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DILLARDS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

September 4, 2014

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended February 1, 2014.



EXECUTIVE OVERVIEW

Although comparable store sales were up for a sixteenth consecutive quarter, our bottom line results for the second quarter of fiscal 2014 were down from the same time last year. Comparable store sales increased 1% over last year's second quarter, while gross margin from retail operations declined 33 basis points as we took more markdowns. Selling general and administrative expenses increased 25 basis points of sales over the prior year second quarter. Net income was $34.4 million for the second quarter of 2014, down from net income of $36.5 million of the prior year second quarter, while earnings per share increased to $0.80 per share--our highest historical second fiscal quarter earnings per share--from $0.79 per share between the same periods. As of August 2, 2014, we had working capital of $988.6 million, cash and cash equivalents of $235.3 million and $814.8 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $133.8 million for the six months ended August 2, 2014, increasing slightly over the prior year comparable period. We operated 296 total stores, including 18 clearance centers, and one internet store as of August 2, 2014, a decrease of four stores from August 3, 2013.



Key Performance Indicators

We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following:

Three Months Ended August 2, August 3, 2014 2013 Net sales (in millions) $ 1,474.5$ 1,479.9 Retail stores sales trend - % - % Comparable retail stores sales trend 1 % 1 % Gross profit (in millions) $ 498.2 $



503.0

Gross profit as a percentage of net sales 33.8 % 34.0 % Retail gross profit as a percentage of net sales 34.0 % 34.4 % Selling, general and administrative expenses as a percentage of net sales 27.2 % 26.9 % Cash flow from operations (in millions)* $ 133.8 $



131.7

Total retail store count at end of period 296



300

Retail sales per square foot $ 29 $



29

Comparable retail store inventory trend (1 )% 8 % Retail merchandise inventory turnover 2.6 2.6 _____________________



*Cash flow from operations data is for the six months ended August 2, 2014 and August 3, 2014.

General Net sales. Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC ("CDI"), the Company's general contracting construction company. Comparable store sales include sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior year. Comparable store sales exclude the change in the allowance for sales returns. Non-comparable store sales include: sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns. 14



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Service charges and other income. Service charges and other income include income generated through the long-term marketing and servicing alliance ("Alliance") with GE Consumer Finance ("GE"), which owns and manages the Dillard's branded proprietary cards. Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.

Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts and non-specific margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, and direct payroll for salon personnel. Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.



Selling, general and administrative expenses. Selling, general and administrative expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

Depreciation and amortization. Depreciation and amortization expenses include depreciation and amortization on property and equipment.

Rentals. Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.

Interest and debt expense, net. Interest and debt expense includes interest, net of interest income and capitalized interest, relating to the Company's unsecured notes, subordinated debentures and borrowings under the Company's credit facility. Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on capital lease obligations. Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an investment. Asset impairment and store closing charges. Asset impairment and store closing charges consist of (a) write-downs to fair value of under-performing or held for sale properties and of cost method investments and (b) exit costs associated with the closure of certain stores, when applicable. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.



Income on and equity in losses of joint ventures. Income on and equity in losses of joint ventures includes the Company's portion of the income or loss of the Company's unconsolidated joint ventures.

Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. We do not believe that inflation has had a material effect on our results during the periods presented; however, our business could be affected by such in the future. 15



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RESULTS OF OPERATIONS

The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding):

Three Months Ended Six Months Ended August 2, August 3, August 2, August 3, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Service charges and other income 2.6 2.5 2.5 2.5 102.6 102.5 102.5 102.5 Cost of sales 66.2 66.0 63.3 63.2 Selling, general and administrative expenses 27.2 26.9 26.2 26.0 Depreciation and amortization 4.2 4.3 4.1 4.3 Rentals 0.4 0.4 0.4 0.4 Interest and debt expense, net 1.0 1.1 1.0 1.1 Gain on disposal of assets - - - (0.4 ) Asset impairment and store closing charges - - - 0.2 Income before income taxes and income on and equity in losses of joint ventures 3.6 3.8 7.5 7.8 Income taxes 1.3 1.3 2.6 2.7 Income on and equity in losses of joint ventures - - - - Net income 2.3 % 2.5 % 4.8 % 5.1 % 16



