DILLARD'S, INC. (DDS) FY 2023 MD&A

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Dillard’s, Inc. operates 277 retail department stores spanning 29 states and an Internet store. The Company also operates a general contracting construction company, CDI, a portion of whose business includes constructing and remodeling stores for the Company, which is a reportable segment separate from our retail operations.

In accordance with the National Retail Federation fiscal reporting calendar and our bylaws, the Company’s fiscal year ends on the Saturday nearest January 31 of each year. Fiscal 2022, 2021 and 2020 ended on January 28, 2023, January 29, 2022 and January 30, 2021, respectively, and contained 52 weeks each.

A discussion regarding results of operations and analysis of financial condition for the year ended January 29, 2022 as compared to the year ended January 30, 2021 is included in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended January 29, 2022, including the impact of COVID-19 on those periods.

EXECUTIVE OVERVIEW

Fiscal 2022

We achieved record results during fiscal 2022 compared to a previously unprecedented performance in fiscal 2021, ending the year in a strong financial position. Overall, our results for 2022 reflected continued disciplined execution of inventory control combined with positive sales, which were particularly strong in the first half of the year.

Total retail sales increased 5% for fiscal 2022 compared to the prior fiscal year. Sales in comparable stores for the year increased 5%.

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Consolidated gross margin for fiscal 2022 was 42.0% of sales compared to 42.3% of sales for fiscal 2021. Retail gross margin for fiscal 2022 was a record 43.0% of sales compared to 42.9% of sales for the prior fiscal year.

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Consolidated selling, general and administrative expenses (“operating expenses”) for fiscal 2022 were $1.674 billion (24.4% of sales) compared to $1.537 billion (23.7% of sales) for fiscal 2021. The increase of approximately $138 million is primarily due to increases in payroll and payroll-related expenses resulting from a highly competitive wage environment.

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We reported record net income for fiscal 2022 of $891.6 million, or $50.81 per share, compared to $862.5 million, or $41.88 per share, for fiscal 2021. Included in net income for fiscal 2022 is a pretax gain of $21.0 million ($16.4 million after tax or $0.94 per share) primarily related to the sale of three store properties. Also included in fiscal 2022 net income are two tax-related benefits:

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Included in net income for the prior year (fiscal 2021) is a pretax gain of $24.7 million ($19.5 million after tax or $0.95 per share) primarily related to the sale of three store properties. Also included in prior year net income is a federal income tax benefit of $18.0 million ($0.88 per share) due to a deduction related to that portion of the special dividend of $15.00 per share that was paid to the Dillard's, Inc. Investment and Employee Stock Ownership Plan during the year.

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Cash flow from operations was $948.4 million for fiscal 2022 and $1,280.0 million for fiscal 2021. During fiscal 2022, we returned $708 million of cash to shareholders in the form of dividends ($271.3 million) and share repurchases ($436.6 million). At January 28, 2023, authorization of $175.4 million remained under the share repurchase program.

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At January 28, 2023, we had working capital of $1,212.9 million (including cash and cash equivalents, restricted cash and short-term investments totaling $809.2 million) and total debt outstanding of $521.4 million excluding operating lease liabilities.

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Key Performance Indicators

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

Trends and Uncertainties

Fluctuations in the following key trends and uncertainties may have a material effect on our operating results.

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At present, a number of economic and geopolitical factors are affecting the U.S. and world economies (including countries from which we source some of our merchandise): inflation and interest rate increases, fluctuating gas prices, uncertainty around shipping costs and shipping capacity and increased U.S. wages in a tight labor market. The extent to which our business will be affected by these factors depends on our customer’s continuing ability and willingness to accept price increases. Accordingly, the related financial impact to fiscal 2023 from these factors cannot be reasonably estimated at this time.

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.

The Company was affected by inflation during fiscal 2022. Our business will likely be affected by inflation in fiscal 2023, the extent of which depends on our customers’ continuing ability and willingness to accept price increases.

