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MERCANTILE STORES COMPANY, INC.
1997
Annual Report
table of contents
financial highlights page 1
chairman's letter page 3
financial information pages 5-25
group presidents,
store divisions and
locations pages 26-27
corporate officers page 28
directors and
stockholder information inside back cover
[Enlarge/Download Table]
Financial Highlights
1997 1996 % change
Year Ending January 31, 1998 Year Ending February 1, 1997
For the year:
Retail Sales $ 3,054,900,000 $ 2,945,600,000 3.7
Income:
Net Operating
Income-
Excluding
Impairment
Charge $ 129,706,000 $ 128,665,000 0.8
Impairment
Charge -- (7,200,000)
_________________ ________________
Net Income $ 129,706,000 $ 121,465,000 6.8
================= =================
Per Share Data:
Net Income-
Excluding
Impairment
Charge $ 3.53 $ 3.50
Impairment
Charge -- (.20)
________________ _________________
Net Income $ 3.53 $ 3.30
================ =================
At year-end:
Working Capital $ 1,023,310,000 $ 1,017,533,000 0.6
Ratio 5.1 4.6
Long-Term Debt
(including current
maturities) $ 224,066,000 $ 254,927,000 (12.1)
Debt to
Capitalization Ratio 12.0% 14.0%
Stockholders'
Equity $ 1,646,846,000 $ 1,565,313,000 5.2
Book Value
Per Share $ 44.81 $ 42.48 5.5
ONE
OUR COMMITMENT. . .
- We will operate leading department stores in each community we serve.
- We will provide value, quality, and exceptional service to our customers.
- We will offer to our associates an environment of respect, learning,
and opportunity for development.
- We will share our resources with the communities we serve.
- We will succeed in an atmosphere of highest ethical standards.
- We will dedicate ourselves to dynamic growth and achieve a high return
for our shareholders.
PHOTO OF STORE
The 212,000 square foot Maison Blanche storewas opened in the new Mall of
Louisiana in Baton Rouge,Louisiana in October.
TWO
Dear Shareholders,The year 1997 was marked by intensified competition and sales
promotion in the retail industry. In light of this environment, Mercantile
Stores Company, Inc. has remained stable with total retail sales increasing
3.7% and net income increasing 6.8% over 1996. In fact, when looking at one of
the key measurements used by the analytical community in reviewing performance,
the ratio of pretax profits to sales, Mercantile's 6.8% in 1997 ranks us in
the upper quartile of the retail industry. In addition, the Company's
debt-to-capitalization ratio, which declined to 12% in 1997 from 14% in 1996,
is one of the lowest such ratios in the business.
While these results represent an increase over our last year's performance,
we certainly recognize the need to "raise the bar" and drive toward increasing
our position within the retail community.Now, let's review some of the
successes Mercantile has experienced over the past year and the programs
that have been established to address this challenge:
- The new Joslins Park Meadows store in Denver opened to rave
reviews and was named "Retail Store of the Year" by Chain Store
Age, a major print media voice of the retail industry. This is
the first time that this coveted and prestigious award has been
presented to a Mercantile store and we will certainly take what
we have learned from this experience and implement it in the
opening of future new stores.
- Our hair and nail salon business surpassed the $100 million milestone
for the first time. Part of this success was the expansion of the
newly furbished McAlpin's Day Spa & Salon in the Kenwood Towne
Centre in Cincinnati. With 118 stations, we believe this to be the
largest hair and nail salon in the country.
- Year-end inventories declined by $55 million as a result of
a concentrated program to align inventory levels with recent
sales trends.
- Within the last several months, plans have been
finalized to introduce an innovative concept into our stores to
satisfy our customers' appetite for the active lifestyle. During
the first quarter of 1998, a new "Activezone" merchandising
concept has been introduced which will display cross-gender
athletic wear and accessories in a self-contained boutique setting.
In looking to the future, Mercantile's management has responded to the
challenge of profitably growing our business by embarking upon a unique
campaign. In early February, 1998, after nine months of an extensive
methodology study utilizing both internal and external resources, we have
established the Profit Growth Initiative Program. We have charged thirty-
three of our fast-track, upper and middle management associates to examine
the five most significant elements of our business operation with the purpose
of identifying "Best Practice" modes. These individuals are dedicating
themselves, on a full-time basis, to the task of determining the most effective
and efficient ways to conduct our business. This program is on schedule and we
have the utmost confidence that the positive results from it will be
implemented in 1998 and reflected in our reported 1999 earnings.
In thinking about the progress of this past year, we thank our associates for
their hard work and dedication which has contributed to making us a better
Company. We also thank our vendors and shareholders whose support is so vital
to our success. And lastly, but most importantly, we extend our sincere
gratitude to our customers for judging us a better place in which to spend
their valued time and hard-earned resources.
Sincerely,
David L. Nichols
Chairman of the Board
THREE
PHOTO OF ACTIVEZONE DEPARTMENT
In 1998, responding to our customers' interest in the active lifestyle,
we are introducing the "ACTIVEZONE" -- a one-stop shopping experience
which offers men's and women's athletic footwear and apparel in a
sports-oriented environment.
FOUR
MANAGEMENT'S DISCUSSION ANALYSIS
(Certain statements contained in this report reflect "forward looking"
information, as that term is defined in the Private Securities Legislation
Reform Act of 1995. Such "forward looking" information is based on a series
of projections and estimates and involves certain risks and uncertainties
that could cause actual results to differ materially from those indicated
in any "forward looking" statements. Such factors include but are not limited
to, the level of consumer spending for merchandise carried by the Company,
the competitive pricing environment within the department store industry,
and the effectiveness of the Company's planned advertising programs,
appropriate inventory management, and the availability of trained personnel.)
Results of Operations
Revenues include sales from retail operations as well as finance charges earned
on private label credit sales. In 1997, revenues amounted to $3.1 billion, an
increase of 3.7% over the previous year. In 1996, revenues increased 2.9% to
$3.0 billion.
Total retail sales for 1997 reflect the impact of two new department stores
opened during 1997 and a full year of operation for five new department stores
opened during 1996. The percentage changes in total and comparable retail
sales for the last three years were as follows:
1997 1996 1995*
Total retail sales 3.7% 3.0% 1.5%
Comparable retail sales 1.1% 2.4% 1.2%*
(The 1995 year consisted of 53 weeks; percentages for that year are reflected
on an equalized 52-week basis.)
Finance charges in 1997 increased 4.7% to $89 million. This improvement was
primarily due to the incremental finance charge income earned on a 4.5%
increase in private label credit sales. Finance charges amounted to $85 million
in 1996 compared to $52 million in 1995. The lower amount earned in 1995 was
attributable to changes in the servicing of the Company's private label credit
program in mid-1995, as discussed in Note 1 of Notes to Consolidated Financial
Statements.
Net Income in 1997 increased 6.8% to $129.7 million, or $3.53 per share,
compared to reported net income of $121.5 million, or $3.30 per share,
earned in 1996. However, 1996 net income was reduced by a net of tax charge
of $7.2 million, or $.20 per share, to recognize the requirements of an
accounting standard with respect to impaired assets. Excluding this charge,
net income for 1996 amounted to $128.7 million, or $3.50 per share. In 1995,
net income amounted to $123.2 million, or $3.35 per share.
Net income reported for 1997 was positively impacted by the effect of the
last-in, first-out (LIFO) method of inventory valuation, and a non-recurring
gain resulting from a software licensing agreement.
