customers of May's six department store divisions. In 2003, May received approval from the Officer of the Comptroller of the Currency and completed its merger of May National Bank of Arizona into MBO. D. Competition in Retail Merchandising May conducts its retail merchandising business under highly competitive conditions. Although May is one of the nation's largest department store retailers, it has numerous competitors at the national and local level which compete with May's individual department stores and the Bridal Group. Competitors include department stores, specialty, off-price, discount, internet, and mail-order retailers. Competition is characterized by many factors including location, reputation, assortment, advertising, price, quality, service, and credit availability. May believes that it is in a strong competitive position with regard to each of these factors. E. May Merchandising Company/May Department Stores International, Inc. May Merchandising Company ("MMC"), an indirectly wholly-owned and consolidated subsidiary of May, identifies emerging fashion trends in both domestic brands and our exclusive proprietary brand merchandise. MMC works closely with our six department store divisions and our merchandise vendors to communicate emerging fashion trends, to develop meaningful merchandise assortments and negotiate the best overall terms for delivery of merchandise in a timely manner to our stores. May Department Stores International, Inc. ("MDSI"), a wholly-owned and consolidated subsidiary of May, is primarily a design and sourcing company. MDSI owns all trade names and marks associated with proprietary brand merchandise and develops, designs, sources, imports, and distributes the proprietary brand merchandise bearing those trade names and marks for May. MDSI has approximately 40-50 private labels in use at the department store divisions and employs approximately 850 persons worldwide. In addition to its corporate office in St. Louis, MDSI operates offices in New York City and ten countries. 4 F. Executive Officers of May The names and ages (as of March 26, 2004) of all executive officers of May, and the positions and offices held with May by each such person are as follows: Name Age Positions and Offices Eugene S. Kahn 54 Chairman of the Board and Chief Executive Officer John L. Dunham 57 President William P. McNamara 53 Vice Chairman Thomas D. Fingleton 56 Executive Vice President and Chief Financial Officer Jay A. Levitt 46 Chief Executive Officer and President, May Merchandising Company and May Department Stores International R. Dean Wolfe 59 Executive Vice President Alan E. Charlson 55 Senior Vice President and General Counsel Martin M. Doerr 49 Senior Vice President Gregory A. Ott 44 Senior Vice President Lonny J. Jay 61 Senior Vice President Jan R. Kniffen 55 Senior Vice President Richard A. Brickson 56 Secretary and Senior Counsel J. Per Brodin 42 Vice President Each of the above named executive officers shall remain in office until the annual meeting of directors following the next annual meeting of shareowners of May and until the officer's successor shall have been elected and shall qualify. Messrs. Kahn, Dunham, and Wolfe are also directors of May. Mr. Ott assumed the position of senior vice president of strategy and new business development in October 2003. Each of the executive officers has been an officer of May for at least the last five years, with the following exceptions: - Mr. McNamara served as senior vice president and general merchandise manager for May Merchandising Company from 1995 to 1997, president and chief executive officer of Famous-Barr from 1997 to 1998, and president of May Merchandising Company from 1998 to February 2000 when he became vice chairman and an executive officer of May. - Mr. Fingleton served as chairman of Hecht's from 1991 to May 2000 when he became executive vice president and an executive officer of May. He assumed his current position in April 2001. - Mr. Levitt served as vice president and general merchandising manager of Robinsons-May from 1991 to 1999 when he was named president and chief executive officer. He became president of May Merchandising Company and May Department Stores International and an executive officer of May in July 2001. He assumed his current position in July 2002. - Mr. Charlson served as senior counsel for May from 1988 to 1998 when he became senior vice president and chief counsel and an executive officer of May. He assumed his current position in January 2001. 5 F. Executive Officers of May (continued) - Mr. Ott served as a senior engagement manager with McKinsey & Company from 1987 to 1993 when he joined Macy's West as senior vice president of planning and systems. In 2000, he joined Homewarehouse.com, an online home improvement site, as vice president of product management and marketing, until becoming president of See Change Services, a division of APL Logistics. He assumed his current position in October 2003. - Mr. Brodin was associated with a public accounting firm from 1989 to 2002. He served as director of May's corporate accounting and reporting from March 2002 to June 2002 when he became vice president and an executive officer of May. G. Web Site Access to Reports and Code of Ethics We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge on or through the Investor Relations page on our internet Web site, www.maycompany.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, the Governance page on our Web site provides our Policy on Business Conduct, Statement of Corporate Responsibility, and information on corporate governance, including the board of directors governance guidelines and the charters for our board committees. We intend to disclose any amendments to the Policy on Business Conduct and any waivers that are required to be disclosed by the rules of either the Securities and Exchange Commission or The New York Stock Exchange on the Governance page on our Web site. Item 3. Legal Proceedings The company is involved in claims, proceedings, and litigation arising from the operation of its business. The company does not believe any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the company's consolidated financial statements taken as a whole. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the 13 weeks ended January 31, 2004. PART II Item 5. Market for May's Common Equity and Related Shareowner Matters Common Stock Dividends and Market Prices information included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. 6 Item 6. Selected Financial Data FIVE-YEAR FINANCIAL SUMMARY (dollars in millions, except per share and operating statistics) 2003 2002 2001 2000 1999 Operations Net sales $13,343 $13,491 $13,883 $14,210 $13,562 Total percent increase (decrease) (1.1)% (2.8)% (2.3)% 4.8% 6.0% Store-for-store percent increase (decrease) (2.8) (5.3) (4.4) 0.0 2.7 Cost of sales 9,378(4) 9,463(5) 9,632 9,798 9,255 Selling, general, and administrative expenses 3,008(4) 2,863(5) 2,758 2,665 2,497 Interest expense, net 318 345 354 345 287 Earnings before income taxes 639(4) 820(5) 1,139 1,402 1,523 Provision for income taxes 205 278 436 544 596 Net earnings 434(4) 542(5) 703 858 927 Percent of net sales 3.3% 4.0% 5.1% 6.0% 6.8% LIFO credit $ - $ - $ (30) $ (29) $ (30) _________________________________________________ Per share Basic earnings per share $ 1.44(4) $ 1.82(5) $ 2.31 $ 2.74 $ 2.73 Diluted earnings per share 1.41(4) 1.76(5) 2.21 2.62 2.60 Dividends paid (1) 0.96 0.95 0.94 0.93 0.89 Book value 14.51 14.00 13.37 12.93 12.53 Market price - high 34.06 37.75 41.25 39.50 45.38 Market price - low 17.81 20.08 27.00 19.19 29.19 Market price - year-end close 32.90 20.50 36.07 37.30 31.25 _________________________________________________ Financial statistics Return on equity 10.7%(6) 14.1%(6) 18.2% 21.0% 24.1% Return on net assets 9.7 (7) 11.8 (7) 15.5 19.5 20.7 _________________________________________________ Operating statistics Stores open at year-end: Department stores 444 443 439 427 408 Bridal Group (2) 680 425 400 123 - Gross retail square footage (in millions): Department stores 77.5 76.5 75.3 72.0 69.1 Bridal Group (2) 2.9 2.2 1.9 1.3 - Net sales per square foot (3) $ 167 $ 174 $ 185 $ 198 $ 201 _________________________________________________ Cash flows and financial position Cash flows from operations $ 1,675 $ 1,460 $ 1,644 $ 1,346 $ 1,530 Depreciation and amortization 564 557 559 511 469 Capital expenditures 600 798 797 598 703 Dividends on common stock 277 273 278 286 295 Working capital 2,458 2,186 2,403 3,056 2,700 Long-term debt and preference stock 4,032 4,300 4,689 4,833 3,875 Shareowners' equity 4,191 4,035 3,841 3,855 4,077 Total assets 12,097 12,001 11,964 11,574 10,935 _________________________________________________ Shares outstanding: Average basic shares outstanding 289.9 288.2 296.0 306.4 332.2 Average diluted shares outstanding and equivalents 307.0 307.9 317.6 327.7 355.6 _________________________________________________ All years included 52 weeks, except 2000, which included 53 weeks. Amounts for all years conform to 2003 presentation. (1) The annual dividend was increased to $0.97 per share effective with the March 15, 2004, dividend payment. (2) After Hours and Priscilla of Boston joined the company in 2001. David's Bridal joined the company in 2000. (3) Net sales per square foot is calculated from net sales and average gross retail square footage. (4) Earnings include restructuring charges for divested stores of $328 million (pretax), or $0.71 per basic share and $0.67 per diluted share, which consist of $6 million as cost of sales and $322 million as selling, general, and administrative expenses. (5) Earnings include restructuring charges for division combinations of $114 million (pretax), or $0.26 per basic share and $0.24 per diluted share, which consist of $23 million as cost of sales and $91 million as selling, general, and administrative expenses. (6) Restructuring charges reduced return on equity by 5.1% in 2003 and 2.0% in 2002. (7) Restructuring charges reduced return on net assets by 3.2% in 2003 and 1.1% in 2002.