2023 Guidance

A summary of management’s estimates of certain financial measures for fiscal 2023 is shown below:

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General

Net sales. Net sales includes 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 includes sales for those stores which were in operation for a full period in both the most recently completed quarter and the corresponding quarter for the prior fiscal year, including our internet store. Comparable store sales excludes changes in the allowance for sales returns. Non-comparable store sales includes: 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.

Sales occur as a result of interaction with customers across multiple points of contact, creating an interdependence between in-store and online sales. Online orders are fulfilled from both fulfillment centers and retail stores. Additionally, online customers have the ability to buy online and pick up in-store. Retail in-store customers have the ability to purchase items that may be ordered and fulfilled from either a fulfillment center or another retail store location. Online customers may return orders via mail, or customers may return orders placed online to retail store locations. Customers who earn reward points under the private label credit card program may earn and redeem rewards through in-store or online purchases.

Service charges and other income. Service charges and other income includes income generated through the long-term marketing and servicing alliance with Wells Fargo Bank, N.A. (“Wells Fargo Alliance”). 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, non-specific margin maintenance allowances and merchandise margin maintenance allowances), bankcard fees, freight to the distribution

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centers, employee and promotional discounts, shipping to customers 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 includes expenses for store leases, including contingent rent, data processing and other equipment rentals and office space leases.

Interest and debt expense, net. Interest and debt expense includes interest, net of interest income from demand deposits and short-term investments and capitalized interest, relating to the Company’s unsecured notes, subordinated debentures and commitment fees and borrowings, if any, under the Company’s credit agreement. Interest and debt expense also includes the amortization of financing costs and interest on finance lease obligations.

Other expense. Other expense includes the interest cost and net actuarial loss components of net periodic benefit costs related to the Company’s unfunded, nonqualified defined benefit plan and charges related to the write off of certain deferred financing fees in connection with the amendment and extension of the Company’s secured revolving credit facility, if any.

(Gain) loss on disposal of assets. (Gain) loss on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment, as well as gains from insurance proceeds in excess of the cost basis of insured assets, if any.

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 cost method investments and (b) exit costs associated with the closure of certain stores, if any. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are also described in Note 1 in the “Notes to Consolidated Financial Statements” in Item 8 hereof. As disclosed in that note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Since future events and their effects cannot be determined with absolute certainty, actual results could differ from those estimates.

Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Company’s consolidated financial statements.

Merchandise inventory. All of the Company’s inventories are valued at the lower of cost or market using the last-in, first-out (“LIFO”) inventory method. Approximately 95% of the Company’s inventories are valued using the LIFO retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost to retail ratio to the retail value of inventories. The retail inventory method is an averaging method that is widely used in the retail industry due to its practicality. Inherent in the retail inventory method calculation are certain significant management judgments including, among others, merchandise markon,

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markups and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. During periods of deflation, inventory values on the first-in, first-out (“FIFO”) retail inventory method may be lower than the LIFO retail inventory method. Additionally, inventory values at LIFO cost may be in excess of net realizable value. At January 28, 2023 and January 29, 2022, merchandise inventories valued at LIFO, including adjustments as necessary to record inventory at the lower of cost or market, approximated the cost of such inventories using the FIFO retail inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales for fiscal 2022, 2021 or 2020. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $8 million for fiscal 2022.

The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of merchandise inventory. Complete physical inventories of the Company’s stores and warehouses are generally performed no less frequently than annually, with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts. While shrinkage has increased in recent years, the differences between the estimated amounts of shrinkage and the actual amounts realized during the past three years have not been material.

Revenue recognition. The Company’s retail operations segment recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns of merchandise. The asset and liability for sales returns are based on historical evidence of our return rate. We recorded an allowance for sales returns of $23.1 million and $19.6 million and return assets of $13.3 million and $10.8 million as of January 28, 2023 and January 29, 2022, respectively. The return asset and the allowance for sales returns are recorded in the consolidated balance sheets in other current assets and trade accounts payable and accrued expenses, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision were not material for fiscal 2022, 2021 and 2020.