The following summary presents an analysis of net and per share, pre-LIFO
income on a comparable basis for the past three years:
1997 1996 1995
(amounts in millions) Amount Per Share Amount Per Share Amount Per Share
Net income before LIFO
and non-recurring items $ 121.8 $ 3.31 $ 133.5 $ 3.63 $ 122.9 $ 3.34
LIFO credit / (charge) 3.6 .10 (4.8) (.13) 0.3 .01
Impairment charge - - (7.2) (.20) - -
Software license 4.3 .12 - - - -
_______ ______ ______ ______ ______ _____
Net income $ 129.7 $ 3.53 $ 121.5 $ 3.30 $ 123.2 $ 3.35
======= ====== ====== ====== ====== ======
FIVE
Cost of Goods Sold (COGS) in the retail industry traditionally includes certain
occupancy and buying costs which are not directly associated with the cost of
merchandise. Occupancy costs so classified include depreciation, rent,
utilities and real estate taxes; buying costs, in this respect, include the
payroll and travel expenses of the corporate central buying and merchandise
planning functions.
In 1997, COGS, as a percent to revenues, increased by 0.5% from the prior year.
Excluding the impact of the LIFO method of inventory valuation, COGS increased
1.0% from 1996. This increase in COGS was primarily attributable to an increase
in markdowns and other promotional activity, such as the extension of volume
discounts to private label credit card customers who had established a certain
level of purchasing activity.
In 1996, COGS, as a percent to revenues and on a pre-LIFO basis, decreased 0.5%.
A merchandise margin improvement of 0.8%, attributable primarily to a higher
initial markup, was effectively offset by a 0.2% increase in lower margin
leased department sales and a 0.1% increase in shrinkage expense.
The Company follows the LIFO method to value all retail inventories and
utilizes inflation indices produced by the Bureau of Labor Statistics. The
effect of LIFO on COGS, as a percent to revenues, for the past three years was:
1997 1996 1995
Cost of goods sold 70.2% 69.7% 69.9%
LIFO credit/(charge) .2 (.3) -
---- ----- ----
Cost of goods sold
(excluding LIFO) 70.4% 69.4% 69.9%
Selling, General and Administrative Expenses (SG&A), as a percent to revenues,
decreased 0.1% to 23.1% in 1997. Advertising costs associated with the higher
promotional environment increased by 0.1% and were offset by a 0.2% reduction
in payroll, payroll-related costs and other operating expenses. In 1996, SG&A
expenses, as a percent to revenues, posted a similar 0.1% decline. For the most
part, this was attributable to a decline of similar proportion in payroll and
payroll-related costs.
Interest Expense and Income (combined) - The $2 million increase in 1997
primarily resulted from a reduction in interest expense capitalized in
connection with new store construction, as 1996 represented a historic high
of five new department store openings. Increased interest expense associated
with higher average short-term borrowings in 1997 was offset by a reduction
in interest expense on long-term debt. Interest expense and income in 1996
declined $4 million in comparison to 1995, primarily due to higher levels of
invested cash throughout the year and the influence of capitalized interest
discussed above.
Other Income increased by $7.4 million in 1997 with the improvement being
almost entirely due to a non-recurring gain which resulted from an agreement
to license an element of proprietary software to a retail organization with
which the Company does not compete directly. This one-time gain amounted to
$4.3 million, net of tax, or $.12 per share.
In 1996, the decline of $12 million in other income was attributable to
changes made in the servicing of the Company's private label credit program
in mid-1995. Prior to that period, the Company's share of finance charge
revenue was earned under revenue sharing agreements with unaffiliated companies
and was classified as an element of other income.
Impairment Charge - During the first quarter of 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which addresses the identification and measurement of asset impairments
and requires the recognition of impairment losses on long-lived assets when
carrying values exceed expected future cash flows. The application of this
new accounting standard in 1996 resulted in a pre-tax impairment charge of
$12 million ($7.2 million after tax, or $.20 per share) to write down the
carrying value of certain operating stores to their estimated fair value.
SIX
Earnings per Share (EPS) - In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings per Share," which establishes new
standards for computing and presenting EPS. SFAS No. 128 replaces the
presentation of primary EPS with basic EPS and requires the presentation of
diluted EPS for all entities with complex capital structures. The Company
adopted the provisions of this standard as of the year ended January 31, 1998.
The Company's basic and diluted EPS amounts are equivalent for all years
presented and restatement of previously reported EPS was not required.
Liquidity and Capital Resources - Cash flow from operations amounted to
$220 million in 1997 contrasted with $145 million in 1996 and $189 million
in 1995. The 1997 increase was primarily due to a comparative reduction in
inventory requirements which was partially offset by a decline in the related
level of accounts payable. Year-end inventories declined by $55 million as a
result of a concentrated program to render inventory levels more commensurate
with recent sales trends. In 1996, the $44 million reduction from the prior
year in cash provided by operations was attributable to increased requirements
for accounts receivable, which resulted from the dynamics associated with the
change in the Company's private label credit program which took place in the
1995 year.
Net cash used in investing activities primarily consists of capital
expenditures which amounted to $131 million in 1997 compared to $134 million
in 1996. Capital expenditures in 1997 reflect the opening of two new department
stores in 1997 as well as costs incurred for two new department stores opened
in the first quarter of 1998. In 1996, cash used for capital expenditures
increased $33 million over 1995 due to the requirements for five new department
stores opened in that year.
Net cash used for financing activities totaled $79 million in 1997, compared
to $47 million in 1996 and $44 million in 1995. Payments on long-term debt
amounted to $31 million, including the first $19 million sinking fund
requirement associated with the 6.7% Notes due 2002. In addition, as discussed
in Note 4 of Notes to Consolidated Financial Statements, approximately
$5 million was used in 1997 to repurchase 95,500 shares of the Company's
common stock. It is the Company's intent to hold these repurchased shares
as treasury stock as a source for potential issuance of a similar number of
shares under the 1996 Stock Option Plan.
Traditionally, the Company has satisfied its short-term financing requirements
primarily through the use of internally generated funds. The Company also has
in place a committed, unsecured $200 million revolving credit facility with
a syndicate of seven banks which expires in August 2000. Interest rates on
borrowings under this facility are based, at the Company's option, on either
the banks' best rates under a competitive bidding environment or a predefined
spread over the appropriate LIBOR rate. The Company also has in place
uncommitted lines of credit totaling $120 million. Maximum short-term
borrowings under these facilities were $86 million in 1997, $43 million in
1996 and $3 million in 1995, at weighted-average interest rates of 5.8%, 6.0%
and 5.9%, respectively. No borrowings were outstanding under any of these
credit arrangements at the end of each of the last three years.
A consistent stability of financial position has long been a Company hallmark
and is best exemplified in the strength of the balance sheet. A significant
barometer of this financial strength is the Company's debt-to-capitalization
ratio, which declined to 12% in 1997 from 14% in 1996 and is one of the lowest
such ratios in the retail industry. The Company's long-term debt ratings of
A+ and A1, which have been reaffirmed by Standard & Poor's Corporation and
Moody's Investors Services, Inc., respectively, are among the highest awarded
in the industry.
SEVEN
Expansion and Capital Expenditures - During 1997, the Company opened two new
department stores and completed several minor expansions, which added
approximately 600,000 square feet to the Company's retail base. The two new
department stores--a Maison Blanche unit in Baton Rouge, Louisiana and a
Joslins store in Denver, Colorado, both entailed approximately 212,000 square
feet and are located in new malls in existing markets. At the end of the year,
the Company closed two under-performing stores--a 374,000 square foot Jones
store in downtown Kansas City, Missouri, and a 161,000 square foot J. B. White
store in Augusta, Georgia. In April 1998, the Company exited the Dayton, Ohio
market upon the sale of the 212,000 square foot McAlpin's store. The closing
of these store locations did not have a material impact on the Company's 1997
operating results.
The Company has opened two new department stores in the first quarter of 1998,
a 192,000 square foot Gayfers unit in a new mall in Oviedo, Florida and a
160,000 square foot J. B. White store in an existing mall in Augusta, Georgia.