7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Fiscal 2003 began with a difficult retailing environment similar to the conditions in 2002 and 2001. However, an improving economy helped us finish 2003 with a strong fourth quarter. During 2003, we made several key investments and implemented initiatives that will benefit future results. Among our significant 2003 achievements are: - Generated $1.7 billion of operating cash flow. These results led to our February 2004 announcement of a $500 million share repurchase program and $200 million planned debt redemption. - Invested in new stores and expanded or remodeled many existing stores. - Began the divestiture of 34 underperforming department stores. - Expanded the nationwide presence of our Bridal Group. - Reduced operating costs and inventory levels. Our operating cash flow was $1.7 billion in 2003. Our strong cash flow enables us to make acquisitions, build new stores, remodel and expand existing stores, repurchase stock, and reduce debt. In 2003, we opened 10 new department stores, which added 1.7 million square feet of retail space. Filene's Brockton, MA Westgate Mall Kaufmann's Columbus, OH Mall at Tuttle Crossing Columbus, OH Columbus City Center Pittsburgh, PA The Waterfront Meier & Frank Ogden, UT The Family Center at Riverdale Hecht's Richmond, VA Short Pump Town Center Foley's Houston, TX The Galleria Lake Charles, LA Prien Lake Mall Denton, TX Golden Triangle Mall Famous-Barr Columbia, MO The Shoppes at Stadium Our new stores in Columbus add critical mass to what had been a single-store market. The other new stores represent strategic expansion in existing or contiguous markets. The four new department stores that opened in Brockton, Pittsburgh, Ogden, and Columbia represent a newer, off-the-mall store format featuring a contemporary design and flexible merchandise presentations. This format enables us to open freestanding stores in innovative centers, including mixed-use "lifestyle" projects. We also remodeled 3.0 million square feet of retail space in 28 department stores in 2003, including the expansion of five stores by 200,000 square feet. At fiscal year-end, we operated 444 department stores in 36 states and the District of Columbia. 8 In July 2003, we announced our intention to divest 34 underperforming department stores, consisting of 32 Lord & Taylor stores, one Famous-Barr store, and one Jones Store location. These divestitures will result in total estimated charges of $380 million, of which $328 million, or $0.67 per share, was incurred in 2003. In 2003, our After Hours Formalwear unit acquired 225 stores, including stores from Gingiss Formalwear, Desmonds Formalwear, and Modern Tuxedo. These acquisitions expand our reach to key Midwestern and Western markets, giving After Hours a leading national presence to further complement the market leadership of David's Bridal. In addition, our Bridal Group opened 30 David's Bridal stores and 10 After Hours stores. Our planned capital expenditures for 2004 are approximately $600 million. This plan includes opening eight new department stores totaling 1.3 million square feet; remodeling or expanding 12 stores totaling 1.1 million square feet of retail space; and the Bridal Group's addition of 30 David's Bridal stores, 20 After Hours stores, and two Priscilla of Boston stores totaling 345,000 square feet of retail space. During 2003, we implemented initiatives to improve productivity. These initiatives led to a 0.4% decrease in selling, general, and administrative expenses as a percent of net sales. (dollars in millions, except per share) 2003 2002 2001 $ % $ % $ % Net sales $13,343 100.0% $13,491 100.0% $13,883 100.0% Cost of sales: Recurring 9,372 70.3 9,440 70.0 9,632 69.4 Restructuring markdowns 6 0.0 23 0.2 - 0.0 Selling, general, and administrative expenses 2,686 20.1 2,772 20.5 2,758 19.9 Restructuring costs 322 2.4 91 0.7 - 0.0 Interest expense, net 318 2.4 345 2.5 354 2.5 Earnings before income taxes 639 4.8 820 6.1 1,139 8.2 Provision for income taxes(1) 205 32.1 278 33.9 436 38.3 Net earnings $ 434 3.3% $ 542 4.0% $ 703 5.1% Earnings per share $ 1.41 $ 1.76 $ 2.21 (1) Percents represent effective income tax rates. Results of Operations Earnings per share were $1.41 in 2003, compared with $1.76 in 2002 and $2.21 in 2001. Net earnings totaled $434 million in 2003, compared with $542 million in 2002 and $703 million in 2001. In 2003, earnings include restructuring costs for store divestitures of $328 million, or $0.67 per share. In 2002, earnings include restructuring costs for division combinations of $114 million, or $0.24 per share. 9 Net Sales. Net sales include merchandise sales and lease department income. Store-for-store sales compare sales of stores open during both years beginning the first day a new store has prior-year sales and exclude sales of stores closed during both years. Net sales increases (decreases) for 2003 and 2002 were: 2003 2002 Store-for- Store-for- Quarter Total Store Total Store First (7.2)% (8.6)% 0.8 % (2.6)% Second (1.0) (2.9) (2.3) (5.1) Third (0.5) (2.3) (4.6) (7.3) Fourth 2.7 0.8 (4.4) (5.9) Year (1.1)% (2.8)% (2.8)% (5.3)% The 1.1% decrease in total net sales from $13.5 billion in 2002 to $13.3 billion in 2003 was due primarily to a $378 million decrease in store-for-store sales, offset by $284 million of new-store sales. The total net sales decrease for 2002 was due to a $732 million decrease in store-for-store sales, offset by $395 million of new-store sales. The decreases in store-for-store sales coincided with a general economic decline, decreased consumer confidence, and the continued war on terrorism. These events resulted in a difficult retailing environment, which had an adverse impact on our sales volumes. The 2003 and 2002 decreases in store-for-store sales were characterized by a decrease in both the number of department store transactions and the average selling price per item. Overall, 2003 sales of both men's and women's apparel, home textiles, and tabletop merchandise lagged, partially offset by stronger sales of fashion accessories and furniture. Division Net Sales, Net Sales per Square Foot, and Retail Square Footage Net Sales in Millions of Dollars Store Company: Headquarters 2003 2002 Lord & Taylor: New York City $ 1,823 $ 1,897 Filene's, Kaufmann's: Boston 3,020 3,096 Robinsons-May, Meier & Frank: Los Angeles 2,446 2,466 Hecht's, Strawbridge's: Washington, D.C. 2,363 2,379 Foley's: Houston 1,977 1,995 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 1,106 1,150 Total Department Stores $12,735 $12,983 Bridal Group: Philadelphia 608 508 The May Department Stores Company $13,343 $13,491 10 Net Sales per Square Foot Store Company: Headquarters 2003 2002 Lord & Taylor: New York City $ 163 $ 171 Filene's, Kaufmann's: Boston 178 190 Robinsons-May, Meier & Frank: Los Angeles 176 181 Hecht's, Strawbridge's: Washington, D.C. 166 171 Foley's: Houston 149 157 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 141 144 Total Department Stores $ 164 $ 172 Bridal Group: Philadelphia 250 244 The May Department Stores Company $ 167 $ 174 Gross Retail Square Footage in Thousands Store Company: Headquarters 2003 2002 Lord & Taylor: New York City 10,475 11,207 Filene's, Kaufmann's: Boston 17,221 16,480 Robinsons-May, Meier & Frank: Los Angeles 14,066 13,767 Hecht's, Strawbridge's: Washington, D.C 14,380 14,134 Foley's: Houston 13,461 12,985 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 7,882 7,887 Total Department Stores 77,485 76,460 Bridal Group: Philadelphia 2,861 2,235 The May Department Stores Company 80,346 78,695 Number of Stores Store Company: Headquarters 2003 New Closed 2002 Lord & Taylor: New York City 78 - 7 85 Filene's, Kaufmann's: Boston 101 4 - 97 Robinsons-May, Meier & Frank: Los Angeles 73 1 - 72 Hecht's, Strawbridge's: Washington, D.C. 80 1 1 80 Foley's: Houston 69 3 - 66 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 43 1 1 43 Total Department Stores 444 10 9 443 Bridal Group: Philadelphia 680 265 10 425 The May Department Stores Company 1,124 275 19 868 Net sales per square foot is calculated from net sales and average gross retail square footage. Gross retail square footage and number of stores represent locations open at the end of the years presented. 11 Cost of Sales. Recurring cost of sales includes the cost of merchandise, inbound freight, distribution expenses, buying, and occupancy costs. In 2003, restructuring markdowns were incurred to liquidate inventory as stores to be divested were closing. In 2002, restructuring markdowns were incurred to conform merchandise assortments and synchronize pricing and promotional strategies during the division combinations. Cost of sales and the related percent of net sales were: 2003 2002 2001 (dollars in millions) $ % $ % $ % Recurring cost of sales $9,372 70.3% $9,440 70.0% $9,632 69.4% Restructuring markdowns 6 0.0 23 0.2 - 0.0 Recurring cost of sales as a percent of net sales increased 0.3% in 2003 compared with 2002 because of a 0.3% increase in occupancy costs. Recurring cost of sales as a percent of net sales increased 0.6% in 2002 compared with 2001 because of a 0.9% increase in occupancy costs and a 0.2% increase for the effect of the LIFO(last-in, first-out) cost method, offset by a 0.6% decrease in the cost of merchandise. There was no LIFO provision or credit in 2003 or 2002, compared with a 2001 LIFO credit of $30 million, or $0.06 per share. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses and the related percent of net sales were: 2003 2002 2001 (dollars in millions) $ % $ % $ % Selling, general, and administrative expenses $2,686 20.1% $2,772 20.5% $2,758 19.9% The 0.4% decrease in selling, general, and administrative expenses as a percent of net sales in 2003 was due to a 0.3% decrease in payroll costs, a 0.3% decrease in net credit expense, and a 0.2% decrease in advertising costs, offset by a 0.4% increase in pension and other costs. The 0.6% increase in selling, general, and administrative expenses as a percent of net sales in 2002 was due to a 0.5% increase in payroll costs and a 0.2% increase in advertising costs, offset by a 0.2% decrease from the elimination of goodwill amortization. Selling, general, and administrative expenses included advertising and sales promotion costs of $628 million, $669 million, and $652 million in 2003, 2002, and 2001, respectively. As a percent of net sales, advertising and sales promotion costs were 4.7% in 2003, 4.9% in 2002, and 4.7% in 2001. We adjusted our media mix in 2003 to increase the use of electronic media and reduce the use of print media. Finance charge revenues are included as a reduction of selling, general, and administrative expenses. Finance charge revenues were $244 million in 2003, $261 million in 2002, and $292 million in 2001. Restructuring Charges. In July 2003, we announced our intention to divest 34 underperforming department stores. These divestitures will result in total estimated charges of $380 million, consisting of asset impairments of $317 million, inventory liquidation losses of $25 million, severance benefits of $23 million, and other charges of $15 million. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. Of the $380 million in expected total charges, $328 million was recognized in 2003, $6 million of which was included in cost of sales. Most of the remaining costs are expected to be recognized in 2004 and 2005. 12 We are negotiating agreements with landlords and developers for each store divestiture. Through the end of 2003, we closed nine of the 34 stores we intend to divest, including one location closed for remodel in 2002 that will not reopen. We recorded asset impairment charges to reduce store assets to their estimated fair value because of the shorter period over which they will be used. Estimated fair values were based on estimated market values for similar assets. Severance benefits are recognized as each store is closed. As of January 31, 2004, severance benefits of $6 million were paid to approximately 900 store and central office associates. Inventory liquidation losses and other costs of $5 million were recognized in 2003. In 2002, we recorded restructuring charges of $102 million for the Filene's/Kaufmann's and Robinsons-May/Meier & Frank division combinations and $12 million for the closure of the Arizona Credit Center and realignment of the company's data centers. Of the $114 million in total charges, $23 million was included as cost of sales. Severance and relocation benefits were given to approximately 2,000 associates, with $2 million remaining to be paid by the end of 2004. Business Combinations. In 2003, our Bridal Group acquired 225 tuxedo rental and retail locations, primarily in the Midwestern and Western United States. These purchases include certain assets of Gingiss Formalwear, Desmonds Formalwear, and Modern Tuxedo. These transactions did not have a material effect on our results of operations or financial position. Interest Expense. Components of net interest expense were: (dollars in millions) 2003 2002 2001 Interest expense $337 $378 $383 Interest income (3) (10) (7) Capitalized interest (16) (23) (22) Net interest expense $318 $345 $354 Percent of net sales 2.4% 2.5% 2.5% The decrease in interest expense in 2003 was due primarily to lower long-term borrowings and a $10 million decrease in early debt redemption costs, partially offset by a $7 million decrease in capitalized interest. The decrease in interest expense in 2002 was due primarily to lower interest on both long-term and short-term debt, offset by a $5 million increase in early debt redemption costs. Short-term borrowings were: (dollars in millions) 2003 2002 2001 Average balance outstanding $226 $235 $397 Average interest rate on average balance 1.3% 1.7% 3.0% Income Taxes. The effective income tax rate for 2003 was 32.1%, compared with 33.9% in 2002 and 38.3% in 2001. The 2003 and 2002 effective tax rates included the effect of income tax credits recorded on the resolution of various federal and state income tax issues: $31 million in 2003 and $25 million in 2002. Excluding these tax credits, our 2003 and 2002 effective tax rates were 37.0%. The 1.3% decrease in the effective tax rate in 2002 compared with 2001 was due primarily to the favorable impact of eliminating goodwill amortization. 