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Net Sales (Three-Month Comparison)

Three Months Ended August 2, August 3, (in thousands of dollars) 2014 2013 $ Change Net sales: Retail operations segment $ 1,461,134$ 1,458,778$ 2,356 Construction segment 13,350 21,074 (7,724 ) Total net sales $ 1,474,484$ 1,479,852$ (5,368 ) The percent change in the Company's sales by segment and product category for the three months ended August 2, 2014 compared to the three months ended August 3, 2013 as well as the sales percentage by segment and product category to total net sales for the three months ended August 2, 2014 are as follows: % Change % of 2014-2013 Net Sales Retail operations segment Cosmetics (0.5 )% 14 % Ladies' apparel 0.2 25 Ladies' accessories and lingerie 0.4 16 Juniors' and children's apparel 4.2 8 Men's apparel and accessories 1.1 18 Shoes 0.1 14 Home and furniture (9.3 ) 4 99 Construction segment (36.7 ) 1 Total 100 % Net sales from the retail operations segment increased $2.4 million during the three months ended August 2, 2014 compared to the three months ended August 3, 2013, remaining essentially unchanged on a percentage basis. Sales in comparable stores increased 1% between the same periods. Sales of juniors' and children's apparel increased moderately over the prior year period, and sales of men's apparel and accessories increased slightly. Sales of shoes, ladies' apparel and ladies' accessories and lingerie remained essentially flat between the periods. Sales of cosmetics decreased slightly compared to the prior year period while sales of home and furniture decreased significantly.



The number of sales transactions decreased 3% for the three months ended August 2, 2014 compared to the three months ended August 3, 2013 while the average dollars per sales transaction increased 3%. We recorded an allowance for sales returns of $6.6 million and $6.7 million as of August 2, 2014 and August 3, 2013, respectively.

During the three months ended August 2, 2014, net sales from the construction segment decreased $7.7 million or 37% compared to the three months ended August 3, 2013 due to a delay in the timing of certain construction projects. The backlog of awarded construction contracts at August 2, 2014 totaled $340.6 million, increasing approximately 73% from February 1, 2014 and approximately 430% from August 3, 2013. 17



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Net Sales (Six-Month Comparison)

Six Months Ended August 2, August 3, (in thousands of dollars) 2014 2013 $ Change Net sales: Retail operations segment $ 3,000,327$ 2,988,778$ 11,549 Construction segment 25,471 40,210 (14,739 ) Total net sales $ 3,025,798$ 3,028,988$ (3,190 ) The percent change in the Company's sales by segment and product category for the six months ended August 2, 2014 compared to the six months ended August 3, 2013 as well as the sales percentage by segment and product category to total net sales for the six months ended August 2, 2014 are as follows: % Change % of 2014-2013 Net Sales Retail operations segment Cosmetics (1.2 )% 15 % Ladies' apparel 0.6 24 Ladies' accessories and lingerie 0.9 16 Juniors' and children's apparel 3.5 8 Men's apparel and accessories 2.2 17 Shoes (0.7 ) 15 Home and furniture (7.1 ) 4 99 Construction segment (36.7 ) 1 Total 100 % Net sales from the retail operations segment increased $11.5 million during the six months ended August 2, 2014 compared to the six months ended August 3, 2013, remaining essentially unchanged on a percentage basis. Sales in comparable stores increased 1% between the same periods. Sales of juniors' and children's apparel and men's apparel and accessories increased moderately over the prior year period, and sales of ladies' accessories and lingerie and ladies' apparel increased slightly. Sales of cosmetics and shoes decreased slightly over the prior year period while sales of home and furniture decreased significantly. The number of sales transactions decreased 2% for the six months ended August 2, 2014 compared to the six months ended August 3, 2013 while the average dollars per sales transaction increased 3%. Storewide sales penetration of exclusive brand merchandise for the six months ended August 2, 2014 was 21.6% compared to 21.8% during the six months ended August 3, 2013.