The Company’s share of income under the Wells Fargo Alliance, involving the Dillard’s branded private label credit cards is included as a component of service charges and other income. The Company recognized income of $67.8 million, $74.8 million and $78.6 million from the alliance in fiscal 2022, 2021 and 2020, respectively. The Company participates in the marketing of the private label credit cards, which includes the cost of customer reward programs. Through the reward programs, customers earn points that are redeemable for discounts on future purchases. The Company defers a portion of its net sales upon the sale of merchandise to its customer reward program members that is recognized in net sales when the reward is redeemed or expired at a future date.

Revenues from CDI construction contracts are generally measured based on the ratio of costs incurred to total estimated contract costs (the “cost-to-cost method”). Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on stand-alone selling prices. Construction contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods and services that are not distinct from the existing contracts; therefore, the modifications are accounted for as if they were part of the existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation for which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. The length of each contract varies but is typically nine to eighteen months. The progress towards completion is determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. Estimated contract losses are recognized in full when determined.

Construction contracts give rise to accounts receivable, contract assets and contract liabilities. We record accounts receivable based on amounts billed to customers. We also record costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) in other current assets and trade accounts payable and accrued expenses, respectively, on the consolidated balance sheets.

Vendor allowances. The Company receives concessions from vendors through a variety of programs and arrangements, including cooperative advertising, payroll reimbursements and margin maintenance programs.

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Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. We are not able to assess the impact of vendor advertising allowances on creating additional revenues, as such allowances do not directly generate revenues for our stores.

Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred.

Amounts of margin maintenance allowances are recorded only when an agreement has been reached with the vendor and the collection of the concession is deemed probable. All such merchandise margin maintenance allowances are recognized as a reduction of cost purchases. Under the retail inventory method, a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory.

Insurance accruals. The Company’s consolidated balance sheets include liabilities with respect to claims for self-insured workers’ compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $2 million per claim). The Company’s retentions are insured through a wholly-owned captive insurance subsidiary. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As of January 28, 2023 and January 29, 2022, insurance accruals of $42.5 million and $39.9 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. A 10% change in our self-insurance reserve would have affected net income by approximately $3 million for fiscal 2022.

Long-lived assets. The Company’s judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets and operating lease assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

The Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the fair value, the carrying value is reduced to its fair value. Various factors including future sales growth, profit margins and real estate values are included in this analysis. To the extent these future projections, the Company’s strategies or market conditions change, the conclusion regarding impairment may differ from the current estimates.

Income taxes. Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management’s estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company’s actual results differ from estimated results due to changes in tax laws, changes in store locations, settlements of tax audits or tax planning, the Company’s effective tax rate and tax balances could be affected.

As such, these estimates may require adjustment in the future as additional information becomes available or as circumstances change. Changes in the Company’s assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.

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The total amount of unrecognized tax benefits as of January 28, 2023 was $7.0 million, of which, $5.3 million would, if recognized, affect the Company’s effective tax rate. The total amount of unrecognized tax benefits as of January 29, 2022 was $6.7 million, of which $3.9 million would, if recognized, affect the Company’s effective tax rate. The Company does not expect a significant change in unrecognized tax benefits in the next twelve months. The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements as income tax expense. The total amounts of interest and penalties were not material.

The fiscal tax years that remain subject to examination for the federal tax jurisdiction are 2015, 2016 and 2018 and forward. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company’s consolidated financial statements.

Pension obligations.  The discount rate that the Company utilizes for determining future pension obligations is based on the FTSE Above Median Pension yield curve on its annual measurement date as of the end of each fiscal year and is matched to the future expected cash flows of the benefit plans by semi-annual periods. The discount rate increased to 4.8% as of January 28, 2023 from 3.0% as of January 29, 2022. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $273.1 million is appropriately stated as of January 28, 2023; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would increase or decrease the pension liability by approximately $14 million. The Company expects to make a contribution to the pension plan of approximately $6.8 million in fiscal 2023. The Company expects pension expense to be approximately $23.8 million in fiscal 2023.