13 Impact of Inflation. Inflation did not have a material impact on our 2003, 2002, or 2001 net sales or earnings. We value inventory principally on a LIFO basis, and as a result, the current cost of merchandise is reflected in current operating results. Financial Condition Return on Equity. Return on equity is our principal measure for evaluating our performance for shareowners and our ability to invest shareowners' funds profitably. Return on beginning equity was 10.7% in 2003, compared with 14.1% in 2002 and 18.2% in 2001. Restructuring charges reduced return on equity by 5.1% in 2003 and 2.0% in 2002. Return on Net Assets. Return on net assets measures performance independent of capital structure. Return on net assets is pretax earnings before net interest expense and the interest component of operating leases, divided by beginning-of- year net assets (including present value of operating leases). Return on net assets was 9.7% in 2003, compared with 11.8% in 2002 and 15.5% in 2001. Restructuring charges reduced return on net assets by 3.2% in 2003 and 1.1% in 2002. Cash Flows. Cash flows from operations were $1.7 billion in 2003, compared with $1.5 billion in 2002 and $1.6 billion in 2001. The increase in cash flows from operations in 2003 was due primarily to a decrease in cash paid for income taxes and the effect of inventory and accounts payable balance changes. Sources (uses) of cash flows were: (in millions) 2003 2002 2001 Net earnings $ 434 $ 542 $ 703 Depreciation and amortization 564 557 559 Store divestiture asset impairments 317 - - Working capital decreases 442 211 318 Other operating activities (82) 150 64 Cash flows from operations 1,675 1,460 1,644 Net capital expenditures (549) (790) (756) Business combinations (70) - (425) Cash flows used for investing activities (619) (790) (1,181) Net long-term debt issuances (repayments) (78) (434) 72 Net short-term debt issuances (repayments) (150) 72 78 Net purchases of common stock (26) (14) (420) Dividend payments (293) (291) (297) Cash flows used for financing activities (547) (667) (567) Increase (decrease) in cash and cash equivalents $ 509 $ 3 $ (104) See "Consolidated Statements of Cash Flows" on page 23. Investing Activities. Capital expenditures were made primarily for new stores, remodels, and expansions. Our strong financial condition enables us to make capital expenditures to enhance growth and improve operations. The operating measures we emphasize when we invest in new stores and remodel or expand existing stores include return on net assets, internal rate of return, and net sales per square foot. 14 Business combinations in 2003 included the purchase of certain assets of Gingiss Formalwear, Desmonds Formalwear, and Modern Tuxedo. In 2001, business combinations included the acquisition of After Hours, Priscilla of Boston, and nine department stores in the Tennessee and Louisiana markets. Liquidity and Available Credit. We finance our activities primarily with cash flows from operations, borrowings under credit facilities, and issuances of long-term debt. We have $1.0 billion of credit under unsecured revolving facilities consisting of a $700 million multi-year credit agreement expiring July 31, 2006, and a $300 million 364-day credit agreement expiring August 2, 2004. These credit agreements support our commercial paper borrowings. Financial covenants under the credit agreements include a minimum fixed-charge coverage ratio and a maximum debt-to-capitalization ratio. We also maintain a $28 million credit facility with a group of minority-owned banks. In addition, we have filed a shelf registration statement with the Securities and Exchange Commission that enables us to issue up to $525 million of debt securities. Annual maturities of long-term debt, including sinking fund requirements and capital lease obligations, are $239 million, $155 million, $131 million, $260 million, and $177 million for 2004 through 2008. Maturities of long-term debt are scheduled over the next 33 years, with the largest single-year principal repayment being $260 million. Interest payments on long-term debt are typically paid on a semi-annual basis. In February 2004, our board of directors approved the repurchase of up to $500 million of May common stock, and we announced our plans for early redemption of $200 million of 8.375% debentures due in 2024. We will incur costs of approximately $8 million for the early redemption expected in August 2004. Both the share repurchase and the debt redemption will be accomplished with internally generated funds. Off-balance-sheet Financing. We do not sell or securitize customer accounts receivable. We have not entered into off-balance-sheet financing or other arrangements with any special-purpose entity. Our existing operating leases do not contain any significant termination payments if lease options are not exercised. The present value of operating leases (minimum rents) was $568 million as of January 31, 2004. Financial Ratios. Our debt-to-capitalization and fixed-charge coverage ratios are consistent with our capital structure objective. Our capital structure provides us with substantial financial and operational flexibility. Our debt-to-capitalization ratios were 46%, 48%, and 51% for 2003, 2002, and 2001, respectively. For purposes of the debt-to-capitalization ratio, we define total debt as short-term and long-term debt (including the Employee Stock Ownership Plan [ESOP] debt reduced by unearned compensation) and the capitalized value of all leases, including operating leases. We define capitalization as total debt, noncurrent deferred taxes, ESOP preference shares, and shareowners' equity. See "Profit Sharing" on page 29 for discussion of the ESOP. Our fixed-charge coverage ratios were 2.6x in 2003, 2.8x in 2002, and 3.5x in 2001. Restructuring charges reduced the fixed-charge coverage ratio by 0.9x in 2003 and 0.3x in 2002. Employee Stock Options. Effective February 2, 2003, we began expensing the fair value of all stock-based compensation granted after February 2, 2003. We adopted the fair value method prospectively. The expense associated with stock options issued in 2003 was $3 million, or $0.01 per share. Common Stock Dividends and Market Prices. Our dividend policy is based on earnings growth and capital investment requirements. We increased the annual dividend by $0.01 to $0.97 per share effective with the March 2004 dividend. This is our 29th consecutive annual dividend increase. We have paid consecutive quarterly dividends since 1911. 15 The quarterly price ranges of the common stock and dividends per share in 2003 and 2002 were: 2003 2002 Market Price Dividends Market Price Dividends Quarter High Low per Share High Low per Share First $21.72 $17.81 $0.24 $37.75 $33.04 $0.2375 Second 25.34 20.02 0.24 37.08 25.74 0.2375 Third 28.20 23.70 0.24 30.50 20.10 0.2375 Fourth 34.06 26.37 0.24 26.10 20.08 0.2375 Year $34.06 $17.81 $0.96 $37.75 $20.08 $0.9500 The approximate number of common shareowners as of March 1, 2004, was 38,000. Contractual Obligations. The following table summarizes our contractual cash obligations as of January 31, 2004: (in millions) Less than 2-3 4-5 More than Total 1 Year Years Years 5 Years Long-term debt $3,988 $ 238 $ 281 $ 433 $3,036 Capital lease obligations 92 7 14 14 57 Operating lease obligations 858 108 193 158 399 Total $4,938 $ 353 $ 488 $ 605 $3,492 In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise up to 12 months in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled. Critical Accounting Policies Accounts Receivable Allowance. In 2003, approximately 35% of our net sales were made under our department store credit programs, which resulted in customer accounts receivable balances of approximately $1.7 billion at January 31, 2004. We have significant experience in managing our credit programs. Our allowance for doubtful accounts is based upon a number of factors including account write- off experience, account aging, and year-end balances. We do not expect actual experience to vary significantly from our estimate. Retail Inventory Method. Under the retail inventory method, we record markdowns to value merchandise inventories at net realizable value. We closely monitor actual and forecasted sales trends, current inventory levels, and aging information by merchandise categories. If forecasted sales are not achieved, additional markdowns may be needed in future periods to clear excess or slow- moving merchandise, which could result in lower gross margins. Asset Impairments. When a store experiences unfavorable operating performance, we evaluate whether an impairment charge should be recorded. A store's assets are evaluated for impairment by comparing its estimated undiscounted cash flows with its carrying value. If the cash flows are not sufficient to recover the carrying value, the assets are written down to fair value. Prior to 2003, impairment losses associated with these reviews were not significant. In 2003, we recorded an asset impairment loss of $317 million because of the planned divestiture of 34 department stores. In the future, if store-for-store sales decline and general economic conditions are negative, impairment losses could be significant. 16 Self-insurance Reserves. We self-insure a portion of the exposure for costs related primarily to workers' compensation and general liability. Expenses are recorded based on actuarial estimates for reported and incurred but not reported claims considering a number of factors, including historical claims experience, severity factors, litigation costs, inflation, and other actuarial assumptions. Although we do not expect the amount we will ultimately pay to differ significantly from our estimates, self-insurance reserves could be affected if future claims experience differs significantly from the historical trends and our assumptions. Pension Plans. We use various assumptions and estimates to measure the expense and funded status of our pension plans. Those assumptions and estimates include discount rates, rates of return on plan assets, rates of future compensation increases, employee turnover rates, and anticipated mortality rates. The use of different assumptions and estimates in our pension plans could result in a significantly different funded status and plan expense. Based on current estimates and assumptions, we believe our 2004 pension expense will be approximately $100 million. Impact of New Accounting Pronouncements In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards that require companies to classify certain financial instruments as liabilities that were previously classified as equity. We did not reclassify any financial instruments as a result of adopting SFAS No. 150. In the first quarter of fiscal 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminates goodwill amortization and prescribes a new approach for assessing potential goodwill impairments. Our transitional assessment of potential goodwill impairments under SFAS No. 142 did not identify any impairment. Goodwill amortization incurred in 2001 was $42 million, or $0.11 per share. Net earnings in 2001, excluding goodwill amortization, were $740 million, or $2.32 per share. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk arises primarily from changes in interest rates on short-term debt. Short-term debt has generally been used to finance seasonal working capital needs, resulting in minimal exposure to interest rate fluctuations. Long-term debt is at fixed interest rates. Our merchandise purchases are denominated in United States dollars. Operating expenses of our international offices located outside the United States are generally paid in local currency and are not material. During fiscal 2003, 2002, and 2001, we were not party to any derivative financial instruments. Forward-looking Statements Management's Discussion and Analysis contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While such statements reflect all available information and management's judgment and estimates of current and anticipated conditions and circumstances and are prepared with the assistance of specialists within and outside the company, there are many factors outside of our control that have an impact on our operations. Such factors include but are not limited to competitive changes, general and regional economic conditions, consumer preferences and spending patterns, availability of adequate locations for building or acquiring new stores, our ability to hire and retain qualified associates, and our ability to manage the business to minimize the disruption of sales and customer service as a result of restructuring activities. Because of these factors, actual performance could differ materially from that described in the forward-looking statements. 