During the six months ended August 2, 2014, net sales from the construction segment decreased $14.7 million or 37% compared to the six months ended August 3, 2013 due to a delay in the timing of certain construction projects.

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Service Charges and Other Income

Three Six Three Months Ended Six Months Ended Months Months $ Change $ Change (in thousands of dollars) August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013 2014-2013 2014-2013 Service charges and other income: Retail operations segment Leased department income $ 2,083 $ 2,159 $



4,050 $ 4,404 $ (76 )$ (354 ) Income from GE marketing and servicing alliance

28,229 27,628 55,747 55,036 601 711 Shipping and handling income 5,203 4,674 10,057 9,457 529 600 Other 2,873 2,476 5,753 8,279 397 (2,526 ) 38,388 36,937 75,607 77,176 1,451 (1,569 ) Construction segment 16 7 24 13 9 11 Total service charges and other income $ 38,404 $ 36,944 $ 75,631 $ 77,189$ 1,460$ (1,558 ) Service charges and other income is composed primarily of income from the Alliance with GE. Income from the Alliance increased during the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 primarily from increases in finance charge income partially offset by increased credit losses. Gross Profit (in thousands of dollars) August 2, 2014 August 3, 2013 $ Change % Change Gross profit: Three months ended Retail operations segment $ 497,319$ 501,417$ (4,098 ) (0.8 )% Construction segment 896 1,613 (717 ) (44.5 ) Total gross profit $ 498,215$ 503,030$ (4,815 ) (1.0 )% Six months ended Retail operations segment $ 1,108,691$ 1,111,306$ (2,615 ) (0.2 )% Construction segment 1,614 3,075 (1,461 ) (47.5 ) Total gross profit $ 1,110,305$ 1,114,381$ (4,076 ) (0.4 )% Three Months Ended Six Months Ended August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013 Gross profit as a percentage of segment net sales: Retail operations segment 34.0 % 34.4 % 37.0 % 37.2 % Construction segment 6.7 7.7 6.3 7.6 Total gross profit as a percentage of net sales 33.8 34.0 36.7 36.8 Gross profit as a percentage of net sales declined 20 basis points of sales during the three months ended August 2, 2014 compared to the three months ended August 3, 2013. Gross profit from retail operations declined 33 basis points of sales during the same comparable periods as a result of increased markdowns partially offset by increased markups. Gross margin declined moderately in home and furniture and men's apparel and accessories, and gross margin was essentially flat in cosmetics, shoes, ladies' accessories and lingerie and ladies' apparel. Gross margin improved moderately in juniors' and children's apparel.



Gross profit as a percentage of net sales declined 10 basis points of sales during the six months ended August 2, 2014 compared to the six months ended August 3, 2013. Gross profit from retail operations declined 23 basis points of sales during

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the same comparable periods as a result of increased markdowns partially offset by increased markups. Gross margin declined moderately in home and furniture and men's apparel and accessories, and gross margin was essentially flat in cosmetics, shoes and ladies' accessories and lingerie. Gross margin improved slightly in juniors' and children's apparel and ladies' apparel. Inventory in total and comparable stores decreased 2% and 1%, respectively, as of August 2, 2014 compared to August 3, 2013. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $3 million and $4 million for the three and six months ended August 2, 2014, respectively.