This latter unit replaces the under-performing J. B. White store in that same
city which was closed at the end of 1997. No additional new department stores
are planned for the 1998 year.
Capital expenditures for 1998 are estimated at $70 million, a substantial
decline from the average $132 million spent in 1997 and 1996. This reduction
reflects a diminishment in viable new department store opportunities in the
Company's existing and adjacent markets, as well as changes between years in
the timing of new department store openings. As stated previously, the majority
of the capital expenditures associated with the two new department stores
opened in the first quarter of 1998 were incurred in 1997. Capital expenditures
for 1997 also reflected the costs associated with the two new department stores
opened during the third quarter of 1997, while 1996 capital expenditures
reflect five new department store openings. The Company anticipates that its
capital expenditures will be funded through a combination of existing working
capital and internally generated funds.
Impact of The "Year 2000" Issue - As is the case with most business
organizations, the Company utilizes software and related technology that is
date sensitive and will be affected by the date change which will take place
in the year 2000. The Company conducted a comprehensive review of its exposure
to the "Year 2000" issue and has developed an implementation plan to resolve
these issues in advance of the turn of the millennium. The Company believes
that, with modifications to existing software and conversion to new software,
where appropriate, the "Year 2000" issue will not present significant
operational problems for the Company's computer systems. During 1997, the
Company started modifying programming code in conformity with it's
implementation plan and anticipates completion of it's "Year 2000" efforts
by early 1999. Costs associated with the Company's "Year 2000" efforts will
be expensed as incurred. Costs incurred in 1997 and total estimated costs are
not material.
EIGHT
BENEFIT PROGRAM
The Company offers a comprehensive benefit program to its eligible associates
including pension and profit sharing plans as well as health, disability and
life insurance programs.
The Pension Plan, established in 1945, has been funded entirely by Company
contributions. All associates who meet the eligibility requirements are
enrolled in the Plan. Members are 100% vested in their accrued benefits upon
completing five years of service after age 18, as defined. At the beginning
of 1997, there were approximately 30,700 Pension Plan members, including
retirees. The market value of Plan assets was $452 million as of the end
of 1997.
All associates who are enrolled in the Pension Plan are eligible to
participate in the Savings, Profit Sharing and Supplemental Retirement Plan.
During 1997, to the extent permitted by the Internal Revenue Code, members
had the option to contribute up to 14% of their earnings into the Plan.
Members can elect to have their contributions invested in a balanced fund,
an equity fund, an investment contract fund or any combination of these funds.
As explained in Note 7 of Notes to Consolidated Financial Statements, the
Company makes an annual contribution to the Savings, Profit Sharing and
Supplemental Retirement Plan based upon its pre-tax income, as defined.
For the latest year, the Company's contribution amounted to $10.6 million,
or approximately $.61 for each $1.00 deposited, before-tax, by a member up
to 6% of compensation.
All members employed as of February 1, 1993 or earlier are 100% vested in the
Company's contribution as soon as it is credited to their accounts. All members
employed after February 1, 1993 vest in Company contributions according to a
3 to 7 year vesting schedule. Members can elect to invest the Company's annual
contribution in a balanced fund, an equity fund, an investment contract fund,
Mercantile Stores common stock fund or any combination of these funds. Members
who have an investment in Mercantile Stores common stock at year-end may, in
confidence, direct the Trustee, The Northern Trust Company, to vote their
shares at the Annual Meeting of Stockholders. At January 31, 1998, the Trustee
was holding 1,250,960 shares of Mercantile stock, or 3.4% of the total
outstanding shares, for the benefit of Plan members. Plan assets at year-end
totalled $602 million, at market value.
The Company pays a substantial portion of the costs of various group medical
and dental plans which are offered to eligible associates. In addition, the
Company offers disability and term life insurance coverage to eligible
associates.
Paid vacation and holiday time, discounts on merchandise, and a highly
successful policy of training and promoting from within complete the
comprehensive benefit program available to associates.
[Enlarge/Download Table]
Market and Dividend Information
1997 1996
Market Dividends Market Dividends
Quarter High Low Declared Paid High Low Declared Paid
First $ 50 1/4 $ 46 3/8 $ .58 1/2 $ .28 1/2 $ 62 5/8 $ 44 1/4 $ .55 $ .26 1/2
Second 68 15/16 49 3/4 - .30 67 57 1/8 - .28 1/2
Third 66 15/16 57 1/4 .60 .30 59 3/8 47 .57 .28 1/2
Four 65 9/16 58 1/4 _ .30 54 47 7/8 _ .28 1/2
$1.18 1/2 $1.18 1/2 $1.12 $1.12
The Company's common stock is traded on the New York Stock Exchange (NYSE
symbol - MST).
The number of stockholders at January 31, 1998 was 9,007.
On April 16, 1998, the Board of Directors approved an increase in the quarterly
dividend from $.30 to $.31 1/2 per share. This increase, payable on June 15,
1998 to holders of record on May 29, 1998, converts to an indicated annual
dividend of $1.26 per share.
NINE
Statement of Management's Responsibility for Financial Statements
The management of Mercantile Stores Company, Inc. has prepared the consolidated
financial statements and related financial information contained in this Annual
Report. Management is responsible for the integrity of the financial
statements and other financial information included and for ascertaining that
the data accurately reflect the financial position and results of operations
of the Company. Financial statements are prepared in conformity with generally
accepted accounting principles, applying certain informed estimates and
judgments as required.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are executed in accordance with
proper authorization; that all such transactions are properly recorded and
summarized to produce reliable financial records and reports; that assets are
safeguarded; and that the accountability for assets is maintained. Management
believes its system of internal accounting controls, augmented by its internal
auditing function, assures the adequacy and quality of financial reporting.
Arthur Andersen LLP, independent public accountants, have been engaged to
render an objective, independent professional opinion on the fairness of
reported operating results and financial condition. They consider the
Company's internal control structure in determining the nature, timing and
extent of the audit procedures they deem necessary to reach and express an
opinion on the fairness of the financial statements.
The Board of Directors pursues its responsibility for the Company's financial
statements through its Audit Committee which is comprised solely of directors
who are not officers or employees of the Company. The Audit Committee meets
regularly with the independent public accountants, management, and the internal
auditors. The independent public accountants have direct access to the Audit
Committee, with or without the presence of management representatives, to
discuss the scope and results of their audit work and their comments on the
adequacy of internal accounting controls and the quality of financial reporting.
Based on the controls described, we believe the financial statements and related
financial information in this report are accurate in all material respects and
that they were prepared in accordance with appropriate and generally accepted
accounting principles.
David L. Nichols James M. McVicker
Chairman of the Board Senior Vice President and
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Mercantile Stores Company, Inc.:
We have audited the accompanying consolidated balance sheets of Mercantile
Stores Company, Inc. (a Delaware corporation) and subsidiaries as of January
31, 1998 and February 1, 1997, and the related statements of consolidated
income and retained earnings and cash flows for each of the three years in
the period ended January 31, 1998. 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.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Mercantile Stores Company,
Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended January 31, 1998 in conformity with generally accepted
accounting principles.