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information required by this item is included in Quantitative and Qualitative Disclosures About Market Risk in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareowners of The May Department Stores Company We have audited the accompanying consolidated balance sheets of The May Department Stores Company and subsidiaries (the "Company") as of January 31, 2004 and February 1, 2003, and the related consolidated statements of earnings, shareowners' equity, and cash flows for the years then ended. Our audits also included the financial statement schedules, as of and for the years ended January 31, 2004 and February 1, 2003, listed at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. The consolidated financial statements and financial statement schedule of the Company for the year ended February 2, 2002 (fiscal 2001), before the inclusion of the transitional disclosures and reclassifications discussed in the notes to the consolidated financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and state that such fiscal 2001 financial statement schedule, when considered in relation to the fiscal 2001 basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein, in their report dated February 13, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 fiscal 2003 and 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2004 and February 1, 2003, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the fiscal 2003 and 2002 financial statement schedules, when considered in relation to the basic consolidated financial statements taken as whole, presents fairly in all material respects, the information set forth therein. As discussed in notes to the consolidated financial statements, in fiscal 2002 the Company changed its method of accounting for goodwill to conform to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." 18 As discussed above, the Company's fiscal 2001 consolidated financial statements were audited by other auditors who have ceased operations. As described in the notes, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142 and to reflect the adoption of SFAS No. 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." Our audit procedures with respect to the disclosures in the notes with respect to 2001 included (1) comparing the previously reported net earnings to the previously issued consolidated financial statements and the adjustments to reported net earnings representing amortization expense (including any related tax effects) recognized in the period related to goodwill that is no longer being amortized as a result of initially applying SFAS No. 142 (including any related tax effects) to the Company's underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliation of adjusted net earnings to reported net earnings, and the related earnings-per-share amounts. Our audit procedures with respect to the 2001 reclassifications described in the notes, that were applied to conform the 2001 consolidated financial statements to the presentation required by SFAS No. 145, included (1) comparing the amount shown as extraordinary loss, net of tax in the Company's consolidated statement of earnings to the Company's underlying accounting analysis obtained from management, (2) comparing the amounts comprising the loss on extinguishment of debt and the related tax benefit to the Company's underlying accounting records obtained from management, and (3) testing the mathematical accuracy of the underlying analysis. In our opinion, the disclosures for 2001 related to SFAS No. 142 in the notes are appropriate and the reclassifications for 2001 have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and reclassifications and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole. /s/Deloitte & Touche LLP St. Louis, Missouri March 19, 2004 The following report is a copy of a report previously issued by Arthur Andersen LLP in connection with the company's annual report on Form 10-K for the year ended February 2, 2002. This opinion has not been reissued by Arthur Andersen LLP. In fiscal 2002, the company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." As discussed in the notes to the consolidated financial statements, the company has presented the transitional disclosures for fiscal 2001 required by SFAS No. 142 and adjusted the 2001 consolidated financial statements as a result of adoption of SFAS No. 145. The Arthur Andersen LLP report does not extend to these transitional disclosures or adjustments. These disclosures and adjustments are reported on by Deloitte & Touche LLP as stated in their report appearing herein. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareowners of The May Department Stores Company We have audited the accompanying consolidated balance sheets of The May Department Stores Company (a Delaware corporation) and subsidiaries as of February 2, 2002, and February 3, 2001, and the related consolidated statement of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended February 2, 2002. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 19 We conducted our audits in accordance with auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the financial position of The May Department Stores Company and subsidiaries as of February 2, 2002, and February 3, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II included in this Form 10-K is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 13, 2002 20 CONSOLIDATED STATEMENTS OF EARNINGS (in millions, except per share) 2003 2002 2001 Net sales $13,343 $13,491 $13,883 Cost of sales: Recurring 9,372 9,440 9,632 Restructuring markdowns 6 23 - Selling, general, and administrative expenses 2,686 2,772 2,758 Restructuring costs 322 91 - Interest expense, net 318 345 354 Earnings before income taxes 639 820 1,139 Provision for income taxes 205 278 436 Net earnings $ 434 $ 542 $ 703 Basic earnings per share $ 1.44 $ 1.82 $ 2.31 Diluted earnings per share $ 1.41 $ 1.76 $ 2.21 See Notes to Consolidated Financial Statements. 21 CONSOLIDATED BALANCE SHEETS January 31, February 1, (dollars in millions, except per share) 2004 2003 Assets Current assets: Cash $ 20 $ 21 Cash equivalents 544 34 Accounts receivable, net of allowance for doubtful accounts of $105 and $112 1,755 1,776 Merchandise inventories 2,737 2,857 Other current assets 87 99 Total current assets 5,143 4,787 Property and equipment: Land 351 361 Buildings and improvements 4,648 4,753 Furniture, fixtures, equipment, and other 4,047 4,034 Property under capital leases 57 57 Total property and equipment 9,103 9,205 Accumulated depreciation (3,954) (3,739) Property and equipment, net 5,149 5,466 Goodwill 1,504 1,441 Intangible assets, net of accumulated amortization of $27 and $19 168 176 Other assets 133 131 Total assets $ 12,097 $ 12,001 Liabilities and shareowners' equity Current liabilities: Short-term debt $ - $ 150 Current maturities of long-term debt 239 139 Accounts payable 1,191 1,101 Accrued expenses 975 947 Income taxes payable 280 264 Total current liabilities 2,685 2,601 Long-term debt 3,797 4,035 Deferred income taxes 773 710 Other liabilities 507 507 ESOP preference shares 235 265 Unearned compensation (91) (152) Shareowners' equity: Common stock 144 144 Additional paid-in capital 16 9 Retained earnings 4,098 3,957 Accumulated other comprehensive loss (67) (75) Total shareowners' equity 4,191 4,035 Total liabilities and shareowners' equity $ 12,097 $ 12,001 Common stock has a par value of $0.50 per share; 1 billion shares are authorized. At January 31, 2004, 320.5 million shares were issued, with 288.8 million shares outstanding and 31.7 million shares held in treasury. At February 1, 2003, 320.5 million shares were issued, with 288.3 million shares outstanding and 32.2 million shares held in treasury. ESOP preference shares have a par value of $0.50 per share and a stated value of $507 per share; 800,000 shares are authorized. At January 31, 2004, 462,846 shares (convertible into 15.6 million shares of common stock) were issued and outstanding. At February 1, 2003, 522,587 shares (convertible into 17.7 million shares of common stock) were issued and outstanding. See Notes to Consolidated Financial Statements.
22 CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) 2003 2002 2001 Operating activities Net earnings $ 434 $ 542 $ 703 Adjustments for noncash items included in earnings: Depreciation and other amortization 556 546 511 Goodwill and other intangible amortization 8 11 48 Store divestiture asset impairments 317 - - Deferred income taxes (64) 34 63 Working capital changes: Accounts receivable, net 21 202 183 Merchandise inventories 122 17 103 Other current assets - 24 30 Accounts payable 90 79 51 Accrued expenses 24 (103) (30) Income taxes payable 185 (8) (19) Other assets and liabilities, net (18) 116 1 Cash flows from operations 1,675 1,460 1,644 Investing activities Capital expenditures (600) (798) (797) Proceeds from dispositions of property and equipment 51 8 41 Business combinations (70) - (425) Cash flows used for investing activities (619) (790) (1,181) Financing activities Issuances of long-term debt - - 250 Repayments of long-term debt (78) (434) (178) Net issuances (repayments) of short-term debt (150) 72 78 Purchases of common stock (52) (45) (474) Issuances of common stock 26 31 54 Dividend payments (293) (291) (297) Cash flows used for financing activities (547) (667) (567) Increase (decrease) in cash and cash equivalents 509 3 (104) Cash and cash equivalents, beginning of year 55 52 156 Cash and cash equivalents, end of year $ 564 $ 55 $ 52 Cash paid during the year: Interest expense $ 329 $ 369 $ 344 Income taxes 87 225 369 See Notes to Consolidated Financial Statements. 23 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY Accumulated Additional Other Total (dollars in millions, except Outstanding Common Stock Paid-in Retained Comprehensive Shareowners' per share, shares in thousands) Shares $ Capital Earnings Income (Loss) Equity Balance at February 3, 2001 298,170 $149 $ - $3,706 $ - $3,855 Net earnings - - - 703 - 703 Minimum pension liability, net - - - - (12) (12) Comprehensive earnings 691 Dividends paid: Common stock ($0.94 per share) - - - (278) - (278) ESOP preference shares, net of tax benefit - - - (19) - (19) Common stock issued 3,038 2 64 - - 66 Common stock purchased (14,035) (7) (64) (403) - (474) Balance at February 2, 2002 287,173 144 - 3,709 (12) 3,841 Net earnings - - - 542 - 542 Minimum pension liability, net - - - - (63) (63) Comprehensive earnings 479 Dividends paid: Common stock ($0.95 per share) - - - (273) - (273) ESOP preference shares, net of tax benefit - - - (18) - (18) Common stock issued 2,723 1 51 - - 52 Common stock purchased (1,645) (1) (42) (3) - (46) Balance at February 1, 2003 288,251 144 9 3,957 (75) 4,035 Net earnings - - - 434 - 434 Minimum pension liability, net - - - - (3) (3) Unrealized gains on marketable securities, net of tax of $7 - - - - 11 11 Comprehensive earnings 442 Dividends paid: Common stock ($0.96 per share) - - - (277) - (277) ESOP preference shares, net of tax benefit - - - (16) - (16) Common stock issued 2,631 1 58 - - 59 Common stock purchased (2,091) (1) (51) - - (52) Balance at January 31, 2004 288,791 $144 $ 16 $4,098 $ (67) $4,191
Treasury Shares (in thousands) 2003 2002 2001 Balance, beginning of year 32,204 183,282 172,285 Common stock issued: Exercise of stock options (484) (935) (1,588) Deferred compensation plan (281) (151) (231) Restricted stock grants, net of forfeitures 153 (236) (337) Conversion of ESOP preference shares (2,019) (1,401) (876) Contribution to profit sharing plan - - (6) (2,631) (2,723) (3,038) Common stock purchased 2,091 1,645 14,035 Common stock retired - (150,000) - Balance, end of year 31,664 32,204 183,282 Outstanding common stock excludes shares held in treasury. See Notes to Consolidated Financial Statements.
