ITEM 1. Business
General
Belk, Inc., together with its subsidiaries (collectively, the "Company" or
"Belk"), is the largest privately owned department store business in the United
States, with total revenues of approximately $2.24 billion for the fiscal year
ended February 1, 2003. The Company and its predecessors have been successfully
operating department stores since 1888 by providing superior service and
merchandise that meets customers' needs for fashion, value and quality.
The Company's fiscal year ends on the Saturday closest to each January 31.
All references to "fiscal year 2004" refer to the current fiscal year ending
January 31, 2004; references to "fiscal year 2003" refer to the period ending
February 1, 2003; references to "fiscal year 2002" refer to the period ending
February 2, 2002; and references to "fiscal year 2001" refer to the period
ending February 3, 2001.
Fiscal Year Ended Weeks
2004 January 31, 2004 52
2003 February 1, 2003 52
2002 February 2, 2002 52
2001 February 3, 2001 53
The Company operates 214 retail department stores in 13 states in the
southeastern United States. Belk stores seek to provide customers the
convenience of one-stop shopping, with a dominant merchandise mix and extensive
offerings of brands, styles, assortments and sizes. Belk stores sell top
national brands of fashion apparel, shoes and accessories for women, men and
children, as well as cosmetics, home furnishings, housewares, gifts and other
types of quality merchandise. The Company also sells exclusive private label
brands, which offer customers differentiated merchandise selections at better
values. Larger Belk stores may include hair salons, spas, restaurants, optical
centers and other amenities.
Although the Company operates 50 Belk stores that exceed 100,000 square
feet in size, most Belk stores range in size from 50,000 to 80,000 square feet.
Most of the Belk stores are anchor tenants in major regional malls and shopping
centers, primarily in medium and smaller markets. In addition to department
stores, the Company operates two stores that sell limited selections of
cosmetics, hosiery and accessories for women under the "Belk Express" store
name. In the aggregate, the Belk stores occupy approximately 17.374 million
square feet of space.
Management of the Belk stores is organized into four regional operating
divisions, with each unit headed by a division chairman and a director of
stores. Each division supervises a number of stores and maintains an
administrative office in the markets served by the division. Division offices
provide overall management and support for the Belk stores in their regions.
Belk Stores Services, Inc., a subsidiary of Belk, Inc., and its subsidiary Belk
Administration Company, along with Belk International, Inc., a subsidiary of
Belk, Inc., and its subsidiary, Belk Merchandising Company, LLC (collectively
"BSS"), coordinate the operations of Belk stores on a company-wide basis by
providing services to the Belk division offices and stores, such as
merchandising, marketing, advertising and sales promotion, information systems,
human resources, public relations, accounting, real estate and store planning,
credit, legal, tax, distribution and purchasing.
2
The Company was incorporated in Delaware in 1997. The Company's principal
executive offices are located at 2801 West Tyvola Road, Charlotte, North
Carolina 28217-4500, and its telephone number is (704) 357-1000.
Business Strategy
Belk's mission is to be the dominant department store in its markets by
selling merchandise to customers that meets their needs for fashion, selection,
value, quality and service. To achieve this mission, Belk's business strategy
includes five key elements: (1) a target customer focus; (2) focused merchandise
assortments; (3) compelling sales promotions; (4) distinctive customer service;
and (5) a winning store and market strategy.
Target Customer Focus. Belk's primary target customer is a
35-to-54-year-old female with middle to upper level family income who works
outside of the home; who buys for herself and her family; and who is
style-conscious and seeks updated fashions and quality merchandise. Belk also
targets the 18-to-25-year-old female who begins shopping at Belk as an
aspirational store at an early age for selected items. The Company maintains its
target customer focus by conducting ongoing research to ascertain and update
target customer characteristics and needs, such as annual customer satisfaction
surveys and customer focus group studies. The Company seeks to maximize customer
convenience and satisfaction through effective inventory management that ensures
consistently high inventory levels of desired merchandise, effective store
layout, merchandise signing and visual display, and quick and efficient
transactions at the point of sale. Additionally, the Company strives to attract
and retain well-qualified associates who provide a high level of friendly,
personal service to enhance the customer's shopping experience.