RESULTS OF OPERATIONS

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

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Sales

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The percent change by segment and product category in the Company’s sales for the past two years is as follows:

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2022 Compared to 2021

Net sales from the retail operations segment increased $327.2 million during fiscal 2022 compared to fiscal 2021, an increase of 5%. Sales in comparable stores increased 5% for fiscal 2022 compared to fiscal 2021. During fiscal 2022, sales of men’s apparel and accessories, cosmetics, ladies’ apparel and shoes increased significantly, while sales of juniors’ and children’s apparel increased moderately. Sales of home and furniture and ladies’ accessories and lingerie decreased slightly.

The number of sales transactions during fiscal 2022 decreased 3% over fiscal 2021 while the average dollars per sales transaction increased 8%.

Net sales from the construction segment increased $50.9 million or 43% during fiscal 2022 compared to fiscal 2021 due to an increase in construction activity. The remaining performance obligations related to executed construction contracts totaled $189.1 million, increasing approximately 101% from January 29, 2022.

Exclusive Brand Merchandise

Sales penetration of exclusive brand merchandise for fiscal 2022, 2021 and 2020 was 23.8%, 22.7% and 20.4% of total net sales, respectively.

Service Charges and Other Income

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2022 Compared to 2021

Service charges and other income is composed primarily of income from the Wells Fargo Alliance. Income from the alliance decreased $7.0 million in fiscal 2022 compared to fiscal 2021 primarily due to increased funding costs. Shipping and handling income increased during fiscal 2022 primarily due to an increase in online shopping.

Gross Margin

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2022 Compared to 2021

Gross margin as a percentage of net sales decreased 30 basis points of sales during fiscal 2022 compared to fiscal 2021. Gross margin from retail operations increased 10 basis points of segment net sales during the same periods. During fiscal 2022, gross margin decreased moderately in home and furniture and ladies’ accessories and lingerie, while decreasing slightly in shoes and juniors’ and children’s apparel. Gross margin increased slightly in cosmetics, men’s apparel and accessories and ladies’ apparel. Retail store inventory increased 4% at January 28, 2023 compared to January 29, 2022.

We source a significant portion of our private label and exclusive brand merchandise from countries that have been impacted by the COVID-19 virus. Additionally, many of our branded merchandise vendors also source a significant portion of their merchandise from these same countries. This issue negatively impacted our supply chain during fiscal 2022 and prior, resulting in shipping delays as well as increased shipping costs. Additionally, disruptions in the global transportation network, including slowdowns in our U.S. ports, caused delays in processing imported merchandise, thereby resulting in untimely deliveries of merchandise. These issues have improved in recent months and the negative impact on the Company’s operations and financial results has begun to diminish. Management continues to monitor these issues closely.

Inflation and rising interest costs continue to be a concern for management. The extent to which our business will be affected by inflation and rising interest costs depends on our customers’ continuing ability and willingness to accept price increases.

Gross margin from the construction segment decreased 210 basis points of segment net sales.

Selling, General and Administrative Expenses (“SG&A”)

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2022 Compared to 2021

SG&A increased $137.8 million, or 9.0%, during fiscal 2022 compared to fiscal 2021, increasing 70 basis points of sales. SG&A from retail operations increased 90 basis points of segment net sales during fiscal 2022 compared to fiscal 2021. The increase in SG&A dollars was primarily due to increases in payroll expense and related payroll taxes.

Payroll expense and related payroll taxes for fiscal 2022 were $1,138.8 million compared to $1,042.7 million for fiscal 2021, an increase of 9.2%. The Company remains focused on hiring, developing and retaining talented associates within the existing tight labor market.

Depreciation and Amortization

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2022 Compared to 2021

Depreciation and amortization expense decreased $10.9 million during fiscal 2022 compared to fiscal 2021, primarily due to the timing and composition of capital expenditures.

Interest and Debt Expense, Net

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2022 Compared to 2021

Net interest and debt expense decreased $12.6 million in fiscal 2022 compared to fiscal 2021 primarily due to an increase in interest income. Total weighted average debt outstanding during fiscal 2022 decreased $3.4 million compared to fiscal 2021 primarily due to a note maturity.