Selling, General and Administrative Expenses ("SG&A")

(in thousands of dollars) August 2, 2014 August 3, 2013 $ Change % Change SG&A: Three months ended Retail operations segment $ 398,968$ 397,125$ 1,843 0.5 % Construction segment 1,491 1,093 398 36.4 Total SG&A $ 400,459$ 398,218$ 2,241 0.6 % Six months ended Retail operations segment $ 791,176$ 786,220$ 4,956 0.6 % Construction segment 2,934 2,194 740 33.7 Total SG&A $ 794,110$ 788,414$ 5,696 0.7 % Three Months Ended Six Months Ended August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013 SG&A as a percentage of segment net sales: Retail operations segment 27.3 % 27.2 % 26.4 % 26.3 % Construction segment 11.2 5.2 11.5 5.5 Total SG&A as a percentage of net sales 27.2 26.9 26.2 26.0 SG&A increased $2.2 million or 25 basis points of sales during the three months ended August 2, 2014 compared to the three months ended August 3, 2013. This increase was primarily due to an increase in payroll and payroll taxes ($8.4 million) partially offset by a decrease in insurance ($4.5 million) and advertising expenses ($2.8 million). SG&A increased $5.7 million or 21 basis points of sales during the six months ended August 2, 2014 compared to the six months ended August 3, 2013. This increase was primarily due to an increase in payroll and payroll taxes ($14.1 million) partially offset by a decrease in advertising ($5.1 million) and insurance expenses ($4.6 million). During the six months ended August 3, 2013, the Company also recognized a $1.5 million pretax reduction of pension expense for a gain from a pension plan curtailment. 20



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Depreciation and Amortization

(in thousands of dollars) August 2, 2014 August 3, 2013 $ Change % Change Depreciation and amortization: Three months ended Retail operations segment $ 61,983 $ 64,186 $ (2,203 ) (3.4 )% Construction segment 75 58 17 29.3



Total depreciation and amortization $ 62,058 $ 64,244

$ (2,186 ) (3.4 )%

Six months ended Retail operations segment $ 123,868$ 129,243$ (5,375 ) (4.2 )% Construction segment 149 117 32 27.4 Total rentals $ 124,017$ 129,360$ (5,343 ) (4.1 )% The decrease in depreciation and amortization expense for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 was primarily due to the timing and composition of capital expenditures. Rentals (in thousands of dollars) August 2, 2014 August 3, 2013 $ Change % Change Rentals: Three months ended Retail operations segment $ 5,842 $ 5,523 $ 319 5.8 % Construction segment 18 9 9 100.0 Total rentals $ 5,860 $ 5,532 $ 328 5.9 % Six months ended Retail operations segment $ 11,639$ 11,081$ 558 5.0 % Construction segment 36 22 14 63.6 Total rentals $ 11,675$ 11,103$ 572 5.2 % The increase in rental expense for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 was primarily due to an increase in the amount of equipment leased by the Company. 21



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Interest and Debt Expense, Net

(in thousands of dollars) August 2, 2014 August 3, 2013 $ Change % Change Interest and debt expense (income), net: Three months ended Retail operations segment $ 15,212$ 16,262$ (1,050 ) (6.5 )% Construction segment (9 ) (16 ) 7 43.8 Total interest and debt expense, net $ 15,203$ 16,246$ (1,043 ) (6.4 )% Six months ended Retail operations segment $ 31,066$ 32,592$ (1,526 ) (4.7 )% Construction segment (22 ) (36 ) 14 38.9 Total interest and debt expense, net $ 31,044$ 32,556$ (1,512 ) (4.6 )% The decrease in net interest and debt expense for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013 was primarily attributable to a reduction in credit facility fees and an increase in capitalized interest. Total weighted average debt decreased approximately $44.1 million and $23.1 million for the three and six months ended August 2, 2014 compared to the three and six months ended August 3, 2013, respectively. Gain on Disposal of Assets (in thousands of dollars) August 2, 2014 August 3, 2013 $ Change (Gain) loss on disposal of assets: Three months ended Retail operations segment $ (50 ) $ (24 ) $ (26 ) Construction segment - - - Total gain on disposal of assets $ (50 ) $ (24 ) $ (26 ) Six months ended Retail operations segment $ (439 ) $ (12,362 )$ 11,923 Construction segment - (7 ) 7



Total gain on disposal of assets $ (439 ) $ (12,369 )$ 11,930

During the six months ended August 3, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas. The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets. During the six months ended August 3, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.



Asset Impairment and Store Closing Charges

There were no asset impairment and store closing charges recorded during the three or six months ended August 2, 2014 or the three months ended August 3, 2013. During the six months ended August 3, 2013, the Company's retail operations segment recorded a pretax charge of $6.5 million for asset impairment and store closing costs. The charge was for the write-down of an operating property and certain cost method investments. 22



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Income Taxes

The Company's estimated federal and state effective income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.4% and 35.0% for the three months ended August 2, 2014 and August 3, 2013, respectively. During the three months ended August 2, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes. During the three months ended August 2, 2014, the IRS concluded its examination of the Company's federal income tax returns for fiscal tax years 2011 and 2012, with no material changes in these tax years as a result of such examination. During the three months ended August 3, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits. The Company's estimated federal and state effective income tax rate, inclusive of income on and equity in losses of joint ventures, was approximately 35.3% and 35.1% for the six months ended August 2, 2014 and August 3, 2013, respectively. During the six months ended August 2, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes. During the six months ended August 3, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits. The Company expects the fiscal 2014 federal and state effective income tax rate to approximate 35%. This rate may change if results of operations for fiscal 2014 differ from management's current expectations. Changes in the Company's assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.



FINANCIAL CONDITION

A summary of net cash flows for the six months ended August 2, 2014 and August 3, 2013 follows: Six Months Ended (in thousands of dollars) August 2, 2014 August 3, 2013 $ Change Operating Activities $ 133,836$ 131,720$ 2,116 Investing Activities (64,090 ) (22,599 ) (41,491 ) Financing Activities (71,549 ) (119,446 ) 47,897 Total Cash Used $ (1,803 )$ (10,325 )$ 8,522



Net cash flows from operations increased $2.1 million during the six months ended August 2, 2014 compared to the six months ended August 3, 2013. This improvement was primarily attributable to an increase of $9.8 million related to changes in working capital items, primarily of changes in inventories.

GE currently owns and manages Dillard's branded proprietary credit card business under the Alliance. The Alliance provides for certain payments to be made by GE to the Company, including a revenue sharing and marketing reimbursement. The Company received income of approximately $55.7 million and $55.0 million from GE during the six months ended August 2, 2014 and August 3, 2013, respectively. The amount the Company receives is dependent on the level of sales on GE accounts, the level of balances carried on the GE accounts by GE customers, payment rates on GE accounts, finance charge rates and other fees on GE accounts, the level of credit losses for the GE accounts as well as GE's funding costs. The Alliance expires in the fourth quarter of fiscal 2014. In April 2014, the Company announced that it entered into a 10-year agreement with Wells Fargo Bank, N.A. ("Wells Fargo") that will become operational following the scheduled expiration of the Alliance. Under the new agreement, Wells Fargo will fund, issue and service Dillard's-branded private label and co-brand credit cards and will also manage the cardholder loyalty program for the Company. While future cash flows under this new agreement are difficult to predict, the Company expects income, exclusive of startup costs, from the new agreement to be comparable to the Company's historical earnings from the Alliance and believes that earnings will increase with future program growth. During the six months ended August 3, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas. The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets. 23



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During the six months ended August 3, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets. Capital expenditures were $68.8 million and $40.9 million for the six months ended August 2, 2014 and August 3, 2013, respectively. The current year expenditures were primarily for the construction of new stores and the remodeling of existing stores. Capital expenditures for fiscal 2014 are expected to be approximately $150 million compared to actual expenditures of $95 million during fiscal 2013. We are nearing the completion of two new stores at The Mall at University Town Center in Sarasota, Florida (180,000 square feet) and The Shops at Summerlin in Las Vegas, Nevada (200,000 square feet), both of which are expected to open during the third quarter of fiscal 2014. No stores were closed during the six months ended August 2, 2014; however, we remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close. The Company had cash on hand of $235.3 million as of August 2, 2014. As part of our overall liquidity management strategy and for peak working capital requirements, the Company maintains a $1.0 billion credit facility. The credit agreement expires July 1, 2018. Limited to 90% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $962.7 million at August 2, 2014. No borrowings were outstanding at August 2, 2014, and letters of credit totaling $33.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $930 million at August 2, 2014. During the six months ended August 2, 2014, the Company repurchased 0.7 million shares of stock for $65.9 million at an average price of $89.34 per share under the Company's March 2013 and November 2013 Stock Plans. During the six months ended August 3, 2013, the Company repurchased 1.4 million shares of stock for $114.7 million at an average price of $79.12 per share under the Company's 2012 and March 2013 Stock Plans. At August 2, 2014, no authorization remained under the 2012 and March 2013 Stock Plans, and $224.5 million of authorization remained under the Company's November 2013 Stock Plan. The ultimate disposition of the repurchased stock has not been determined. The Company paid dividends of $5.2 million and $2.3 million during the six months ended August 2, 2014 and August 3, 2013, respectively. Historically, our dividends declared during the fourth quarter of a fiscal year were paid during the first quarter of the following fiscal year; however, the dividends declared during the fourth quarter of fiscal 2012 were expedited and paid during that same quarter. During fiscal 2014, the Company expects to finance its capital expenditures and its working capital requirements, including stock repurchases, from cash on hand, cash flows generated from operations and utilization of the credit facility. The Company expects peak borrowings for fiscal 2014 to not exceed $250 million. Depending on conditions in the capital markets and other factors, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes. There have been no material changes in the information set forth under caption "Contractual Obligations and Commercial Commitments" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2014.



OFF-BALANCE-SHEET ARRANGEMENTS

The Company has not created, and is not party to, any special-purpose entities or off-balance-sheet arrangements for the purpose of raising capital, incurring debt or operating the Company's business. The Company does not have any off-balance-sheet arrangements or relationships that are reasonably likely to materially affect the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or the availability of capital resources. 24



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NEW ACCOUNTING STANDARDS

Presentation of Discontinued Operations

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which stipulates that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The pronouncement also removed the conditions that (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company adopted this guidance as of the beginning of its fiscal year 2014. The adoption of this guidance had no impact on the Company's condensed consolidated financial statements.



Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will be effective for the Company retrospectively beginning in the first quarter of fiscal 2017 with early adoption not permitted. The Company is currently assessing the impact of this update on its condensed consolidated financial statements.



FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements. The following are or may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (a) statements including words such as "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "estimate," "continue," or the negative or other variations thereof; (b) statements regarding matters that are not historical facts; and (c) statements about the Company's future occurrences, plans and objectives, including statements regarding management's expectations and forecasts for the remainder of fiscal 2014 and beyond. The Company cautions that forward-looking statements contained in this report are based on estimates, projections, beliefs and assumptions of management and information available to management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors include (without limitation) general retail industry conditions and macro-economic conditions; economic and weather conditions for regions in which the Company's stores are located and the effect of these factors on the buying patterns of the Company's customers, including the effect of changes in prices and availability of oil and natural gas; the availability of consumer credit; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount and Internet retailers; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability of materials, production facilities and labor from which the Company sources its merchandise at acceptable pricing; changes in operating expenses, including employee wages, commission structures and related benefits; system failures or data security breaches; possible future acquisitions of store properties from other department store operators; the continued availability of financing in amounts and at the terms necessary to support the Company's future business; fluctuations in LIBOR and other base borrowing rates; potential disruption from terrorist activity and the effect on ongoing consumer confidence; epidemic, pandemic or other public health issues; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature. The Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended February 1, 2014, contain other information on factors that may affect financial results or cause actual results to differ materially from forward-looking statements. 25



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