Focused Merchandise Assortments. The Company has positioned itself through
its target customer focus to take advantage of significant sales growth
opportunities in its women's apparel (including special sizes), accessories and
shoe businesses. The Company has launched merchandise initiatives focused on
providing its target customer with in-depth assortments of updated, branded
fashions that meet customers' lifestyle needs for casual, career and social
occasions.
Compelling Sales Promotions. Belk's sales promotion strategy focuses on
promoting merchandise that the target customer desires, offering her compelling
price values, and providing adequate inventory to support all sales promotion
events.
Distinctive Customer Service. The Company's customer research has
determined that Belk generally differentiates itself from competitors through
the high level of service and amenities that its stores provide. Belk intends to
continue its tradition of employing sales associates who are knowledgeable about
the merchandise they sell, approach customers promptly, help when needed and
provide quick checkout.
Winning Store and Market Strategy. The Company has a store and market
strategy focused on maximizing return on investment and improving its
competitive position. The approach to investment in new markets and the
expansion and renovation of existing facilities includes a disciplined real
estate evaluation process using a balanced scorecard, rigorous financial
measures and investment guidelines.
Productivity and Efficiency Strategy
The Company seeks to improve profitability through developing and
implementing initiatives designed to improve productivity and efficiency
throughout the organization. Such initiatives include a "store-ready"
merchandise program that speeds delivery of merchandise to the sales floor, the
expanded implementation of a "smart store" concept that enhances efficiencies on
the sales floor through the use of centralized cash register and gift wrap
stands, and the use of computer-based training programs.
During fiscal year 2003, a Company-wide profit improvement initiative
begun the previous year continued to produce substantial expense savings and
gross margin improvement along with gains in efficiency and productivity.
Associates from throughout the Company contributed numerous ideas, many of which
were implemented to help reduce costs and boost profits across all areas of the
business. The profit improvement efforts had a significant positive impact on
the Company's overall financial results for the year. Integrating
3
expense management and profit improvement strategies, processes and programs
into operations throughout the Company will continue to be a top priority.
Growth Strategy
The Company intends to continue to open new stores selectively in new and
existing markets in order to increase sales, market share and customer loyalty.
As the consolidation of the department store industry continues, the Company
also will consider store acquisitions that offer opportunities for growth in
existing and contiguous markets.
Management of the Company believes that significant opportunities for
growth exist in Belk markets where the Belk name and reputation are well known.
Although the Company will continue to take advantage of prudent opportunities to
expand into large markets, the Company will focus its expansion in medium-sized
markets with store units in the 50,000 to 80,000 square-foot size range.
In determining where to open new stores in the future, the Company's
management will evaluate demographic information such as income, education
levels, age and occupation, as well as the availability of prime real estate
locations, existing and potential competitors and the number of Belk stores in
the same or contiguous market areas. Management will also analyze store and
market sales and income data and seek to identify economies of scale available
in advertising, distribution and other expenses as part of its process for
determining new store sites and markets for expansion.
In fiscal year 2003, the Company opened nine new stores that have a
combined size of approximately 845,000 square feet of space and completed a
44,652-square-foot expansion and major renovation of its flagship store at
SouthPark Mall in Charlotte, NC.
In fiscal year 2004, Belk plans to open eight new stores that will have a
combined space of approximately 518,000 square feet. The Company also will
complete major renovations of four existing stores in fiscal year 2004.