Other Expense

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2022 Compared to 2021

Other expense decreased $3.6 million in fiscal 2022 compared to fiscal 2021 primarily due to the write-off in fiscal 2021 of certain deferred financing fees in connection with the amendment and extension of the Company’s secured revolving credit facility.

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(Gain) Loss on Disposal of Assets

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Fiscal 2022

During fiscal 2022, the Company received proceeds of $25.1 million primarily from the sale of three store properties, resulting in a gain of $21.0 million that was recorded in (gain) loss on disposal of assets.

Fiscal 2021

During fiscal 2021, the Company received proceeds of $29.3 million primarily from the sale of three store properties, resulting in a gain of $24.7 million that was recorded in (gain) loss on disposal of assets.

Asset Impairment and Store Closing Charges

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Fiscal 2020

During fiscal 2020, the Company recorded $10.7 million in asset impairment charges related to certain clearance locations.

Income Taxes

The Company’s estimated federal and state effective income tax rate was 19.6% in fiscal 2022, 20.8% in fiscal 2021 and 53.3% in fiscal 2020. The Company expects the fiscal 2023 federal and state effective income tax rate to approximate 23%.

Fiscal 2022

During fiscal 2022, income taxes included federal and state tax benefits of $19.3 million due to the deduction related to that portion of the Company’s dividends that were paid to the Dillard’s, Inc. Investment and Employee Stock Ownership Plan, including the special dividend of $15 per share paid on January 9, 2023. Income taxes also included a net $13.7 million income tax benefit due to the release of valuation allowances primarily related to increases in the expected future utilization of state net operating loss carryforwards.

Fiscal 2021

During fiscal 2021, income taxes included federal and state tax benefits of $20.1 million due to the deduction related to that portion of the Company’s dividends that were paid to the Dillard’s, Inc. Investment and Employee Stock Ownership Plan, including the special dividend of $15 per share paid on December 15, 2021.

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LIQUIDITY AND CAPITAL RESOURCES

The Company’s current non-operating priorities for its use of cash are strategic investments to enhance the value of existing properties, stock repurchases and dividend payments to stockholders.

Cash flows for the Company’s most recent three fiscal years were as follows:

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Operating Activities

The primary source of the Company’s liquidity is, and historically has been, cash flows from operations. Due to the seasonality of the Company’s business, we have historically realized a significant portion of the cash flows from operating activities during the second half of the fiscal year. Retail operations sales are the key operating cash component, providing 95.8%, 96.2% and 93.8% of total revenues in fiscal 2022, 2021 and 2020, respectively.

Net cash flows from operations decreased $331.6 million during fiscal 2022 compared to fiscal 2021 primarily due to changes in working capital items, notably decreases in trade accounts payable and accrued expenses and other liabilities and income taxes payable.

Operating cash inflows also include the Company’s income and reimbursements from the Wells Fargo Alliance and cash distributions from joint ventures (excluding returns of investments), if any. Operating cash outflows include payments to vendors for inventory, services and supplies, payments to employees and payments of interest and taxes.

Wells Fargo owns and manages the Dillard’s private label cards under the Wells Fargo Alliance. Under the Wells Fargo Alliance, Wells Fargo establishes and owns private label card accounts for our customers, retains the benefits and risks associated with the ownership of the accounts, provides key customer service functions, including new account openings, transaction authorization, billing adjustments and customer inquiries, receives the finance charge income and incurs the bad debts associated with those accounts.

Pursuant to the Wells Fargo Alliance, we receive on-going cash compensation from Wells Fargo based upon the portfolio’s earnings. The compensation received from the portfolio is determined monthly and has no recourse provisions. The amount the Company receives is dependent on the level of sales on Wells Fargo accounts, the level of balances carried on Wells Fargo accounts by Wells Fargo customers, payment rates on Wells Fargo accounts, finance charge rates and other fees on Wells Fargo accounts, the level of credit losses for the Wells Fargo accounts as well as Wells Fargo’s ability to extend credit to our customers. We participate in the marketing of the private label cards, which includes the cost of customer reward programs. The Wells Fargo Alliance expires in November 2024.