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year. The company's fiscal year ends on the Saturday closest to January 31. Fiscal years 2003, 2002, and 2001 ended on January 31, 2004, February 1, 2003, and February 2, 2002, respectively. References to years in this annual report relate to fiscal years or year-ends rather than calendar years. Basis of Reporting. The consolidated financial statements include the accounts of The May Department Stores Company (May or the company), a Delaware corporation, and all subsidiaries. All intercompany transactions are eliminated. The company operates as one reportable segment. The company's 444 quality department stores are operated by six regional department store divisions across the United States under 11 long-standing and widely recognized trade names. The company aggregates its six department store divisions into a single reportable segment because they have similar economic and operating characteristics. In addition, the Bridal Group operates 210 David's Bridal stores, 460 After Hours Formalwear stores, and 10 Priscilla of Boston stores. Use of Estimates. Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates. Net Sales. Net sales include merchandise sales and lease department income. Merchandise sales are recognized at the time the sale is made to the customer, are net of estimated returns and promotional coupons, and exclude sales tax. Lease department income is recognized based on a percentage of lease department sales, net of estimated returns. Cost of Sales. Recurring cost of sales includes the cost of merchandise, inbound freight, distribution expenses, buying, and occupancy costs. In 2003, restructuring markdowns were incurred to liquidate inventory as stores to be divested were closing. In 2002, restructuring markdowns were incurred to conform merchandise assortments and synchronize pricing and promotional strategies during the division combinations. Vendor Allowances. The company has arrangements with some vendors under which it receives cash or allowances when merchandise does not achieve anticipated rates of sale. The amounts recorded for these arrangements are recognized as reductions of cost of sales. Preopening Expenses. Preopening expenses of new stores are expensed as incurred. Advertising Costs. Advertising and sales promotion costs are expensed at the time the advertising occurs. These costs are net of cooperative advertising reimbursements and are included in selling, general, and administrative expenses. Advertising and sales promotion costs were $628 million, $669 million, and $652 million in 2003, 2002, and 2001, respectively. Finance Charge Revenues. Finance charge revenues are recognized in accordance with the contractual provisions of customer agreements and are included as a reduction of selling, general, and administrative expenses. Finance charge revenues were $244 million, $261 million, and $292 million in 2003, 2002, and 2001, respectively. Income Taxes. Income taxes are accounted for using the liability method. The liability method applies statutory tax rates in effect at the date of the balance sheet to differences between the book basis and the tax basis of assets and liabilities. 25 Earnings per Share. References to earnings per share relate to diluted earnings per share. Stock-based Compensation. Effective February 2, 2003, the company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The company adopted SFAS No. 123 using the prospective transition method, under which all stock- based compensation granted after February 2, 2003, is expensed using the fair value method. The expense associated with stock options issued in 2003 was $3 million. The company accounts for stock-based compensation on stock options granted prior to February 2, 2003 by applying Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123. Accordingly, no compensation expense was recognized for these stock options because the option exercise price was fixed at the market price on the date of grant. Cash Equivalents. Cash equivalents consist primarily of commercial paper with maturities of less than three months. Cash equivalents are stated at cost, which approximates fair value. Merchandise Inventories. Merchandise inventories are valued principally at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. Merchandise inventories on a FIFO (first-in, first-out) cost basis approximate LIFO. There was no LIFO provision or credit in 2003 or 2002. Property and Equipment. Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives. Properties under capital leases and leasehold improvements are amortized over the shorter of their useful lives or related lease terms. Software development costs are capitalized and amortized over their expected useful life. Capitalized interest was $16 million, $23 million, and $22 million in 2003, 2002, and 2001, respectively. The estimated useful life for each major class of long-lived assets is as follows: Buildings and improvements: Buildings and improvements 10-50 years Leasehold interests 5-30 years Furniture, fixtures, equipment, and other: Furniture, fixtures, and equipment 3-15 years Software development costs 2-7 years Rental formalwear 2-4 years Property under capital leases 16-50 years Goodwill and Other Intangibles. Goodwill represents the excess of cost over the fair value of net tangible and separately recognized intangible assets acquired at the dates of acquisition. Business combinations in 2003 added $63 million of goodwill. The company completes its annual goodwill impairment test in the fourth quarter. No impairment was identified in 2003 or 2002. Other intangibles include trade names and customer lists, and are amortized using the straight- line method over a period of three to 40 years. Impairment of Long-lived Assets. Long-lived assets and certain identifiable intangibles are reviewed when events or circumstances indicate that their net book values may not be recoverable. The estimated future undiscounted cash flows associated with the asset are compared with the asset's carrying amount to determine if a writedown to fair value is required. Prior to 2003, impairment losses resulting from these reviews were not significant. In 2003, the company recorded $317 million of asset impairments for the planned divestiture of 34 department stores. In the future, if store-for-store sales decline and general economic conditions are negative, impairment losses could be significant. 26 Financial Derivatives. The company was not a party to any derivative financial instruments in 2003, 2002, or 2001. Impact of New Accounting Pronouncements. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards that require companies to classify certain financial instruments as liabilities that were previously classified as equity. The company did not reclassify any financial instruments as a result of adopting SFAS No. 150. In 2002, the company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminated goodwill amortization and prescribes a new approach for assessing potential goodwill impairments. The following table illustrates the impact of goodwill amortization on the results of 2001: (in millions, except per share) 2003 2002 2001 Reported net earnings $ 434 $ 542 $ 703 Add back: Goodwill amortization, net of tax - - 37 Adjusted net earnings $ 434 $ 542 $ 740 Basic earnings per share: Reported net earnings $ 1.44 $ 1.82 $ 2.31 Add back: Goodwill amortization, net of tax - - 0.12 Adjusted basic earnings per share $ 1.44 $ 1.82 $ 2.43 Diluted earnings per share: Reported net earnings $ 1.41 $ 1.76 $ 2.21 Add back: Goodwill amortization, net of tax - - 0.11 Adjusted diluted earnings per share $ 1.41 $ 1.76 $ 2.32 Reclassifications. Certain prior-year amounts have been reclassified to conform with the current-year presentation. RESTRUCTURING COSTS Store Divestitures. In July 2003, the company announced its intention to divest 34 underperforming department stores. These divestitures will result in total estimated charges of $380 million, consisting of asset impairments of $317 million, inventory liquidation losses of $25 million, severance benefits of $23 million, and other charges of approximately $15 million. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. Of the $380 million of expected total charges, $328 million was recognized in 2003, $6 million of which was included in cost of sales. Most of the remaining costs are expected to be recognized in 2004 and 2005. The company is negotiating agreements with landlords and developers for each store divestiture. Through the end of 2003, the company has closed nine of the 34 stores it intends to divest. 27 The significant components of the store divestiture costs and status of the related liability are summarized below: (in millions) Balance 2003 Payments Non-cash Jan. 31, Charge (Proceeds) Uses 2004 Asset impairment $ 317 $ - $ 317 $ - Disposal (gains) losses (9) (30) 21 - Inventory liquidation losses 6 6 - - Severance benefits 6 6 - - Other 8 8 - - Total $ 328 $ (10) $ 338 $ - Asset impairment charges were recorded to reduce store assets to their estimated fair value because of the shorter period over which they will be used. Estimated fair values were based on estimated market values for similar assets. Inventory liquidation losses are incurred to mark down inventory during liquidation sales as stores to be divested are closing. Severance benefits are recognized as each store is closed. As of January 31, 2004, severance benefits were paid to approximately 900 store and central office associates. Division Combinations. In 2002, the company recorded restructuring charges of $102 million for the Filene's/Kaufmann's and Robinsons-May/Meier & Frank division combinations and $12 million for the closure of the Arizona Credit Center and realignment of the company's data centers. Of the $114 million in total charges, $23 million was included as cost of sales. The significant components of the division combination costs and status of the related liability are summarized below: (in millions) Balance Balance Total | Feb. 1, Non-cash Jan. 31, Charge | 2003 Payments Uses 2004 Severance and | relocation benefits $ 59 | $ 17 $ 15 $ - $ 2 Inventory alignment 23 | - - - - Central office closure 15 | - - - - Other 17 | 7 2 5 - Total $114 | $ 24 $ 17 $ 5 $ 2 Severance and relocation benefits include severance for approximately 2,000 associates and the costs to relocate certain employees. Inventory alignment includes the markdowns incurred to conform merchandise assortments and to synchronize pricing and promotional strategies. Central office closure includes primarily accelerated depreciation of fixed assets in the closed central offices. Remaining severance costs will be paid by the end of fiscal 2004. BUSINESS COMBINATIONS In 2003, the company acquired 225 tuxedo rental and retail locations, primarily in the Midwestern and Western United States. These purchases include certain assets of Gingiss Formalwear, Desmonds Formalwear, and Modern Tuxedo. The aggregate purchase price for these acquisitions was $70 million. The purchase price allocations for these business combinations are preliminary and subject to final valuations. These transactions did not have a material effect on results of operations or financial position. 28 PROFIT SHARING The company has a qualified profit sharing plan that covers most associates who work 1,000 hours or more in a year and have attained age 21. The plan is a defined-contribution program that provides discretionary matching allocations at a variable matching rate generally based upon changes in the company's annual earnings per share, as defined in the plan. The plan's matching allocation value totaled $53 million for 2003, an effective match rate of 91%. The matching allocation values were $28 million in 2002 and $33 million in 2001. The plan includes an Employee Stock Ownership Plan (ESOP), under which the plan borrowed $400 million in 1989, guaranteed by the company, at an average rate of 8.5%. The proceeds were used to purchase $400 million (788,955 shares) of convertible preference stock of the company (ESOP preference shares). Each share is convertible into 33.787 shares of common stock and has a stated value of $15.01 per common share equivalent. The annual dividend rate on the ESOP preference shares is 7.5%. The $91 million outstanding portion of the guaranteed ESOP debt is reflected on the consolidated balance sheet as current maturities of long-term debt because the company will fund the remaining debt service in 2004. The company's contributions to the ESOP and the dividends on the ESOP preference shares are used to repay the loan principal and interest. Interest expense associated with the ESOP debt was $9 million in 2003, $14 million in 2002, and $18 million in 2001. Dividends on ESOP preference shares were $18 million in 2003, $20 million in 2002, and $22 million in 2001. The release of ESOP preference shares is based upon debt-service payments. Upon release, the shares are allocated to participating associates' accounts. Unearned compensation, initially an equal offsetting amount to the $400 million guaranteed ESOP debt, has been adjusted for the difference between the expense related to the ESOP and cash payments to the ESOP. It is reduced as principal is repaid. The company's profit sharing expense was $46 million in 2003, $40 million in 2002, and $47 million in 2001. At January 31, 2004, the plan beneficially owned 12.3 million shares of the company's common stock and 100% of the company's ESOP preference shares, representing 9.2% of the company's common stock. PENSION AND OTHER POSTRETIREMENT BENEFITS The company has a qualified defined-benefit plan that covers most associates who work 1,000 hours or more in a year and have attained age 21. The company also maintains two nonqualified, supplementary defined-benefit plans for certain associates. All plans are noncontributory and provide benefits based upon years of service and pay during employment. Pension expense is based on information provided by an outside actuarial firm that uses assumptions to estimate the total benefits ultimately payable to associates and allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. 