New stores and major expansions completed in fiscal year 2003 include:
New Stores
Date of New or Existing
Location Size (Sq. Ft.) Opening Market
Jasper, AL (Jasper Mall) 48,640 03/06/02 New
Rogers, AR (Scottsdale Center) 73,777 03/06/02 New
Durham, NC (The Streets At Southpoint) 179,799 03/06/02 Existing
Newnan, GA (Newnan Crossing) 65,773 03/12/02 Existing
Norcross, GA (The Forum at Peachtree) 65,804 03/12/02 New
Morristown, TN (College Square Mall) 73,000 03/13/02 New
Morehead City, NC (Cypress Bay Plaza) 100,000 04/25/02 Existing
Raleigh, NC (Triangle Towne Center) 179,466 08/14/02 Existing
McDonough, GA (Henry Town Center) 58,267 08/21/02 New
Expansions and Renovations
Expansion Size Date of New or Existing
Location (Sq. Ft.) Opening Market
Charlotte, NC (SouthPark Mall) 44,652 11/06/02 Existing
4
New stores and major store renovations scheduled for completion in fiscal
year 2004 include:
New Stores
Scheduled Date New or Existing
Location Size (Sq. Ft.) of Opening Market
Gulfport, MS (Crossroads Center) 68,221 3/12/03 New
Gallatin, TN (Village Green Commons) 58,364 9/10/03 New
Columbia, TN (Shoppes of Columbia) 64,917 9/10/03 New
Springfield, TN (Centre Stage Shopping
Center) 51,416 9/10/03 New
Lufkin, TX 64,893 9/10/03 New
Hot Springs, AR (Cornerstone Market
Place) 70,348 11/5/03 New
Destin, FL (Destin Commons) 65,856 11/5/03 New
Conway, AR (Conway Commons) 73,777 11/5/03 New
Store Renovations
Scheduled
Completion New or Existing
Location Size (Sq. Ft.) Date Market
Greensboro, NC (Four Seasons) 214,507 Fall 2003 Existing
Shelby, NC (Cleveland Mall) 93,754 Fall 2003 Existing
Westminster, MD (TownMall) 73,102 Fall 2003 Existing
Winston-Salem, NC (Hanes Mall) 236,161 Fall 2003 Existing
Merchandising
Belk stores feature quality name brand and private label merchandise in
moderate to better price ranges, providing fashion, selection and value to
customers. The merchandise mix is targeted to middle and upper income customers
shopping for their families and homes, and includes a wide selection of fashion
apparel, accessories and shoes for women, men and children, as well as
cosmetics, home furnishings, housewares, gift and guild, jewelry, and other
types of department store merchandise. The goal is to position Belk stores as
the leaders in their markets in providing updated, "fashion-right" assortments
with greater depth of style, selection and value.
Belk stores offer complete assortments of the most desirable national
brands. The Company has enjoyed excellent long term relationships with many top
apparel and cosmetics suppliers and is often the exclusive distributor of
apparel, accessories and cosmetic lines in its markets. These exclusive
distribution arrangements enhance the Belk stores' image as fashion leaders and
enable Belk to offer customers exclusive and original merchandise that is not
generally available in other stores in their markets.
Belk stores also offer exclusive private brands in selected merchandise
areas that provide customers with merchandise that is comparable in quality and
style with national brands at substantial savings. Belk private brands, which
include Kim Rogers, Madison Studio, J. Khaki, Meeting Street, Saddlebred and
Home Accents provide outstanding value for customers and set Belk apart from its
competitors. During fiscal year 2003, the Company placed a renewed emphasis on
expanding the growth and profitability of its private brand business and
reintroduced an updated Nursery Rhyme label for infants and toddlers.
The Merchandising Restructuring
In August 2002, the Company consolidated its merchandising, marketing and
sales promotion functions into a single organization located at the Company's
corporate offices in Charlotte, NC. The new organization includes a central
planning and allocation function that oversees the distribution and allocation
of merchandise to all Belk stores. The Company anticipates the consolidation
will permit the Company to achieve more
5
unified and consistent execution of its merchandising, marketing and advertising
strategies and more focused merchandise assortments at the store level. The
Company also anticipates that the consolidation will result in cost savings and
greater operating efficiencies.
Marketing
The Company employs its strategic marketing initiatives and strategies to
develop and enhance the equity of the Belk brand, strengthen its relationship
with and become the desired destination for the target customer, and create and
strengthen "one-to-one" relationships with customers. The Company's primary
marketing strategy emphasizes direct communications with customers through
personal contact and the use of multi-faceted advertising, marketing and sales
promotion programs. This strategy involves extensive mass media print and
broadcast advertising, direct mailings to charge customers, comprehensive store
visual merchandising and signing, in-store special events (e.g., trunk shows,
celebrity and designer appearances) and magazine, newspaper and billboard
advertising. The Company also provides information about the Company and its
sales promotions and bridal gift registry on the belk.com website.