As explained in Note 2 to the Consolidated Financial Statements, the Company
changed its method of accounting for long-lived assets effective February 4,
1996. Cincinnati, Ohio Arthur Andersen LLP April 3, 1998
TEN
Statements of Consolidated Income and Retained Earnings
(in thousands, except per share data) 1997 1996 1995
Revenues $ 3,143,765 $ 3,030,822 $ 2,944,324
Costs, Expenses, and Other Income:
Cost of goods sold
(including occupancy
and central buying expenses) 2,207,618 2,113,022 2,059,753
Selling, general and
administrative expenses 727,083 702,862 686,924
Interest expense 17,685 16,451 19,558
Interest income (5,143) (5,665) (5,087)
Other income (16,840) (9,400) (21,404)
Impairment charge - 12,000 -
____________ ____________ ___________
2,930,403 2,829,270 2,739,744
Income before Provision
for Income Taxes 213,362 201,552 204,580
Provision for Income Taxes:
Current 74,420 82,951 80,239
Deferred 9,236 (2,864) 1,093
__________ ___________ _________
83,656 80,087 81,332
__________ ___________ _________
Net Income $ 129,706 $ 121,465 $ 123,248
__________ ___________ _________
Retained Earnings at
Beginning of Year 1,553,892 1,473,692 1,389,130
Dividends Declared 43,574 41,265 38,686
__________ ____________ _________
Retained Earnings at
End of Year $ 1,640,024 $ 1,553,892 $ 1,473,692
============ ========== ==========
Earnings per Share $ 3.53 $ 3.30 $ 3.35
============ =========== ==========
Weighted Average Shares Outstanding 36,770,797 36,844,050 36,844,050
See Notes to Consolidated Financial Statements
ELEVEN
Consolidated Balance Sheets
(in thousands) January 31, 1998 February 1, 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 144,986 $ 128,115
Receivables:
Customer, net 571,513 571,336
Other 17,591 16,851
Inventories 505,201 560,666
Deferred income taxes 19,196 13,009
Other current assets 16,702 13,325
___________ ___________
Total Current Assets 1,275,189 1,303,302
___________ ___________
Prepaid Pension and
Other Noncurrent Assets 116,218 100,994
___________ ___________
Property and Equipment:
Land 38,869 40,663
Buildings and improvements 839,356 783,825
Fixtures 292,307 251,502
Leased property 62,018 62,018
___________ ___________
1,232,550 1,138,008
Accumulated depreciation (446,166) (399,801)
___________ ___________
Property and equipment, net 786,384 738,207
___________ ___________
Total Assets $ 2,177,791 $ 2,142,503
TWELVE
(in thousands) January 31, 1998 February 1, 1997
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt $ 21,429 $ 25,017
Accounts payable 79,117 112,485
Taxes other than income 22,235 18,876
Other current liabilities 63,775 62,438
Accrued income taxes 40,913 39,128
Accrued payroll 24,410 27,825
___________ ___________
Total Current Liabilities 251,879 285,769
___________ ___________
Long-term Debt 202,637 229,910
___________ ___________
Due to Affiliated Companies 25,353 24,737
___________ ___________
Deferred Income Taxes 21,712 5,685
___________ ___________
Other Long-term Liabilities 29,364 31,089
___________ ___________
Stockholders' Equity:
Common stock - $.14 2/3 par
value, 36,887,475 authorized
and issued shares 5,410 5,410
Additional paid-in capital 6,018 6,018
Retained earnings 1,640,024 1,553,892
Treasury stock, at cost,
138,925 shares in 1997 and
43,425 in 1996 (4,606) (7)
__________ __________
Total Stockholders' Equity 1,646,846 1,565,313
__________ __________
Total Liabilities and
Stockholders' Equity $ 2,177,791 $ 2,142,503
=========== ===========
thirteen
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands) 1997 1996 1995
Cash Flows from Operating Activites:
Net Income $ 129,706 $ 121,465 $ 123,248
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 79,254 83,661 88,714
Deferred taxes 9,236 (2,864) 1,093
Gain on disposition of property (2,832) (157) (5,916)
Impairment charge - 12,000 -
Net pension benefit (17,299) (12,851) (14,667)
Changes in working capital
attributable to
Inventories 55,465 (37,093) (54,791)
Receivables (917) (13,565) 45,616
Accounts payable (33,368) 5,840 (15,022)
Other working capital item 404 (11,349) 20,416
________ ________ ________
Net cash provided by operating activities 219,649 145,087 188,691
________ ________ ________
Cash Flows from Investing Activities:
Cash payments for property
and equipment (131,011) (133,861) (101,202)
Proceeds from sale of property 6,240 2,777 5,982
Net change in other noncurrent
assets and liabilities 1,027 (369) (1,919)
_________ _________ ________
Net cash used in investing activit (123,744) (131,453) (97,139)
Cash Flows from Financing Activities:
Payments of long-term debt (30,861) (6,147) (5,210)
Repurchase of common stock (4,599) - -
Dividends paid (43,574) (41,265) (38,686)
_________ _________ ________
Net cash used in financing activities (79,034) (47,412) (43,896)
Net Increase (Decrease) in
Cash and Cash Equivalents 16,871 (33,778) 47,656
Cash and Cash Equivalents at
Beginning of Year 128,115 161,893 114,237
_________ _________ _______
Cash and Cash Equivalents at
End of Year $ 144,986 $ 128,115 $161,893
========== ========== =======
Supplemental Cash Flow Information:
Interest paid $ 19,975 $ 19,950 $ 20,926
Income taxes paid $ 68,424 $ 83,491 $ 70,593
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations - Mercantile Stores Company, Inc. (the Company) is a
conventional department store retailer engaged in the general merchandising
business. The Company operates 102 department stores and 16 home fashion
stores under 13 different names in a total of 17 states. The Company also
maintains a partnership interest in five operating shopping center ventures
and one land ownership venture.
B. Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all of its subsidiaries. All material
intercompany accounts and transactions have been eliminated. The Company
uses the equity method to account for its 33 1/3% to 50% position in the
six joint ventures.
C. Fiscal Year - The Company's fiscal year ends on the Saturday nearest to
January 31. All fiscal years presented consist of fifty-two weeks except
1995 which included fifty-three weeks. Fiscal year 1997 ended on January
31, 1998; fiscal year 1996 ended on February 1, 1997; and fiscal year 1995
ended on February 3, 1996. All references to years relate to fiscal years
rather than calendar years.
D. Revenues - Revenues include sales from retail operations, leased departments
and finance charge revenue earned on customer accounts serviced by the
Company under its private label credit program. Finance charge revenue
from the Company's private label credit program is recognized in the period
in which it is earned. Finance charge revenue earned in 1997, 1996 and 1995
totalled $89 million, $85 million and $52 million, respectively. Operating
expenses incurred in connection with the private label credit program are
included in selling, general and administrative expenses. Prior to August
1, 1995, the Company's share of finance charge revenue accrued to the
Company under revenue sharing agreements with unaffiliated companies and was
classified as a component of other income in the accompanying Statements of
Consolidated Income and Retained Earnings.
E. Cost of Goods Sold - Cost of goods sold in the retail industry
traditionally includes occupancy and buying costs which are not directly
associated with the cost and eventual selling price of merchandise. Among
the occupancy expenses so classified are depreciation, rent, utilities and
real estate taxes. Buying costs, in this respect, include the payroll and
travel expenses associated with the corporate buying and merchandise
planning functions.
F. Advertising Costs - Advertising expenditures, including production costs,
are expensed as incurred. In 1997, total advertising expense was $109
million, compared with $100 million in 1996, and $97 million in 1995.
G. Store Pre-opening Costs - Store pre-opening costs which include advertising,
occupancy, and payroll are charged to expense as incurred.
H. Earnings per Share (EPS) - Effective January 31, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which replaces the calculation of primary and fully diluted EPS
under previous accounting standards with basic and diluted EPS. The assumed
issuance of all equivalent common shares granted under the Company's 1996
Stock Option Plan did not have a material effect on the number of weighted
average shares outstanding used in the 1997 diluted EPS calculation and
there were no outstanding stock options in 1996 and 1995. Therefore, the
Company's basic and diluted EPS amounts are equivalent for all years
presented and restatement of previously reported EPS amounts is not
required.