29 The components of net periodic benefit costs and actuarial assumptions for the benefit plans were: (in millions) 2003 2002 2001 Components of pension expense (all plans) Service cost $ 51 $43 $39 Interest cost 59 55 53 Expected return on assets (31) (38) (42) Net amortization(1) 29 12 12 Total $108 $72 $62 (1) Prior service cost and actuarial (gain) loss are amortized over the remaining service period. (as of January 1) 2004 2003 2002 Actuarial assumptions Discount rate 6.00% 6.75% 7.25% Expected return on plan assets 7.00 7.00 7.50 Salary increase 3.50 4.00 4.00 The expected return on plan assets represents the weighted expected return for each asset category using the target allocation and actual returns in prior periods. Target asset allocations and actual asset allocations by asset category were: Target Percentage of Allocation Actual Plan Assets Asset Category 2003 2003 2002 Equity securities 55-65% 61% 60% Debt securities 35-45 39 40 100% 100% The accumulated benefit obligations (ABO), change in projected benefit obligations (PBO), change in net plan assets, and funded status of the benefit plans were: Qualified Plan Nonqualified Plans (in millions) 2003 2002 2003 2002 Change in PBO(1) PBO at beginning of year $727 $638 $ 175 $ 170 Service cost 46 39 5 4 Interest cost 46 44 13 11 Actuarial loss(2) 72 53 43 - Plan amendments (1) 15 2 (1) Benefits paid (69) (62) (10) (9) PBO at end of year $821 $727 $ 228 $ 175 ABO at end of year(3) $715 $641 $ 187 $ 152 30 Qualified Plan Nonqualified Plans (in millions) 2003 2002 2003 2002 Change in net plan assets Fair value of net plan assets at beginning of year $ 494 $ 549 $ - $ - Actual return on plan assets 88 (47) - - Employer contribution 84 54 - - Benefits paid (69) (62) - - Fair value of net plan assets at end of year $ 597 $ 494 $ - $ - Funded status (PBO less plan assets) $(224) $(233) $(228) $(175) Unrecognized net actuarial loss 194 192 78 40 Unrecognized prior service cost 49 60 11 11 Net prepaid (accrued) benefit cost $ 19 $ 19 $(139) $(124) Plan assets (less than) ABO $(118) $(147) $(187) $(152) Amounts recognized in the balance sheets(4) Accrued benefit liability $(118) $(147) $(187) $(152) Intangible asset 49 60 10 11 Accumulated other comprehensive loss 88 106 38 17 Net amount recognized $ 19 $ 19 $(139) $(124) (1) PBO is the actuarial present value of benefits attributed by the benefit formula to prior associate service; it takes into consideration future salary increases. (2) Actuarial loss is the change in benefit obligations or plan assets resulting from changes in actuarial assumptions or from experience different than assumed. (3) ABO is the actuarial present value of benefits attributed by the pension benefit formula to prior associate service based on current and past compensation levels. (4) Accrued benefit liability is included in accrued expenses and other liabilities. Intangible pension assets are included in other assets. Accumulated other comprehensive loss, net of tax benefit, is included in equity. Estimated future benefit payments to plan participants at January 31, 2004 are: (in millions) Qualified Nonqualified Plan Plan 2004 $ 79 $ 9 2005 82 9 2006 85 9 2007 87 9 2008 90 9 2009-2013 463 41 The company's practice is to make annual plan contributions equal to qualified plan expense. The company expects 2004 qualified plan expense to be approximately $75 million. The company also provides postretirement life and/or health benefits for certain associates. As of January 31, 2004, the company's estimated PBO (at a discount rate of 6.00%) for postretirement benefits was $67 million, of which $50 million was accrued in other liabilities. As of February 1, 2003, the company's estimated PBO (at a discount rate of 6.75%) for postretirement benefits was $62 million, of which $49 million was accrued in other liabilities. The postretirement plan is unfunded. The postretirement benefit expense was $6 million in 2003 and $4 million in both 2002 and 2001. 31 The estimated future obligations for postretirement medical benefits are based upon assumed annual healthcare cost increases of 9% for 2004, decreasing by 1% annually to 5% for 2008 and future years. A 1% increase or decrease in the assumed annual healthcare cost increases would increase or decrease the present value of estimated future obligations for postretirement benefits by approximately $4 million. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 is not expected to have a material impact on the company's postretirement health benefits. TAXES The provision for income taxes and the related percent of pretax earnings for the last three years were: (dollars in millions) 2003 2002 2001 $ % $ % $ % Federal $231 $211 $315 State and local 38 33 58 Current taxes 269 42.1% 244 29.7% 373 32.7% Federal (59) 62 54 State and local (5) (28) 9 Deferred taxes (64) (10.0) 34 4.2 63 5.6 Total $205 32.1% $278 33.9% $436 38.3% The reconciliation between the statutory federal income tax rate and the effective income tax rate for the last three years follows: (percent of pretax earnings) 2003 2002 2001 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 5.2 0.6 5.9 Federal tax benefit of state and local income taxes (1.8) (0.2) (2.1) Resolution of federal tax matters (4.9) 0.0 0.0 Other, net (1.4) (1.5) (0.5) Effective income tax rate 32.1% 33.9% 38.3% Major components of deferred tax assets (liabilities) were: (in millions) 2003 2002 Accrued expenses and reserves $ 108 $ 127 Deferred and other compensation 194 209 Merchandise inventories (224) (188) Depreciation and amortization and basis differences (879) (792) Other deferred income tax liabilities, net (5) (53) Net deferred income taxes (806) (697) Less: Net current deferred income tax assets(liabilities) (33) 13 Noncurrent deferred income taxes $(773) $(710) 32 EARNINGS PER SHARE All ESOP preference shares were issued in 1989, and earnings per share is computed in accordance with the provisions of Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans," and Emerging Issues Task Force 89-12, "Earnings Per Share Issues Related to Convertible Preferred Stock Held by an Employee Stock Ownership Plan." For basic earnings per share purposes, the ESOP preference shares dividend, net of income tax benefit, is deducted from net earnings to arrive at net earnings available for common shareowners. Diluted earnings per share is computed by use of the "if converted" method, which assumes all ESOP preference shares were converted as of the beginning of the year. Net earnings are adjusted to add back the ESOP preference dividend deducted in computing basic earnings per share, less the amount of additional ESOP contribution required to fund ESOP debt service in excess of the current common stock dividend attributable to the ESOP preference shares. Diluted earnings per share also include the effect of outstanding options. Options excluded from the diluted earnings per share calculation because of their antidilutive effect totaled 23.4 million in 2003, 18.5 million in 2002, and 9.3 million in 2001. The following tables reconcile net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings per share for 2003, 2002, and 2001: (in millions, except per share) 2003 Net Earnings Earnings Shares per Share Net earnings $434 ESOP preference shares' dividends (16) Basic earnings per share $418 289.9 $1.44 ESOP preference shares 14 16.6 Assumed exercise of options (treasury stock method) - 0.5 Diluted earnings per share $432 307.0 $1.41 (in millions, except per share) 2002 Net Earnings Earnings Shares per Share Net earnings $542 ESOP preference shares' dividends (18) Basic earnings per share $524 288.2 $1.82 ESOP preference shares 17 18.5 Assumed exercise of options (treasury stock method) - 1.2 Diluted earnings per share $541 307.9 $1.76 33 (in millions, except per share) 2001 Net Earnings Earnings Shares per Share Net earnings $703 ESOP preference shares' dividends (19) Basic earnings per share $684 296.0 $2.31 ESOP preference shares 17 19.5 Assumed exercise of options (treasury stock method) - 2.1 Diluted earnings per share $701 317.6 $2.21 ACCOUNTS RECEIVABLE Credit sales under department store credit programs as a percent of net sales were 35.3% in 2003. This compares with 36.9% in 2002 and 39.0% in 2001. Net accounts receivable consisted of: (in millions) 2003 2002 Customer accounts receivable $1,703 $1,750 Other receivables 157 138 Total accounts receivable 1,860 1,888 Allowance for doubtful accounts (105) (112) Accounts receivable, net $1,755 $1,776 The fair value of customer accounts receivable approximates their carrying values at January 31, 2004, and February 1, 2003, because of the short-term nature of these accounts. We do not sell or securitize customer accounts receivables. The allowance for doubtful accounts is based upon a number of factors including account write-off experience, account aging, and month-end balances. Net sales made through third-party debit and credit cards as a percent of net sales were 43.6% in 2003, 41.1% in 2002, and 38.2% in 2001. OTHER CURRENT ASSETS Other current assets consisted of: (in millions) 2003 2002 Prepaid expenses and supply inventories $87 $86 Current deferred income taxes - 13 Total $87 $99 34 OTHER ASSETS Other assets consisted of: (in millions) 2003 2002 Intangible pension asset $ 59 $ 71 Deferred debt expense 35 39 Other 39 21 Total $133 $131 ACCRUED EXPENSES Accrued expenses consisted of: (in millions) 2003 2002 Insurance costs $ 262 $ 257 Salaries, wages, and employee benefits 190 172 Advertising and other operating expenses 157 146 Interest and rent expense 135 134 Sales, use, and other taxes 116 104 Construction costs 55 68 Current deferred income taxes 33 - Other 27 66 Total $ 975 $ 947 SHORT-TERM DEBT AND LINES OF CREDIT Short-term debt for the last three years was: (dollars in millions) 2003 2002 2001 Balance outstanding at year-end $ - $ 150 $ 78 Average balance outstanding 226 235 397 Average interest rate: At year-end - 1.3% 1.8% On average balance 1.3% 1.7% 3.0% Maximum balance outstanding $ 473 $ 825 $1,090 The average balance of short-term debt outstanding, primarily commercial paper, and the respective weighted average interest rates are based on the number of days such short-term debt was outstanding during the year. The maximum balance outstanding in 2003 consisted of $445 million of commercial paper and $28 million of short-term bank financing. The company has $1.0 billion of credit under unsecured revolving facilities consisting of a $700 million multi-year credit agreement expiring July 31, 2006, and a $300 million 364-day credit agreement expiring August 2, 2004. These credit agreements support the company's commercial paper borrowings. Financial covenants under the credit agreements include a minimum fixed-charge coverage ratio and a maximum debt-to-capitalization ratio. The company also maintains a $28 million credit facility with a group of minority-owned banks. 35 LONG-TERM DEBT Long-term debt and capital lease obligations were: (in millions) 2003 2002 Unsecured notes and sinking-fund debentures due 2004-2036 $3,970 $4,104 Mortgage notes and bonds due 2004-2020 18 21 Capital lease obligations 48 49 Total debt 4,036 4,174 Less: Current maturities of long-term debt 239 139 Long-term debt $3,797 $4,035 The weighted average interest rate of long-term debt was 8.0% at January 31, 2004, and 8.0% at February 1, 2003. The annual maturities of long-term debt, including sinking fund requirements and capital lease obligations, are $239 million, $155 million, $131 million, $260 million, and $177 million for 2004 through 2008. Maturities of long-term debt are scheduled over the next 33 years, with the largest principal repayment in any single year being $260 million. Interest payments on long-term debt are typically paid on a semi-annual basis. The net book value of property encumbered under long-term debt agreements was $73 million at January 31, 2004. The fair value of long-term debt (excluding capital lease obligations) was approximately $4.7 billion and $4.8 billion at January 31, 2004, and February 1, 2003, respectively. The fair value was determined using borrowing rates for debt instruments with similar terms and maturities. During the third quarter of 2002, the company recorded $10 million of interest expense related to the call of $200 million of 8.375% debentures due in 2022. The debentures were called effective October 1, 2002. During the third quarter of 2001, the company recorded interest expense of $5 million related to the call of $100 million of 9.875% debentures due in 2021. These debentures were called effective October 9, 2001. In February 2004, the company announced its intention to redeem $200 million of 8.375% debentures due in 2024. The debentures are expected to be called effective August 1, 2004. LEASE OBLIGATIONS The company leases approximately 27% of its gross retail square footage. Rental expense for the company's operating leases consisted of: (in millions) 2003 2002 2001 Minimum rentals $107 $ 97 $80 Contingent rentals based on sales 12 13 15 Real property rentals 119 110 95 Equipment rentals 2 3 4 Total $121 $113 $99 36 Future minimum lease payments at January 31, 2004, were: Capital Operating (in millions) Leases Leases Total 2004 $ 7 $108 $115 2005 7 101 108 2006 7 92 99 2007 7 84 91 2008 7 74 81 After 2008 57 399 456 Minimum lease payments $ 92 $858 $950 The present value of minimum lease payments under capital leases was $48 million at January 31, 2004, of which $2 million was included in current liabilities. The present value of operating leases (minimum rents) was $568 million at January 31, 2004. Property under capital leases was: (in millions) 2003 2002 Cost $57 $57 Accumulated amortization (33) (31) Total $24 $26 The company is a guarantor with respect to certain lease obligations of previously divested businesses. The leases, two of which include potential extensions to 2087, have future minimum lease payments aggregating approximately $825 million and are offset by payments from existing tenants and subtenants. In addition, the company is liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by the current tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the company. The company believes that the risk of significant loss from these lease obligations is remote. OTHER LIABILITIES In addition to accrued pension and postretirement costs, other liabilities consisted principally of deferred compensation liabilities of $144 million at January 31, 2004, and $148 million at February 1, 2003. Under the company's deferred compensation plan, eligible associates may elect to defer part of their compensation each year into cash and/or stock unit alternatives. The company issues shares to settle obligations with participants who defer in stock units, and it maintains shares in treasury sufficient to settle all outstanding stock unit obligations. LITIGATION The company is involved in claims, proceedings, and litigation arising from the operation of its business. The company does not believe any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the company's consolidated financial statements taken as a whole. 