Major sales promotions and sales events are planned and implemented in
Belk stores throughout the year. The Company regularly produces advertising
circulars that are distributed to millions of customers via newspaper inserts or
direct mailings. The Company uses creative advertising that effectively
communicates the Company's merchandise offerings, fashion image and reputation
for superior service to store customers in a variety of media, including
customized advertising based upon the particular merchandise needs and shopping
preferences of its customers.
Gift Cards
The Company's "Great Gifts Card" program provides a convenient option for
customer gift-giving and enables stores to issue electronic credits to customers
in lieu of cash refunds for merchandise returned without sales receipts. Four
types of Great Gifts Cards are available, each with its own distinctive design
and appeal: Bridal/ Anniversary, Holiday, Zuniverse (for juniors customers), and
Standard.
Salons and Spas
The Company owns and operates 12 hair styling salons in its various store
locations, nine of which also offer spa services. During fiscal year 2003, the
Company opened new salon and spa operations at Belk of The Streets at Southpoint
in Durham, NC, and at Belk of Triangle Towne Center in Raleigh, NC. The hair
salons offer the latest hair styling services as well as wide assortments of top
brand name beauty products, including Aveda. The spas offer massage therapy,
skincare, nail treatments and other specialized services. The salons and spas in
the Belk stores at SouthPark Mall in Charlotte, NC, Asheville Mall in Asheville,
NC, Columbiana Centre in Columbia, SC, Triangle Towne Center in Raleigh, NC, the
Streets at Southpoint in Durham, NC, and Westfield Shoppingtown/ Independence
Mall in Wilmington, NC operate under the name of "Carmen! Carmen! Prestige Salon
and Spa at Belk."
Belk Gift Registry
The Company's gift registry offers a wide assortment of bridal merchandise
that can be registered and purchased online at belk.com or in local Belk stores
and shipped directly to the customer or gift recipient. The gift registry is a
fully integrated system that combines the best of Internet technology and
in-store shopping. Brides and engaged couples can conveniently create their gift
registry and make selections through belk.com from a home computer, or they can
go to a Belk store where a certified professional bridal consultant can provide
assistance using the store's online "Great Gifts" kiosk. In the Belk stores that
have kiosks, brides and engaged couples can use a portable scanning device,
which enables them to quickly and easily enter information on their gift
selections directly into the registry system.
6
Belk Proprietary Charge Programs
The Company offers its customers the convenience of paying for their
purchases on credit using a variety of proprietary charge payment programs,
including a 30-day revolving account, an interest-free 30-60-90 day account, an
interest-free table top plan (for china, crystal, silver and other gift
purchases) and an interest-free fine jewelry plan.
The Company promotes the development of new and existing cardholder
business through targeted marketing campaigns and active solicitation efforts
within Belk stores. The Company's "Belk Select" affinity program is designed to
recognize and reward its best Belk charge customers, attract profitable new
customers, increase sales from existing customers and expand the active Belk
credit card account base. The program offers special benefits and services to
charge customers whose Belk charge purchases total $650 or more in a calendar
year, including $5 in free "Belk Reward Dollars" for every $150 charged to their
Belk Select card which can be applied toward future Belk purchases, "Make Your
Own Sale" certificates, free deluxe gift wrapping, free basic alterations,
choice of billing dates, no annual fee, and notifications of special savings,
sales events and courtesy shopping days.
The Company's charge cards are issued through Belk National Bank, a
subsidiary of the Company located in Lawrenceville, Georgia.
Systems and Technology
Belk makes significant investments in technology and information systems
in order to drive sales growth, improve operating efficiency and support its
overall business strategy. The Company has prioritized the development and
implementation of computerized systems to support its merchandising, sales
floor, inventory management and logistics initiatives. These systems enable
management quickly to identify sales trends, order, track and distribute
merchandise, manage markdowns and monitor merchandise mix and inventory levels.
During fiscal year 2003, the Company outsourced its central computer operations
to IBM Global Services; modified merchandise planning and price file systems to
meet the needs of the new consolidated merchandising, marketing and
planning/allocation organization; upgraded its data warehouse capability; and
outsourced its telecommunications transport services and network management to
Electronic Data Services. Additionally, the Company implemented a new
Promotional Price Look-up system that will help ensure pricing accuracy and
enable associates to quickly and easily provide customers with the most current
pricing on all merchandise; developed a telephone append system that will
support its customer relationship management efforts and began development of a
new company-wide Human Resources Information System that will incorporate the
latest technology and human resources practices and eliminate many current
manual and paper-intensive processes.