I. Cash and Cash Equivalents - For purposes of these statements, short-term
investments which have a maturity of 90 days or less are considered cash
equivalents. The carrying amount of cash equivalents is a reasonable
estimate of fair value.
J. Customer Receivables - Customers are extended credit under customary
revolving credit terms. Customer receivables are classified as current
assets and include some amounts which are due after one year, consistent
with industry practice. Concentrations of credit risk with respect to
customer receivables are limited due to the large number of customers and
their geographic dispersion. At January 31, 1998 and February 1, 1997,
customer receivables are net of an allowance for doubtful accounts in the
amount of $18 million and $16 million, respectively.
fifteen
K. Inventories - All retail inventories are valued by the retail method and
stated on the last-in, first-out (LIFO) cost basis, which is lower than
market. At January 31, 1998 and February 1, 1997, inventories were $32
million and $38 million lower, respectively, than they would have been had
the retail method been applied using the first-in, first-out (FIFO) cost
basis.L. Property and Equipment - Property and equipment is carried at cost.
Depreciation is provided by using the straight-line method based on
estimated useful lives of the assets for financial reporting purposes while
accelerated depreciation, where permitted, is used for income tax purposes.
Betterments, renewals, and repairs that extend the life of the asset are
capitalized; other repairs and maintenance are expensed. Property and
equipment, other than buildings, are written off in the year that they
become fully depreciated.
The Company computes depreciation for financial reporting purposes based on the
following ranges of estimated useful lives:
Buildings 15-50 years
Building improvements 10-30 years
Store fixtures 7 years
Leased property Term of lease or life of property
The Company leases certain properties, principally store locations, under
capital leases as defined by SFAS No. 13, "Accounting for Leases." Property
meeting the criteria within the SFAS No. 13 is capitalized and accounted for
as an asset with the corresponding obligation carried as a liability. The
provision for amortization of leased properties is included in depreciation
and amortization expense. All other lease agreements are classified and
accounted for as operating leases with payments expensed as incurred.
M. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
N. Segment Reporting - The Company has one significant segment of business
general merchandise department store retailing).
O. Reclassifications - Certain reclassifications have been made to prior years'
financial statements to conform with the classification used in the 1997
financial statements.
2. IMPAIRMENT CHARGE
During the first quarter of 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which addresses the identification and measurement of asset
impairments and requires the recognition of impairment losses on long-lived
assets when carrying values exceed expected future cash flows. The Company
evaluated its investment in long-lived assets at the individual store level.
Based upon an assessment of historical and projected operating results, it was
determined that the carrying value of certain operating stores was impaired
under the criteria defined in SFAS No. 121. As a result, in 1996, the Company
recorded a pre-tax impairment charge of $12 million (a net of tax impact of
$7.2 million, or $.20 per share) to write down the carrying value of these
assets to their estimated fair value. The fair value of these assets was
based on operating projections and discounted future cash flows.
sixteen
3. Long-Term Debt and financing arrangements
The Company's long-term debt consisted of the following:
(in thousands) 1997 1996
8.2% Sinking Fund Debentures due 2022 (a) $100,000 $100,000
6.7% Notes due 2002 (b) 76,000 95,000
Industrial Revenue Bonds, at rates ranging
from 5.61% to 7.75% 505 8,250
Other Notes Payable 2,231 4,385
________ _______
Total 178,736 207,635
Capitalized Lease Obligations 45,330 47,292
________ _______
224,066 254,927
Less - due within one year 21,429 25,017
________ ________
Total Long-term Debt $202,637 $229,910
(a) The 8.2% Sinking Fund Debentures have a mandatory sinking fund
requirement of $5 million annually commencing in 2003.
(b) The 6.7% Notes have a mandatory annual sinking fund requirement
of $19 million through 2000; $14 million in 2001, and $5 million in 2002.
Maturities of long-term debt, including capitalized leases, for the next five
years are as follows:
(in thousands) Amount
1998 $ 21,429
1999 $ 21,565
2000 $ 21,505
2001 $ 16,865
2002 $ 7,181
The fair value of long-term debt, including the current portion and excluding
capital lease obligations, was approximately $194 million at January 31, 1998
and approximately $215 million at February 1, 1997. The fair value is based on
the present value of future cash flows. The discount rates used approximated
the current borrowing costs for similar instruments.
The Company has a $200 million Revolving Credit Agreement (the Credit
Agreement) with a syndicate of banks which expires on August 3, 2000. The
applicable interest rate on borrowings is based, at the Company's option, on
either the banks' best rates under a competitive bid environment or a
predefined spread (which is tied to the Company's long-term debt credit
rating) over the appropriate LIBOR rate. The Credit Agreement requires the
Company to comply with certain financial covenants with respect to minimum net
worth and financial leverage.
The Company also has in place additional uncommitted lines of credit in the
total amount of $120 million. No fee is paid for maintaining these lines and
interest on any borrowings is charged at a floating rate.
At January 31, 1998 and February 1, 1997, there were no borrowings outstanding
under the Credit Agreement or the uncommitted lines. Maximum borrowings under
these facilities for 1997 were $86 million, at an average interest rate of
5.8%. During 1996, maximum borrowings were $43 million, at an average interest
rate of 6.0%.
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4. STOCKHOLDERS' EQUITY
During the first quarter of 1997, the Board of Directors authorized the
Company to purchase up to 1,500,000 shares of its common stock in the open
market over a time frame which may extend to ten years. These shares are to be
held as treasury stock and are to be used solely to satisfy requirements
arising from the exercise of options granted under the 1996 Stock Option Plan,
which is discussed in Note 5. During the year ended January 31, 1998, under
this program, the Company purchased 95,500 shares of its common stock at a
cost of approximately $4.6 million.
5. STOCK OPTIONS
On December 3, 1996, the Company adopted the Mercantile Stores Company, Inc.
1996 Stock Option Plan, which provides for the issuance of non-qualified stock
option awards to certain employees designated by the Company's Board of
Directors. Beginning in 1997, stock options were granted under the plan at an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. These options will generally become exercisable in equal
increments over a four year period and expire ten years from the date of grant.
The maximum number of shares available for awards under the plan is 1,500,000.
For the year ended January 31, 1998, 95,500 stock options were granted under
the plan at an exercise price of $48 per share. There were no stock options
exercised or forfeited during 1997.
The Company has elected to account for stock options under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and to provide the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation." Therefore, no compensation expense
has been recognized in the accompanying Statements of Consolidated Income and
Retained Earnings. Had the Company applied the fair value method of accounting
for stock options set forth in SFAS No. 123, pro forma net income and earnings
per share would have been approximately the same as the amounts reported.
The Company estimated the fair value of stock options granted using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 6.9%; expected volatility of 22.7%; dividend yield of 2.3%
and a weighted-average expected life of the stock options of six years. The
weighted-average fair market value of stock options granted in 1997 was $14
per share.