37 STOCK OPTION AND STOCK-RELATED PLANS Under the company's common stock option plans, options are granted at market price on the date of grant. Options to purchase may extend for up to 10 years, may be exercised after stated intervals of time, and are conditional upon continued active employment with the company. At the end of 2003, 17.1 million shares were available for grant under the plans, of which 5.7 million could be issued as restricted stock. Effective February 2, 2003, the company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The company adopted SFAS No. 123 using the prospective transition method, under which all stock-based compensation granted after February 2, 2003, is expensed using the fair value method. Stock options granted prior to February 2, 2003, are accounted for as provided by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized related to these stock options because the option exercise price is fixed at the market price on the date of grant. Stock option expense is recorded over each option grant's vesting period, usually four years. Accordingly, the cost related to stock-based employee compensation included in net earnings, using the prospective method of transition, is less than it would have been had the fair value method been applied retroactively to all outstanding grants. The following table illustrates the pro forma effect on net earnings and earnings per share for 2003, 2002, and 2001 if the fair value-based method had been applied retroactively rather than prospectively to all outstanding unvested grants. (millions, except per share) 2003 2002 2001 Net earnings, as reported $ 434 $ 542 $ 703 Add: Compensation expense for employee stock options included in net earnings, net of tax 2 - - Deduct: Total compensation expense for employee stock options determined under retroactive fair value-based method, net of tax 22 23 26 Pro forma net earnings $ 414 $ 519 $ 677 Earnings per share: Basic - as reported (prospective) $ 1.44 $ 1.82 $ 2.31 Basic - pro forma (retroactive) $ 1.37 $ 1.74 $ 2.23 Diluted - as reported (prospective) $ 1.41 $ 1.76 $ 2.21 Diluted - pro forma (retroactive) $ 1.34 $ 1.69 $ 2.14 38 The company uses the Black-Scholes option pricing model to estimate the grant date fair value of its 1996 and later option grants. The Black-Scholes assumptions used were: 2003 2002 2001 Risk-free interest rate 3.1% 5.1% 4.6% Expected dividend $0.96 $0.95 $0.94 Expected option life (years) 7 7 7 Expected volatility 32% 32% 32% A combined summary of the stock option plans at the end of 2003, 2002, and 2001, and of the changes in outstanding shares within years, is presented below: (shares in thousands) 2003 2002 2001 Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Beginning of year 25,275 $34 22,474 $34 20,057 $33 Granted 4,237 22 5,131 35 4,688 36 Exercised (485) 25 (947) 26 (1,588) 26 Forfeited or expired (2,904) 33 (1,383) 36 (683) 35 End of year 26,123 $33 25,275 $34 22,474 $34 Exercisable at end of year 16,082 $35 14,431 $35 11,049 $34 Fair value per share of options granted $ 5 $11 $11 The following table summarizes information about stock options outstanding at January 31, 2004: Options Outstanding Options Exercisable Average Exercise Number Remaining Average Number Average Price Outstanding Contractual Exercise Exercisable Exercise Range (in thousands) Life Price (in thousands) Price $21-30 10,459 7 $25 5,358 $26 31-35 6,024 7 34 2,826 33 36-45 9,640 6 41 7,898 42 26,123 6 $33 16,082 $35 The company is authorized to grant restricted stock to management associates with or without performance restrictions. No monetary consideration is paid by associates who receive restricted stock. Restricted stock vests over periods of up to 10 years. In 2003 and 2002, the company granted 125,000 and 439,208 shares of restricted stock, respectively. The aggregate outstanding shares of restricted stock as of January 31, 2004, and February 1, 2003, were 904,000 and 1,140,750, respectively. For restricted stock grants, compensation expense is based upon the grant date market price and is recorded over the vesting period. For performance-based restricted stock, compensation expense is recorded over the performance period and is based on estimates of performance levels. 39 COMMON STOCK REPURCHASE PROGRAMS In 2001, the company's board of directors authorized a common stock repurchase program of $400 million. During 2001, the company completed this repurchase program totaling 11.9 million shares of May common stock at an average price of $34 per share. In February 2004, the company's board of directors authorized a common stock repurchase program of $500 million. PREFERENCE STOCK The company is authorized to issue up to 25 million shares of $0.50 par value preference stock. As of January 31, 2004, there were 800,000 ESOP preference shares authorized and 462,846 shares outstanding. Each ESOP preference share is convertible into shares of May common stock, at a conversion rate of 33.787 shares of May common stock for each ESOP preference share. Each ESOP preference share carries the number of votes equal to the number of shares of May common stock into which the ESOP preference share could be converted. Dividends are cumulative and paid semiannually at a rate of $38.025 per share per year. ESOP preference shares have a liquidation preference of $507 per share plus accumulated and unpaid dividends. ESOP preference shares may be redeemed, in whole or in part, at the option of May or an ESOP preference shareowner, at a redemption price of $507 per share, plus accumulated and unpaid dividends. The redemption price may be satisfied in cash or May common stock or a combination of both. The ESOP preference shares are shown outside of shareowners' equity in the consolidated balance sheet because the shares are redeemable by the holder or by the company in certain situations. SHAREOWNER RIGHTS PLAN The company has a shareowner rights plan under which a right is attached to each share of the company's common stock. The rights become exercisable only under certain circumstances involving actual or potential acquisitions of May's common stock by a person or by affiliated persons. Depending upon the circumstances, the holder may be entitled to purchase units of the company's preference stock, shares of the company's common stock, or shares of common stock of the acquiring person. The rights will remain in existence until August 31, 2004, unless they are terminated, extended, exercised, or redeemed. 40 QUARTERLY RESULTS (UNAUDITED) Quarterly results are determined in accordance with annual accounting policies. They include certain items based upon estimates for the entire year. The quarterly information below is presented using the same classifications as the annual financial statements. Summarized quarterly results for the last two years were: (in millions, except per share) 2003 First Second Third Fourth Year Net sales $2,873 $3,000 $2,976 $4,494 $13,343 Cost of sales: Recurring 2,088 2,118 2,160 3,006 9,372 Restructuring markdowns - - 1 5 6 Selling, general, and administrative expenses 640 657 658 731 2,686 Restructuring costs - 318 5 (1) 322 Pretax earnings 65 (173) 74 673 639 Net earnings 72 (110) 47 425 434 Earnings per share: Basic $ 0.23 $(0.39) $ 0.15 $ 1.45 $ 1.44 Diluted 0.23 (0.39) 0.15 1.38 1.41 (in millions, except per share) 2002 First Second Third Fourth Year Net sales $3,096 $3,030 $2,992 $4,373 $13,491 Cost of sales: Recurring 2,203 2,119 2,171 2,947 9,440 Restructuring markdowns - 20 3 - 23 Selling, general, and administrative expenses 658 657 691 766 2,772 Restructuring costs 40 39 6 6 91 Pretax earnings 112 109 25 574 820 Net earnings 70 69 16 387 542 Earnings per share: Basic $ 0.23 $ 0.22 $ 0.05 $ 1.32 $ 1.82 Diluted 0.23 0.22 0.05 1.26 1.76 41 CONDENSED CONSOLIDATING FINANCIAL INFORMATION. The company ("Parent") has fully and unconditionally guaranteed certain long-term debt obligations of its wholly-owned subsidiary, The May Department Stores Company, New York ("Subsidiary Issuer"). Other subsidiaries of the Parent include May Department Stores International, Inc. ("MDSI"), Leadville Insurance Company, Snowdin Insurance Company, Priscilla of Boston, and David's Bridal, Inc. and subsidiaries, including After Hours Formalwear, Inc. Condensed consolidating balance sheets as of January 31, 2004, and February 1, 2003, and the related condensed consolidating statements of earnings and cash flows for each of the three fiscal years in the period ended January 31, 2004, are presented below. Condensed Consolidating Balance Sheet As of January 31, 2004 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 551 $ 13 $ - $ 564 Accounts receivable, net - 1,740 46 (31) 1,755 Merchandise inventories - 2,637 100 - 2,737 Other current assets - 75 32 (20) 87 Total current assets - 5,003 191 (51) 5,143 Property and equipment, at cost - 8,860 243 - 9,103 Accumulated depreciation - (3,882) (72) - (3,954) Property and equipment, net - 4,978 171 - 5,149 Goodwill - 1,129 375 - 1,504 Intangible assets, net - 4 164 - 168 Other assets - 125 8 - 133 Intercompany (payable) receivable (642) 161 3,706 (3,225) - Investment in subsidiaries 4,981 - - (4,981) - Total assets $ 4,339 $11,400 $ 4,615 $ (8,257) $12,097 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ - $ - $ - $ - Current maturities of long-term debt - 239 - - 239 Accounts payable - 1,095 91 5 1,191 Accrued expenses 4 917 110 (56) 975 Income taxes payable - 240 40 - 280 Total current liabilities 4 2,491 241 (51) 2,685 Long-term debt - 3,796 1 - 3,797 Intercompany note payable (receivable) - 3,225 - (3,225) - Deferred income taxes - 706 67 - 773 Other liabilities - 985 9 (487) 507 ESOP preference shares 235 - - - 235 Unearned compensation (91) (91) - 91 (91) Shareowners' equity 4,191 288 4,297 (4,585) 4,191 Total liabilities and shareowners' equity $ 4,339 $11,400 $ 4,615 $ (8,257) $12,097
42 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Fiscal Year Ended January 31, 2004 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 12,735 $ 1,918 $ (1,310) $ 13,343 Cost of sales: Recurring - 9,185 1,477 (1,290) 9,372 Restructuring markdowns - 6 - - 6 Selling, general, and administrative expenses - 2,434 286 (34) 2,686 Restructuring costs - 322 - - 322 Interest expense (income), net: External - 318 - - 318 Intercompany - 285 (285) - - Equity in earnings of subsidiaries (434) - - 434 - Earnings (loss) before income taxes 434 185 440 (420) 639 Provision for income taxes - 48 157 - 205 Net earnings (loss) $ 434 $ 137 $ 283 $ (420) $ 434
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended January 31, 2004 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 434 $ 137 $ 283 $ (420) $ 434 Equity in earnings of subsidiaries (434) - - 434 - Depreciation and amortization - 525 39 - 564 Asset impairments - 317 - - 317 (Increase) decrease in working capital (1) 425 15 3 442 Other, net (27) 27 (65) (17) (82) Cash flows from (used for) operations (28) 1,431 272 - 1,675 Investing activities: Net additions to property and equipment, and business combinations - (484) (135) - (619) Cash flows used for investing activities - (484) (135) - (619) Financing activities: Net short-term debt repayments - (150) - - (150) Net long-term debt repayments - (53) (25) - (78) Net issuances (repurchases) of common stock (39) 13 - - (26) Dividend payments (295) 2 - - (293) Intercompany activity, net 362 (245) (117) - - Cash flows from (used for) financing activities 28 (433) (142) - (547) Increase (decrease) in cash and cash equivalents - 514 (5) - 509 Cash and cash equivalents, beginning of year - 37 18 - 55 Cash and cash equivalents, end of year $ - $ 551 $ 13 $ - $ 564
43 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of February 1, 2003 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 37 $ 18 $ - $ 55 Accounts receivable, net - 1,766 46 (36) 1,776 Merchandise inventories - 2,787 70 - 2,857 Other current assets - 79 23 (3) 99 Total current assets - 4,669 157 (39) 4,787 Property and equipment, at cost - 9,024 181 - 9,205 Accumulated depreciation - (3,690) (49) - (3,739) Property and equipment, net - 5,334 132 - 5,466 Goodwill - 1,129 312 - 1,441 Intangible assets, net - 6 170 - 176 Other assets - 122 9 - 131 Intercompany (payable) receivable (671) 254 3,617 (3,200) - Investment in subsidiaries 4,824 - - (4,824) - Total assets $ 4,153 $11,514 $ 4,397 $ (8,063) $12,001 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 150 $ - $ - $ 150 Current maturities of long-term debt - 139 - - 139 Accounts payable - 1,021 80 - 1,101 Accrued expenses 5 890 88 (36) 947 Income taxes payable - 244 23 (3) 264 Total current liabilities 5 2,444 191 (39) 2,601 Long-term debt - 4,034 1 - 4,035 Intercompany note payable (receivable) - 3,200 - (3,200) - Deferred income taxes - 646 64 - 710 Other liabilities - 970 10 (473) 507 ESOP preference shares 265 - - - 265 Unearned compensation (152) (152) - 152 (152) Shareowners' equity 4,035 372 4,131 (4,503) 4,035 Total liabilities and shareowners' equity $ 4,153 $11,514 $ 4,397 $ (8,063) $12,001