Inventory Management and Logistics
The Company operates a 371,000 square foot Central Distribution Center in
Blythewood, SC that incorporates the latest distribution center design,
technology and equipment and facilitates the automation of many labor-intensive
processes. During fiscal year 2003, the Company continued to focus on increasing
the number of merchandise vendors certified for cross dock shipments and on
ensuring ongoing vendor compliance with Floor Ready industry standards. The
Central Distribution Center implemented a "first-in, first-out" trailer rotation
method to improve the flow of shipments through the Center and increased average
total productivity by 5,000 to 8,000 cartons per day, which reduced on-hand
carton inventory and aging. The Company was able to reduce the number of freight
carriers used and implement new standards of performance.
Additionally, the Central Distribution Center, working in conjunction with
the Company's inventory management systems and "Floor Ready" initiatives,
continued to significantly reduce merchandise cycle time, improve merchandise
margin and reduce expenses. As part of the Company's "Store Ready" initiatives,
the Company implemented refined "best method" processes for store merchandise
receiving to enable stores to receive and process merchandise shipments and move
goods to the sales floor more quickly and efficiently, thus ensuring the ongoing
timely delivery of fresh goods to meet customers' shopping needs.
7
Non-Retail Businesses
Several of the Company's subsidiaries engage in businesses that indirectly
or directly support the operations of the retail department stores. The
non-retail businesses include United Electronic Services, Inc. ("UES"), a wholly
owned subsidiary of Belk, Inc., which provides equipment maintenance services,
primarily on cash registers, but also on other equipment. UES provides such
services to the Company pursuant to contracts with BSS.
Industry and Competition
The Company operates retail department stores in the highly competitive
and dynamic retail apparel industry. Management of the Company believes that the
principal competitive factors for retail department store operations include
merchandise selection, quality, value, customer service and convenience. The
Company believes its stores are strong competitors in all of these areas. The
Company's primary competitors are traditional department stores, mass
merchandisers, national apparel chains, individual specialty apparel stores and
direct merchant firms, including Federated Department Stores, Inc., Wal-Mart
Stores, Inc., Kohl's Corporation, The May Department Stores Company, Dillard's,
Inc., Sak's, Inc., Sears Roebuck & Co. and J.C. Penney Company, Inc.
Trademarks and Service Marks
Belk Stores Services, Inc. owns all of the principal trademarks and
service marks now used by the Company, including "Belk" and "All for You". These
marks are registered with the United States Patent and Trademark Office. The
term of each of these registrations is generally ten years, and they are
generally renewable indefinitely for additional ten-year periods, so long as
they are in use at the time of renewal. Most of the trademarks, trade names and
service marks employed by the Company are used in the Company's private brands
program. The Company intends to vigorously protect its trademarks and service
marks and initiate appropriate legal action whenever necessary.
Seasonality and Quarterly Fluctuations
Due to the seasonal nature of the retail business, the Company has
historically experienced and expects to continue to experience seasonal
fluctuations in its revenues, operating income and net income. A
disproportionate amount of the Company's revenues and a substantial amount of
the Company's operating and net income are realized during the fourth quarter,
which includes the Christmas selling season. Working capital requirements also
fluctuate during the year, increasing somewhat in mid-summer in anticipation of
the fall merchandising season and increasing substantially prior to the
Christmas selling season when the Company carries higher inventory levels. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Seasonality and Quarterly Fluctuations."
Associates
As of February 1, 2003, the Company had approximately 17,800 full-time and
part-time associates. Because of the seasonal nature of the retail business, the
number of associates fluctuates from time to time and is highest during the
holiday shopping period in November and December. The Company as a whole
considers its relations with associates to be good. None of the associates of
the Company are represented by unions or subject to collective bargaining
agreements.
Where You Can Find More Information
The Company makes available free of charge through its website,
www.belk.com, its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after the Company files such material with, or
furnishes it to, the SEC.
8
|