BELK INC - BLKIA Annual Report (10-K) PART I

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.

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.

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.

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.

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

expense management and profit improvement strategies, processes and programs into operations throughout the Company will continue to be a top priority.

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 store renovations scheduled for completion in fiscal year 2004 include:

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.

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

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.

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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.

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.”

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.

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.