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6. Income Taxes
The provision for income taxes consisted of the following:
(in thousands) 1997 Federal State Total
Current $63,486 $10,934 $74,420
Deferred 7,861 1,375 9,236
_______ _______ _______
Total $71,347 $12,309 $83,656
1996 Federal State Total
Current $67,287 $15,664 $82,951
Deferred (2,325) (539) (2,864)
________ ________ ________
Total $64,962 $15,125 $80,087
1995 Federal State Total
Current $66,171 $14,068 $80,239
Deferred 494 599 1,093
_______ _______ _______
Total $66,665 $14,667 $81,332
The provision for income taxes is different from the amount computed by
applying the statutory Federal income tax rate. The differences are
summarized as follows:
(in thousands) 1997 1996 1995
Provision at statutory rate of 35% $74,677 $70,543 $71,603
State and local income tax, less
Federal income tax benefit 8,001 9,831 9,534
Other 978 (287) 195
______ ________ _______
Total income tax provision $83,656 $80,087 $81,332
Effective income tax rate 39.2% 39.7% 39.8%
The tax effects of significant temporary differences representing deferred tax
assets and liabilities were as follows:
(in thousands) 1997 1996
Assets:
Inventory accounting $ 8,046 $ 3,804
Associate benefit costs 13,515 13,309
Interest, taxes and real estate costs 11,456 11,887
Bad debts 5,485 4,845
Capitalized leases 4,660 4,457
Other 8,919 8,384
_______ _______
Total deferred tax assets 52,081 46,686
Liabilities:
Depreciation (13,599) (6,455)
Pension and profit
sharing plan costs (38,365) (30,386)
Other (2,633) (2,521)
________ ________
Total deferred tax liabilities (54,597) (39,362)
________ ________
Total net deferred tax (liability) asset $(2,516) $ 7,324
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7. Associate Benefit Plans
The Company maintains a formal, qualified, non-contributory, defined benefit
pension plan covering all associates who have met certain age and service
requirements. Benefits under this plan are generally based on a career average
formula. The Company funds this plan in accordance with ERISA requirements.
As computed under the provisions of SFAS No. 87, "Employers'Accounting for
Pensions," components of the net pension benefit included in income before
income taxes for the past three years were as follows:
(in thousands) 1997 1996 1995
Service cost $ 8,429 $ 8,689 $ 5,656
Interest cost 14,764 14,169 12,405
Actual return on plan assets (74,581) (44,416) (54,809)
Amortization of transition asset (5,043) (5,043) (5,043)
Other amortization and deferral 39,132 13,750 27,124
_________ _________ _________
Net pension benefit $(17,299) $(12,851) $(14,667)
The expected long-term rate of return on assets used in determining the net
pension benefit was 8.5% in all years presented.
The funded status of the formal, qualified pension plan at January 31, 1998
and February 1, 1997, based on actuarial and plan asset information as of
October 31, 1997 and 1996, was as follows:
(in thousands) 1997 1996
Actuarial present value of benefit obligations:
Vested benefits $ 181,734 $ 154,385
Non-vested benefits 5,070 4,537
_________ _________
Accumulated benefit obligation 186,804 158,922
Impact of future salary increases 28,300 27,629
_________ _________
Projected benefit obligation 215,104 186,551
Plan assets at fair value 444,531 379,861
Plan assets in excess of projected benefit
obligation 229,427 193,310
Items not yet recognized in income:
Initial transition credit which
is being amortized over 15 years (20,172) (25,216)
Subsequent net gains (108,257) (84,395)
___________ ___________
Prepaid pension benefit $ 100,998 $ 83,699
The actuarial present value of benefits was determined using a discount rate
of 7.25% in 1997 and 7.75% in 1996. The rate of compensation increase used to
measure the projected benefit obligation was 4.5% in 1997 and 5.0% in 1996.
The change in the discount rate and rate of compensation assumptions caused
the projected benefit obligation to increase by approximately $12 million in
1997.
The plan's assets include investments in common stocks, fixed income
securities, real estate investments, short-term investments, and cash. No
funding activity occurred between the plan and the Company during the fourth
quarter of 1997 or 1996.
The Company contributes to qualified and non-qualified savings and profit
sharing plans covering certain associates. The Company's total contribution to
the qualified and non-qualified savings and profit sharing plans is based on 5%
of pre-federal income tax FIFO profits, as defined. The Company also provides
retirement benefits to certain associates through non-qualified defined
benefit pension plans. The costs to the Company under these plans for the
past three years were as follows:
(in thousands) 1997 1996 1995
Savings and Profit Sharing $ 10,604 $ 10,271 $ 9,750
Pension 1,852 1,682 810
________ ________ ________
Total $ 12,456 $ 11,953 $ 10,560
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The Company provides certain health care benefits for retired associates on a
contributory basis. Current retirees and active associates who retire on or
after age 60, with five or more years of service, are eligible for these
benefits if they had continuous medical coverage in the five years preceding
retirement. The plan does not cover retirees after Medicare eligibility. The
Company funds these benefits as claims are incurred.
The Company accounts for postretirement benefits under the provisions of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The components of net periodic postretirement benefit cost for the
last three years were as follows:
(in thousands) 1997 1996 1995
Service cost earned during the year $ 509 $ 522 $ 490
Interest cost on projected benefit
obligation 771 776 800
Net amortization and deferral (1,174) (1,148) (1,199)
________ ________ ________
Net periodic postretirement benefit cost $ 106 $ 150 $ 91
The following table sets forth the plan's funded status at January 31, 1998
and February 1, 1997:
(in thousands) 1997 1996
Accumulated postretirement benefit obligation:
Retirees $ 3,719 $ 3,520
Fully eligible active plan participants 235 216
Other active plan participants 6,534 6,279
________ ________
10,488 10,015
Unrecognized net gain from changes in plan
and assumptions 4,358 5,301
Unrecognized prior service cost 4,448 5,490
________ ________
Accrued postretirement benefit cost $19,294 $20,806
For measurement purposes, the following assumptions were used to project
changes in the accumulated postretirement benefit obligation for 1997 and 1996:
1997 1996
Discount rate 7.25% 7.75%
Health care cost trend rate 7.50% to 5.0% 8.00% to 5.0%
Years to ultimate trend 7 8
The health care cost trend rate affects the amounts reported. To illustrate,
increasing the assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit obligation by
$1.0 million and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost by $.1 million.
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8. Leases
The Company leases certain stores, warehouse facilities and equipment under
operating leases. The majority of these leases will expire within the next 20
years. the leases usually contain renewal options and provide for payment by
the lessee of real estate taxes and other expenses, and, in certain instances,
increased rentals based on percentages of sales.
Future minimum lease payments under noncancelable leases as of January 31, 1998
were as follows:
(in thousands) Capital Operating Total
1998 $ 6,118 $ 26,137 $ 32,255
1999 6,060 25,129 31,189
2000 6,060 23,021 29,081
2001 5,955 22,119 28,074
2002 5,562 20,687 26,249
Thereafter 59,534 101,677 161,211
_______ ________ ________
Total minimum lease payments $ 89,239 $ 218,770 $ 308,059
Less: Executory costs (188)
Interest (43,771)
Present value of net minimum ________
lease payments $ 45,330
Rent expense consisted of the following:
(in thousands) 1997 1996 1995
Minimum rentals $ 25,180 $ 23,993 $ 23,305
Contingent rentals
(based on % of sales) 7,218 7,080 7,269
________ ________ ________
$ 32,398 $ 31,073 $ 30,574
9. Contingencies
The Company is involved in various legal actions arising in the normal course
of business. After taking into consideration legal counsels' evaluation of
such actions, management is of the opinion that their outcome will not have a
significant effect on the Company's consolidated financial statements.
The Company has entered into agreements with certain executives which provide
for severance pay benefits should the executive's employment be terminated
within two years following a change in control of the Company. In general,
severance pay benefits under these agreements are payable at 2.99 times the
executive's annual compensation for the year preceding the change in control.
Such annual compensation totalled approximately $5.2 million for the year
ended January 31, 1998.
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QUARTERLY RESULTS
(unaudited in thousands, except per share data)
January 31, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $ 683,298 $ 692,905 $ 753,730 $ 1,013,832 $ 3,143,765
Costs, Expenses, and Other Income:
Cost of goods sold 478,928 494,063 527,599 707,028 2,207,618
Selling, general and
administrative expenses 172,642 173,593 189,849 190,999 727,083
Interest expense, net 3,235 2,372 1,879 5,056 12,542
Other income (3,252) (2,401) (2,965) (8,222) (16,840)
_____________ _____________ ____________ ___________ ___________
651,553 667,627 716,362 894,861 2,930,403
_____________ _____________ ____________ ___________ ___________
Income before provision for
income taxes 31,745 25,278 37,368 118,971 213,362
Provision for income taxes 12,437 9,930 14,658 46,631 83,656
____________ ____________ ____________ ___________ ___________
Net income $ 19,308 $ 15,348 $ 22,710 $ 72,340 $ 129,706
============ ============ =========== =========== ===========
Earnings per share $ .52 $ .42 $ .62 $ 1.97 $ 3.53
February 1, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $ 655,409 $ 659,527 $ 727,741 $ 988,145 $ 3,030,822
Costs, Expenses, and Other Income:
Cost of goods sold 452,969 467,927 495,379 696,747 2,113,022
Selling, general and
administrative expenses 168,251 168,112 180,814 185,685 702,862
Interest expense, net 2,414 2,222 2,387 3,763 10,786
Other income (2,314) (2,755) (2,590) (1,741) (9,400)
Impairment charge 12,000 - - - 12,000
____________ ____________ ____________ ___________ ____________
633,320 635,506 675,990 884,454 2,829,270
____________ ____________ ____________ ___________ ____________
Income before provision for
income taxes 22,089 24,021 51,751 103,691 201,552
Provision for income taxes 8,818 9,587 20,663 41,019 80,087
____________ ____________ ____________ ___________ ____________
Net Income $ 13,271 $ 14,434 $ 31,088 $ 62,672 $ 121,465
============ ============ ============ =========== ============
Earnings per share $ .36 $ .39 $ .85 $ 1.70 $ 3.30
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FIVE YEAR SELECTED FINANCIAL DATA
(dollars in thousands, except per share data) 1997 1996 1995 1994 1993
Operating Results
Revenues $ 3,143,765 $ 3,030,822 $ 2,944,324 $ 2,819,837 $ 2,729,928
Retail sales 3,054,924 2,945,606 2,892,083 2,819,837 2,729,928
Cost of goods sold 2,207,618 2,113,022 2,059,753 2,020,264 1,960,914
Selling, general and administrative expenses 727,083 702,862 686,924 625,726 627,391
Interest expense, net 12,542 10,786 14,471 23,526 30,948
Other income (16,840) (9,400) (21,404) (27,571) (33,003)
Impairment charge - 12,000 - - -
Provision for consolidation/relocation - - - 5,000 -
Income before provision for income taxes 213,362 201,552 204,580 172,892 143,678
Percent to revenues 6.8 6.7 6.9 6.1 5.3
Provision for income taxes 83,656 80,087 81,332 68,375 57,039
Income before cumulative effect of accounting changes 129,706 121,465 123,248 104,517 86,639
Net income 129,706 121,465 123,248 103,417 89,739
Per common share Earnings per share(1) $ 3.53 $ 3.30 $ 3.35 $ 2.81 $ 2.44
Dividends $ 1.19 $ 1.12 $ 1.05 $ 1.02 $ 1.02
Stockholders' equity $ 44.81 $ 42.48 $ 40.31 $ 38.01 $ 36.23
Financial PositionWorking capital $ 1,023,310 $ 1,017,533 $ 1,013,576 $ 957,030 $ 902,268
Current ratio 5.1 4.6 4.7 4.7 3.5
Receivables, net 589,104 588,187 574,622 620,238 635,114
Inventories 505,201 560,666 523,573 468,782 425,492
Property and equipment, net
(includes capitalized leases) 786,384 738,207 701,233 688,806 691,502
Total assets 2,177,791 2,142,503 2,074,724 1,981,729 2,031,982
Long-term debt
(includes capitalized lease obligations) 202,637 229,910 254,926 261,187 271,965
Debt to capitalization ratio 12.0 14.0 15.0 16.0 22.5
Retained earnings 1,640,024 1,553,892 1,473,692 1,389,130 1,323,294
Stockholders' equity 1,646,846 1,565,313 1,485,113 1,400,551 1,334,715
Other DataCapital expenditures for property
and equipment $ 131,011 $ 133,861 $ 101,202 $ 93,639 $ 106,210
Depreciation 79,254 83,661 88,714 93,540 93,455
Department stores
Opened 2 5 - 3 2
Closed 2 - 3 2 1
Number of department stores, at end of year 102 102 97 100 99
Home fashion stores
Opened 2 3 1 3 1
Closed 1 - - - -
Number of home stores, at end of year 16 15 12 11 8
Total square feet 17,331 17,282 16,300 16,484 16,212
Sales per square foot(2) $179 $177 $177 $173 $169
All years include 52 weeks, except 1995 which includes 53 weeks.
(1) Based on 36,844,050 shares outstanding for all years, except 1997 which
has 36,770,797 weighted average shares outstanding.
(2) Based on stores opened for the entire year. The 1995 year is presented on
a 52 week basis.
twenty-four and
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STORE DIVISIONS AND GROUP PRESIDENTS
MERCANTILE SOUTH
Gayfers/Maison Blanche
Headquartered in Mobile, Alabama
Michael G. Shannon, President
Store Locations Shopping Centers/Malls
Mobile, AL Springdale Mall (Gayfers)
Jubilee Mall (Gayfers)
Biloxi-Gulfport, MS Edgewater Mall (Gayfers)
Edgewater Mall Home Store (Gayfers)
Baton Rouge, LA Main Street (Maison Blanche)
Cortana Mall (Maison Blanche)
Mall of Louisiana (Maison Blanche)
Lafayette, LA Acadiana Mall (Maison Blanche)
New Orleans, LA Canal Street (Maison Blanche)
Clearview Shopping Center (Maison Blanche)
Plaza Lake Forest (Maison Blanche)
North Shore Square (Maison Blanche)
Oakwood Shopping Center (Maison Blanche)
Clearwater, FL Clearwater Mall (Gayfers)
Pensacola, FL Town & Country Plaza (Gayfers)
Cordova Mall (Gayfers)
Ft. Walton Beach, FL Santa Rosa Mall (Gayfers)
Panama City, FL Panama City Mall (Gayfers)
Panama City Mall Home Store (Gayfers)
Tallahassee, FL Tallahassee Mall (Gayfers)
Jacksonville, FL Regency Square Mall (Gayfers)
Roosevelt Mall (Gayfers)
Orange Park Mall (Gayfers)
The Avenues (Gayfers)
Daytona Beach, FL Volusia Mall (Gayfers)
Orlando, FL Orlando Fashion Square (Gayfers)
Altamonte Mall (Gayfers)
The Florida Mall (Gayfers)
West Oaks Mall (Gayfers)
Oviedo, FL Oviedo Marketplace (Gayfers)
MERCANITLE SOUTHEAST
Gayfers/J.B. White
Headquartered in Montgomery, Alabama
Robin E. Sanderford, President
Store Locations Shopping Centers/Malls
Montgomery, AL Montgomery Mall (Gayfers)
Eastdale Mall (Gayfers)
Eastdale Mall Home Store (Gayfers)
Auburn, AL Village Mall (Gayfers)
Dothan, AL Wiregrass Commons (Gayfers)
Tuscaloosa, AL McFarland Mall (Gayfers)
Albany, GA Albany Mall (Gayfers)
Columbus, GA Peachtree Mall (Gayfers)
Jackson, MS Metrocenter (Gayfers)
Northpark Mall (Gayfers)
Hattiesburg, MS Turtle Creek Mall (Gayfers)
Savannah, GA Savannah Mall (J.B. White)
Augusta, GA National Hills Shopping Center (J.B. White)
National Hills Home Store (J.B. White)
Augusta Mall (J.B. White)
Aiken, SC Heritage Square (J.B. White)
Columbia, SC Columbiana Mall (J.B. White)
Dutch Square (J.B. White)
Richland Mall (J.B. White)
Greenville, SC Greenville Mall (J.B. White)
Spartanburg, SC Westgate Mall (J.B. White)
Westgate Mall Home Store (J.B. White)
MERCATILE CENTRAL
Castner Knott
Headquartered in Nashville, Tennessee
Edward A. Overbey, Jr., President
Store Locations Shopping Centers/Malls
Nashville, TN The Mall at Green Hills
Rivergate Mall
Donelson Plaza
Harding Mall
Hickory Hollow Mall
Bellevue Center
Tullahoma, TN Northgate Mall
Murfreesboro, TN Stones River Mall
Franklin, TN Cool Springs Galleria
Cool Springs Galleria Home Store
Florence, AL Regency Square Mall
Decatur, AL River Oaks Center
River Oaks Center Home Store
Huntsville, AL Madison Square Mall
Bowling Green, KY Greenwood Mall
Greenwood Mall Home
twenty-six
Bacons/McAlpin's/Lion/Root's
Headquartered in Louisville, Kentucky
Thomas N. Groh, President
Store Locations Shopping Centers/Malls
Louisville, KY Bashford Manor Mall (Bacons)
Bashford Manor Home Store (Bacons)
Shively Center (Bacons)
Louisville Galleria (Bacons)
The Mall in St. Matthew's (Bacons)
St. Matthew's Home Store (Bacons)
Owensboro, KY Towne Square Mall (Bacons)
Lexington, KY Lexington Mall (McAlpin's)
Turfland Mall (McAlpin's)
Turfland Mall Home Store (McAlpin's)
Fayette Mall (McAlpin's)
Crestview Hills, KY Crestview Hills Mall (McAlpin's)
Clarksville, IN River Falls Mall (Bacons)
Terre Haute, IN Honey Creek Square (Root's)
Cincinnati, OH Eastgate Mall (McAlpin's)
Kenwood Towne Centre (McAlpin's)
Northgate Mall (McAplin's)
Signatures Home Store-Harper's Station (McAlpin's)
Tri-County Mall (McAlpin's)
Western Hills Plaza (McAlpin's)
Middletown, OH Towne Mall (McAlpin's)
Toledo, OH Southwyck Shopping Center (Lion)
Southwyck Home Store (Lion)
North Towne Square (Lion)
Franklin Park Mall (Lion)
Westgate Home Store (Lion)
MERCANTILE WEST
Jones/Joslins/Hennessy's
de Lendrecie's/Glass Block
Headquartered in Kansas City, Missouri
James L. Schmidt, President
Store Locations Shopping Centers/Malls
Kansas City, MO Blue Ridge Mall (Jones)
Metro North Mall (Jones)
Bannister Mall (Jones)
Overland Park, KS Metcalf South Shopping Center (Jones)
Metcalf South Home Store (Jones)
Prairie Village, KS Prairie Village Shopping Center (Jones)
Independence, MO Independence Center (Jones)
Topeka, KS West Ridge Mall (Jones)
Denver, CO Buckingham Square (Joslins)
Villa Itaila Center (Joslins)
Westminister Mall (Joslins)
Southwest Plaza (Joslins)
Southglenn Mall (Joslins)
Park Meadows (Joslins)
Greeley, CO Greeley Mall (Joslins)
Longmont, CO Twin Peaks Mall (Joslins)
Colorado Springs, CO Chapel Hills Mall (Joslins)
Pueblo, CO Pueblo, CO (Joslins)
Cheyenne, WY Frontier Mall (Joslins)
Billings, MT Rimrock Mall (Hennessy's)
Missoula, MT Southgate Mall (Hennessy's)
Helena, MT Capital Hill Shopping Center (Hennessy's)
Fargo, ND West Acres Shopping Center (de Lendrecie's)
Duluth, MN Miller Hill Mall (Glass Block)
twenty-seven
MERCANTILE STORES COMPANY, INC.
is a traditional department store retailer which, at year-end, operated 102
predominantly fashion apparel stores and 16 home fashion stores. The stores,
which are located in a total of 17 states, are primarily mall-based and
operate under 13 different names. They are situated in 53 different markets
and, in the majority of these markets, the Company holds the dominant general
merchandise retailer position. This acceptance within the communities in which
we operate essentially conforms with our Corporate strategy: To operate
profitable stores in markets in which we hold a substantial competitive
position and thereby produce an acceptable return for our stockholders while
offering value, selection and service to our customers. The typical Mercantile
department store encompasses approximately 170,000 square feet and presents a
merchandise assortment which includes apparel, cosmetics, accessories and home
fashions which is tailored to appeal to the middle to upper-middle income
consumer.
The Company also maintains a partnership interest in five operating shopping
centers. In each of these centers, the Company operates a full-line department
store.
CORPORATE OFFICERS
David L. Nichols
Chairman of the Board
and Chief Executive Officer
James M. McVicker
Senior Vice President and
Chief Financial Officer
Randolph L. Burnette
Senior Vice President
Real Estate
Kathryn M. Muldowney
Vice President
Chief Information Officer
Louis L. Ripley
Vice President
Human Resources
William A. Carr
Treasurer and Secretary
Donald L. Radcliff
Controller
(Picture of Store)
The 212,000 square foot Joslins store in the Park Meadows Mall in
Denver, Colorado was opened in August. It received the prestigious Chain
Store Age Magazine "Retail Store of the Year" award the first Mercantile
store to be so honored.
twenty-eight
DIRECTORS
snu H. Keith H. Brodie, M.D.
President Emeritus of Duke University
s John A. Herdeg
Attorney at Law and
Chairman of the Board of
Christiana Bank & Trust Company
s Thomas J. Malone
President, Chief Operating Officer and
Director of Milliken & Company
Gerrish H. Milliken
Director Emeritus of
Milliken & Company
n Minot K. Milliken
Director Emeritus of
Milliken & Company
snu Roger Milliken
Chairman of the Board and
Chief Executive Officer of
Milliken & Company
David L. Nichols
Chairman of the Board and
Chief Executive Officer of
Mercantile Stores Company, Inc.
n Lawerance R. Pugh
Chairman of the Board of
VF Corporation
n Francis G. Rodgers
Former Vice President of
IBM Corporation
u Roger K. Smith
Product Line Marketing Manager of
Analog Devices, Inc.
s- Audit Committee
n- Compensation Committee
u- Nominating Committee
Annual Meeting
The Annual Meeting of Stockholders
will be held at 11:00 a.m. on
Wednesday, May 27, 1998
at 1100 North Market Street,
Wilmington, Delaware.
All stockholders are cordially invited to attend.
Corporate Offices
Mercantile Stores Company, Inc.
9450 Seward Road
Fairfield, Ohio 45014
Telephone: 513-881-8000
Stock Transfer Agent, Registrar
and Dividend Distributing Agent
Harris Trust Company of New York
311 West Monroe Street, 11th Floor
Chicago, Illinois 60690
Telephone: 312-461-3309
6.7% Notes and 8.2% Debentures Trustee
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Telephone: 513-579-5300
Independent Accountants
Arthur Andersen LLP
425 Walnut Street
Cincinnati, Ohio
Telephone: 513-381-6900
General Counsel
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178
Telephone: 212-696-6000
Form 10-K Annual Report
A copy of Mercantile's 1997 Form 10-K
Annual Report as filed with the Securities and Exchange Commission is
available upon request by writing:
Office of the Secretary
Mercantile Stores Company, Inc.
1100 North Market Street
Wilmington, Delaware 19801
Telephone: 302-575-1816
Mercantile's Home Page on the Internet http://www.mercstores.com
Dates Referenced Herein and Documents Incorporated by Reference
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