The Company recognized income of $67.8 million, $74.8 million and $78.6 million from the Wells Fargo Alliance during fiscal 2022, 2021 and 2020, respectively.

During fiscal 2021, the Company received proceeds from insurance of $2.9 million for claims filed for merchandise losses related to storm damage incurred at two stores.

At January 28, 2023, the Company had purchase obligations of $1,330.3 million outstanding for merchandise and store construction commitments, all of which are expected to be paid during fiscal 2023.

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Investing Activities

Cash inflows from investing activities generally include proceeds from sales of property and equipment and maturities of short-term investments. Cash outflows from investing activities generally include payments for capital expenditures such as property and equipment and purchases of short-term investments.

Cash used in investing activities increased $166.1 million during fiscal 2022 compared to fiscal 2021 primarily due to the increase in short-term investment activity.

Capital expenditures increased $15.7 million for fiscal 2022 compared to fiscal 2021. During fiscal 2022, the Company opened: (1) a new store at University Place in Orem, Utah (160,000 square feet) which replaced a store at Provo Towne Centre (200,000 square feet) in the same market and (2) a newly remodeled owned facility at Westgate Mall in Amarillo, Texas, which replaced a leased building at that same location where the Company operates a dual-anchor format. The Company also plans to open a new store at The Empire Mall in Sioux Falls, South Dakota in the Spring of 2024, which will mark the Company’s 30th state of operation. During fiscal 2021, the Company opened a new store at Mesa Mall in Grand Junction, Colorado (100,000 square feet).

During fiscal 2022, the Company received cash proceeds of $25.1 million and recorded a related gain of $21.0 million, primarily from the sale of three store properties: (1) a 200,000 square foot location at Provo Towne Centre in Provo, Utah; (2) a 75,000 square foot non-operating store property at Frontier Mall in Cheyenne, Wyoming and (3) a 90,000 square foot clearance center at Metrocenter Mall in Phoenix, Arizona.

During fiscal 2022, the Company also closed (1) a leased clearance center at University Square Mall in Tampa, Florida (80,000 square feet), (2) an owned clearance center at East Hills Mall in St. Joseph, Missouri (100,000 square feet) and (3) a leased location at Sikes Senter in Wichita Falls, Texas (150,000 square feet). During early 2023, the Company has closed an owned location at Santa Rosa Mall in Fort Walton Beach, Florida (115,000 square feet) and a leased location at Conestoga Mall in Grand Island, Nebraska (80,000 square feet). There were no material costs associated or expected with any of these store closures. We remain committed to closing under-performing stores where appropriate and may incur future closing costs related to such stores when they close.

During fiscal 2021, the Company received cash proceeds of $29.3 million and recorded a related gain of $24.7 million, primarily related to the sale of three store properties: (1) a 120,000 square foot location at Cortana Mall in Baton Rouge, Louisiana; (2) a 200,000 square foot location at Paradise Valley Mall in Phoenix, Arizona and (3) a non-operating store property in Knoxville, Tennessee. During fiscal 2021, the Company also closed its leased clearance center at Valle Vista Mall in Harlingen, Texas (100,000 square feet).

During fiscal 2022, the Company received proceeds from insurance of $0.5 million for a claim filed for building losses related to storm damage incurred at one store. During fiscal 2021, the Company received proceeds from insurance of $3.1 million for claims filed for building losses related to storm damage incurred at two stores.

During fiscal 2022, the Company received proceeds from life insurance of $4.4 million related to one policy. During fiscal 2021, the Company received proceeds from life insurance of $0.7 million related to one policy.

During fiscal 2022, the Company purchased certain treasury bills for $245.7 million that are classified as short-term investments. During fiscal 2022, the Company received proceeds of $100.0 million related to maturities of its short-term investments.

Financing Activities

Our primary source of cash inflows from financing activities is generally borrowings from our $800 million senior secured revolving credit facility. Financing cash outflows generally include the repayment of borrowings under the revolving credit facility, the repayment of long-term debt, finance lease obligations, the payment of dividends and the purchase of treasury stock.

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Cash used in financing activities decreased to $769.0 million in fiscal 2022 from $853.8 million in fiscal 2021, primarily due to decreases in treasury stock purchases and cash dividends paid during 2022.

Stock Repurchase.   In March 2018, the Company’s Board of Directors authorized the Company to repurchase up to $500 million of the Company’s Class A Common Stock under an open-ended plan (“March 2018 Stock Plan”). In May 2021, the Company’s Board of Directors authorized the Company to repurchase up to $500 million of the Company’s Class A Common Stock under an open-ended plan (“May 2021 Stock Plan”). In February 2022, the Company’s Board of Directors authorized the Company to repurchase up to $500 million of the Company’s Class A Common Stock under an open-ended plan (“February 2022 Stock Plan”). As of January 28, 2023, the Company had completed the authorized purchases under the March 2018 Stock Plan and the May 2021 Stock Plan, and $175.4 million of authorization remained under the February 2022 Stock Plan.

During fiscal 2022, the Company repurchased 1.7 million shares of Class A Common Stock for $436.6 million at an average price of $255.49 per share, and the Company paid $16.2 million for share repurchases that had not yet settled but were accrued at January 29, 2022. During fiscal 2021, the Company repurchased 3.2 million shares of Class A Common Stock for $561.1 million (including the unsettled share repurchases accrued at January 29, 2022) at an average price of $175.06 per share. The ultimate disposition of the repurchased stock has not been determined.

On August 16, 2022, the Inflation Reduction Act of 2022 ("the Act") was signed into law. Under the Act share repurchases after December 31, 2022 will be subject to a 1% excise tax. This excise tax and the remaining corporate tax changes included in the Act are not expected to have a material impact on the Company's financial statements.

Revolving Credit Agreement.   The Company maintains a revolving credit facility (“credit agreement”) for general corporate purposes including, among other uses, working capital financing, the issuance of letters of credit, capital expenditures and, subject to certain restrictions, the repayment of existing indebtedness and share repurchases. The credit agreement is secured by certain deposit accounts of the Company and certain inventory of certain subsidiaries and provides a borrowing capacity of $800 million, subject to certain limitations as outlined in the credit agreement, with a $200 million expansion option.

In April 2021, the Company amended the credit agreement (the "2021 amendment"). Pursuant to the 2021 amendment, the Company pays a variable rate of interest on borrowings under the credit agreement and a commitment fee to the participating banks. The rate of interest on borrowings is LIBOR plus 1.75% if average quarterly availability is less than 50% of the total commitment, as defined in the 2021 amendment ("total commitment"), and the rate of interest on borrowings is LIBOR plus 1.50% if average quarterly availability is greater than or equal to 50% of the total commitment. The commitment fee for unused borrowings is 0.30% per annum if average borrowings are less than 35% of the total commitment and 0.25% if average borrowings are greater than or equal to 35% of the total commitment. As long as availability exceeds $80 million and certain events of default have not occurred and are not continuing, there are no financial covenant requirements under the credit agreement. The credit agreement, as amended by the 2021 amendment, matures on April 28, 2026.

During fiscal 2021, the Company paid $3.0 million in issuance costs related to the 2021 amendment, which were recorded in other assets on the consolidated balance sheet, and the Company recognized a loss on early extinguishment of debt of $2.8 million for the write-off of certain remaining deferred financing fees related to the 2020 amendment. This charge was recorded in other expense on the consolidated statement of operations.

No borrowings were outstanding at January 28, 2023. Letters of credit totaling $19.3 million were issued under the credit agreement leaving unutilized availability under the facility of $729.4 million at January 28, 2023. The Company had no borrowings during fiscal 2022 and 2021, and the Company had weighted-average borrowings of $148.6 million during fiscal 2020.

Long-term Debt.   At January 28, 2023, the Company had $321.4 million of long-term debt, comprised of unsecured notes. The unsecured notes bear interest at rates ranging from 7.000% to 7.750% with due dates from fiscal 2026 through fiscal 2028.

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Long-term debt maturities over the next five years are (in millions):

​

During fiscal 2022, the Company decreased its net level of outstanding debt by $44.8 million related to the maturity of 7.875% Notes. During fiscal 2021, the Company made finance lease payments of $0.7 million and no debt matured.

During fiscal 2023, the Company expects to accrue interest expense of $24.2 million on its long-term debt.

Subordinated Debentures.   As of January 28, 2023, the Company had $200 million outstanding of its 7.5% subordinated debentures due August 1, 2038. All of these subordinated debentures were held by Dillard’s Capital Trust I, a 100% owned, unconsolidated finance subsidiary of the Company. The Company has the right to defer the payment of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters; however, the Company has no present intention of exercising this right to defer interest payments.

During fiscal 2023, the Company expects to accrue interest expense of $15.2 million on its subordinated debentures.

Dividends. During fiscal 2022, in addition to our typical quarterly dividends, the Board of Directors declared a special dividend of $15.00 per share that was paid on the Class A and Class B Common Stock of the Company.

Fiscal 2023 Outlook

The Company expects to finance its operations during fiscal 2023 from cash on hand, cash flows generated from operations and, if necessary, utilization of our revolving credit facility. Depending upon our actual and anticipated sources and uses of liquidity, the Company will from time to time consider other possible financing transactions, the proceeds of which could be used to fund working capital or for other corporate purposes.

LIBOR

On March 5, 2021, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative: (a) immediately after December 31, 2021, in the case of the 1-week and 2-month U.S. dollar settings; and (b) immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. The 2021 amendment to our credit agreement included an approach to replace LIBOR with a SOFR-based rate. We have not yet transitioned to a SOFR-based rate and will continue to monitor, assess and plan for the replacement of LIBOR with an alternative rate. We also intend to work with the Wells Fargo Alliance and any other applicable agreements to determine a suitable alternative reference rate.

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.

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COMMERCIAL COMMITMENTS

AMOUNT OF COMMITMENT EXPIRATION PER PERIOD

NEW ACCOUNTING PRONOUNCEMENTS

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 in the “Notes to Consolidated Financial Statements” in Item 8 hereof.

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 those statements included under the headings “2023 Guidance” and “Fiscal 2023 Outlook” included in this Management’s Discussion and Analysis and other statements regarding management’s expectations and forecasts for the remainder of fiscal 2023 and beyond, statements concerning the opening of new stores or the closing of existing stores, statements regarding our competitive position, statements concerning capital expenditures and sources of liquidity, statements regarding the expected impact of the COVID-19 pandemic and related government responses, statements concerning share repurchases, statements concerning pension contributions, statements concerning changes in loss trends, settlements and other costs related to our self-insurance programs, statements regarding the expected phase out of LIBOR, statements concerning expectations regarding the payment of dividends, statements regarding the impacts of inflation in fiscal 2023 and statements concerning estimated taxes. 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) the COVID-19 pandemic and its effects on public health, our supply chain, the health and well-being of our employees and customers, and the retail industry in general; other general retail industry conditions and macro-economic conditions including inflation and changes in traffic at malls and shopping centers; 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 and interest rates on 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 the Company’s ability to meet labor needs amid nationwide labor shortages and an intense competition for talent; changes in consumer spending patterns, debt levels and their ability to meet credit obligations; high levels of unemployment; changes in tax legislation (including the Inflation Reduction Act of 2022); changes in legislation, affecting such matters as the cost of employee benefits or credit card income; adequate and stable availability and pricing of materials, production facilities and labor from which the Company sources its merchandise; 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

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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; the elimination of LIBOR; potential disruption from terrorist activity and the effect on ongoing consumer confidence; other epidemic, pandemic or public health issues; potential disruption of international trade and supply chain efficiencies; any government-ordered restrictions on the movement of the general public or the mandated or voluntary closing of retail stores in response to the COVID-19 pandemic; global conflicts (including the recent conflict in Ukraine) and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature, and other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the SEC, particularly those set forth under the caption “Item 1A, Risk Factors” in this Annual Report.