44 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Fiscal Year Ended February 1, 2003 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 12,978 $ 1,865 $ (1,352) $13,491 Cost of sales: Recurring - 9,294 1,477 (1,331) 9,440 Restructuring markdowns - 23 - - 23 Selling, general, and administrative expenses - 2,563 245 (36) 2,772 Restructuring costs - 91 - - 91 Interest expense (income), net: External - 345 - - 345 Intercompany - 284 (284) - - Equity in earnings of subsidiaries (542) - - 542 - Earnings (loss) before income taxes 542 378 427 (527) 820 Provision for income taxes - 123 155 - 278 Net earnings (loss) $ 542 $ 255 $ 272 $ (527) $ 542
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended February 1, 2003 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 542 $ 255 $ 272 $ (527) $ 542 Equity in earnings of subsidiaries (542) - - 542 - Depreciation and amortization - 522 35 - 557 (Increase) decrease in working capital (1) 191 22 (1) 211 Other, net (170) 428 (94) (14) 150 Cash flows from (used for) operations (171) 1,396 235 - 1,460 Investing activities: Net additions to property and equipment, and business combinations - (745) (45) - (790) Cash flows used for investing activities - (745) (45) - (790) Financing activities: Net short-term debt issuances - 72 - - 72 Net long-term debt repayments - (433) (1) - (434) Net issuances (repurchases) of common stock (22) 8 - - (14) Dividend payments (294) 3 - - (291) Intercompany activity, net 487 (300) (187) - - Cash flows from (used for) financing activities 171 (650) (188) - (667) Increase in cash and cash equivalents - 1 2 - 3 Cash and cash equivalents, beginning of year - 36 16 - 52 Cash and cash equivalents, end of year $ - $ 37 $ 18 $ - $ 55
45 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Fiscal Year Ended February 2, 2002 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 13,562 $ 1,647 $ (1,326) $13,883 Cost of sales - 9,586 1,358 (1,312) 9,632 Selling, general, and administrative expenses - 2,637 151 (30) 2,758 Interest expense (income), net: External - 355 (1) - 354 Intercompany - 284 (284) - - Equity in earnings of subsidiaries (703) - - 703 - Earnings (loss) before income taxes 703 700 423 (687) 1,139 Provision for income taxes - 280 156 - 436 Net earnings (loss) $ 703 $ 420 $ 267 $ (687) $ 703
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended February 2, 2002 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 703 $ 420 $ 267 $ (687) $ 703 Equity in earnings of subsidiaries (703) - - 703 - Depreciation and amortization - 536 23 - 559 (Increase) decrease in working capital (1) 272 47 - 318 Other, net 193 8 (121) (16) 64 Cash flows from operations 192 1,236 216 - 1,644 Investing activities: Net additions to property and equipment, and business combinations - (1,029) (152) - (1,181) Cash flows used for investing activities - (1,029) (152) - (1,181) Financing activities: Net short-term debt issuances - 78 - - 78 Net long-term debt issuances - 74 (2) - 72 Net issuances (repurchases) of common stock (432) 12 - - (420) Dividend payments (300) 3 - - (297) Intercompany activity, net 540 (475) (65) - - Cash flows used for financing activities (192) (308) (67) - (567) Decrease in cash and cash equivalents - (101) (3) - (104) Cash and cash equivalents, beginning of year - 137 19 - 156 Cash and cash equivalents, end of year $ - $ 36 $ 16 $ - $ 52
46 SCHEDULE II THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED JANUARY 31, 2004 (millions) Charges to costs and Balance expenses Balance beginning and other Deductions end of of period adjustments (a) period FISCAL YEAR ENDED January 31, 2004 Allowance for uncollectible accounts $ 112 $115 $(122) $105 FISCAL YEAR ENDED February 1, 2003 Allowance for uncollectible accounts $ 90 $124 $(102) $112 FISCAL YEAR ENDED February 2, 2002 Allowance for uncollectible accounts $ 76 $117 $(103) $ 90 (a) Write-off of accounts determined to be uncollectible, net of recoveries of $24 million in 2003, $25 million in 2002, and $24 million in 2001. 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company had no disagreements with its accountants during the last two fiscal years. On April 10, 2002, the company engaged Deloitte & Touche LLP to act as its independent auditors as successor to Arthur Andersen LLP. All information relating to such change in accountants is incorporated by reference from the company's Current Report on Form 8-K, dated April 12, 2002. Item 9A - Disclosure Controls and Procedures. As of the period covered by this annual report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date the controls were evaluated. PART III Items 10, 11, 12, 13, 14. Directors and Executive Officers of May, Executive Compensation, Security Ownership of Certain Beneficial Owners and Management, Certain Relationships and Related Transactions, Principal Accounting Fees and Services Pursuant to paragraph G (Information to be Incorporated by Reference) of the General Instructions to Form 10-K, the information required by Items 10, 11, 12, 13, and 14 (other than information about executive officers of May and its Code of Ethics) is incorporated by reference from the definitive proxy statement for the registrant's 2004 Annual Meeting of Shareowners to be filed with the commission pursuant to Regulation 14A. Information about executive officers of May and May's Code of Ethics is set forth in Part I of this Form 10-K, under the heading "Items 1. and 2. Business and Description of Property." PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report: (1) Financial Statements. Page in this Report Report of Deloitte & Touche LLP, Independent Auditors 18-19 Report of Arthur Andersen LLP, Independent Auditors 19-20 Consolidated Statements of Earnings for the three fiscal years ended January 31, 2004 21 Consolidated Balance Sheets as of January 31, 2004, and February 1, 2003 22 Consolidated Statements of Cash Flows for the three fiscal years ended January 31, 2004 23 Consolidated Statements of Shareowners' Equity for the three fiscal years ended January 31, 2004 24 Notes to Consolidated Financial Statements 25-46 48 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) Page in this report (2) Supplemental Financial Statement Schedule(for the three fiscal years ended January 31, 2004): Schedule II Valuation and Qualifying Accounts 47 (3) Exhibits: Location 3.1 Amended and Restated Certificate Incorporated of Incorporation of May, by Reference dated May 22, 1996 to Exhibit 4(a) of Post Effective Amendment No. 1 to Form S-8, filed May 29, 1996. 3.2 Certificate of Amendment of the Incorporated by Amended and Restated Certificate of Reference to Incorporation, dated May 21, 1999 Exhibit 3(b) of Form 10-Q filed June 8, 1999. 3.3 By-Laws of May Incorporated by Reference to Exhibit 4.3 of Form S-8 filed February 20, 2003. 4.1 Rights Agreement, dated August Incorporated by 19, 1994 Reference to Exhibit 1 to Current Report on Form 8-K, dated September, 2, 1994. 4.2 Assignment and Assumption of the Incorporated by Rights Agreement, dated May 24, 1996 Reference to Exhibit 4(d) of Post-Effective Amendment No. 1 to Form S-8, dated May 29, 1996. 10.1 1994 Stock Incentive Plan Incorporated by Reference to the Definitive Exhibit 10.1 of Form 10-K,filed April 19, 2000. 10.2 Deferred Compensation Plan Incorporated by Reference to the Definitive Exhibit 10.1 of Form 10-K,filed April 19, 2000. 49 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) 10.3 Executive Incentive Compensation Incorporated by Plan for Corporate Executives Reference to the Definitive Proxy Statement for the 2004 Annual Meeting of Shareowners. 10.4 Form of Employment Agreement Incorporated by Reference to Exhibit 10.4 of Form 10-K filed April 19, 2000. 12 Computation of Ratio of Filed Earnings to Fixed Charges herewith. 21 Subsidiaries of May Filed herewith. 23 Independent Auditors' Consent Filed herewith. 31.1 Certification Pursuant to Exchange Act Filed 13a-15 and 15d-15(e) herewith. 31.2 Certification Pursuant to Exchange Act Filed 13a-15 and 15d-15(e) herewith. 32 Certification Pursuant to Section 906 Filed of the Sarbanes-Oxley Act of 2002 (18 herewith. U.S.C. Section 1350, as adopted) (b) Reports on Form 8-K A report dated February 12, 2004, which furnished a company press release announcing its financial results for the 13 and 52 weeks ended January 31, 2004. All other schedules and exhibits of May for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted, as they are not required or are inapplicable or the information required thereby has been given otherwise. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, May has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY Date: March 26, 2004 By: /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of May and in the capacities and on the dates indicated. Date Signature Title Principal Executive Officer: March 26, 2004 /s/ Eugene S. Kahn Director, Eugene S. Kahn Chairman of the Board and Chief Executive Officer Principal Financial and Accounting Officer: March 26, 2004 /s/ Thomas D. Fingleton Executive Vice Thomas D. Fingleton President and Chief Financial Officer Directors: March 26, 2004 /s/ John L. Dunham Director and John L. Dunham President March 26, 2004 /s/ R. Dean Wolfe Director and R. Dean Wolfe Executive Vice President March 26, 2004 /s/ Marsha J. Evans Director Marsha J. Evans March 26, 2004 /s/ James M. Kilts Director James M. Kilts March 26, 2004 /s/ Russell E. Palmer Director Russell E. Palmer March 26, 2004 /s/ Michael R. Quinlan Director Michael R. Quinlan March 26, 2004 /s/ Joyce M. Roche' Director Joyce M. Roche' 51 Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED JANUARY 31, 2004 (Dollars in Millions) Fiscal Year Ended Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan 29, 2004 2003 2002 2001 2000 Earnings Available for Fixed Charges: Pretax earnings $ 639 $ 820 $1,139 $1,402 $1,523 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 367 405 411 406 346 Dividends on ESOP preference shares (18) (20) (22) (23) (24) Capitalized interest amortization 10 9 8 8 7 998 1,214 1,536 1,793 1,852 Fixed Charges: Gross interest expense (a) $ 345 $ 392 $ 401 $ 395 $ 340 Interest factor attributable to rent expense 38 36 32 28 22 383 428 433 423 362 Ratio of Earnings to Fixed Charges 2.6 2.8 3.5 4.2 5.1 (a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense.
Exhibit 21 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES SUBSIDIARIES OF MAY The corporations listed below are subsidiaries of May, and all are included in the consolidated financial statements of May as subsidiaries (unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary): Jurisdiction in which Name organized The May Department Stores Company New York May Merchandising Company Delaware May Department Stores International, Inc. Delaware May Capital, Inc. Delaware Grande Levee, Inc. Nevada Leadville Insurance Company Vermont Snowdin Insurance Company Vermont David's Bridal, Inc. Florida After Hours Formalwear, Inc. Georgia Priscilla of Boston, Inc. Delaware Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-42940 and 333-42940-01 of The May Department Stores Company on Form S-3 and Registration Statements Nos. 333-59792, 333-76227, 333-00957, 333-103352 and 333-111987 of The May Department Stores Company on Form S-8 of our report dated March 19, 2004, relating to the consolidated financial statements of The May Department Stores Company and subsidiaries as of and for the years ended January 31, 2004 and February 1, 2003 (which expresses an unqualified opinion and includes explanatory paragraphs relating to (1) the adoption of a new accounting principle and (2) the application of procedures relating to certain other disclosures and reclassifications of financial statement amounts related to the 2001 consolidated financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures and reclassifications), appearing in this Annual Report on Form 10-K of The May Department Stores Company for the year ended January 31, 2004. /s/Deloitte & Touche LLP St. Louis, Missouri March 25, 2004 Exhibit 31.1 CERTIFICATION I, Eugene S. Kahn, certify that: 1. I have reviewed this annual report on Form 10-K of The May Department Stores Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2004 /s/ Eugene S. Kahn Eugene S. Kahn Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Thomas D. Fingleton, certify that: 1. I have reviewed this annual report on Form 10-K of The May Department Stores Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2004 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350, as adopted) In connection with the Annual Report of The May Department Stores Company (the "Company") on Form 10-K for the period ending January 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Eugene S. Kahn, Chairman of the Board and Chief Executive Officer, and Thomas D. Fingleton, Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), that: 1. The Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 26, 2004 /s/ Eugene S. Kahn /s/ Thomas D. Fingleton Eugene S. Kahn Thomas D. Fingleton Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer