EXECUTIVE OVERVIEW

The sustained economic decline and the continued slowdown in consumer spending throughout the first half of fiscal 2009 continued to have a significant impact on Dillard's, Inc.'s (the "Company", "we", "us" or "our") operations. Net sales from retail operations were $1,365.9 million during the quarter ended August 1, 2009, a decrease of $242.0 million or 15% from the quarter ended August 2, 2008. Despite the significant decrease in sales, gross profit from retail operations increased 130 basis points, primarily due to our inventory management efforts as evidenced by lower inventory levels (down 18% in comparable stores), decreased purchases and decreased markdown activity. Our cost reduction activities that began in fiscal 2008 reduced advertising, selling, administrative and general expenses for the second quarter of 2009 by $82.6 million compared to the second quarter of fiscal 2008. Despite all of these efforts, the Company recorded a net loss for the second quarter of 2009 of $26.7 million, or $0.36 per share, compared to a net loss of $38.3 million (which includes a gain on the sale of an airplane of $17.6 million), or $0.51 per share, for the second quarter of 2008.

As of August 1, 2009, we had working capital of $841.3 million, cash and cash equivalents of $116.9 million and $1,044.4 million of total debt outstanding. Cash flows from operating activities were $183.1 million for the six months ended August 1, 2009. We operated 314 total stores as of August 1, 2009, a decrease of 4.0% from the same period last year mainly as a result of the store closures that occurred during fiscal 2008. At August 1, 2009, we had unutilized availability of approximately $692 million under our $1.2 billion revolving credit facility that expires December 12, 2012.

Key Performance Indicators

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



                                                      Three Months Ended
                                                  August 1,        August 2,
                                                    2009*             2008
      Net sales (in millions)                     $  1,365.9       $  1,607.8
      Sales per square foot                       $       25       $       28
      Total store count at end of period                 314              327
      Net sales trend                                    (15 )%            (3 )%
      Comparable store sales trend                       (13 )%            (4 )%
      Gross profit (in millions)                  $    424.0       $    478.5
      Gross profit as a percentage of net sales         31.0 %           29.7 %
      Comparable store inventory trend                   (18 )%            (5 )%
      Merchandise inventory turnover                     2.5              2.5
      Cash flow from operations (in millions)     $    183.1       $    109.7

* Retail segment only, excluding cash flow data

Trends and Uncertainties

We have identified the following key uncertainties whose fluctuations may have a material effect on our operating results.

• Cash flow - Cash from operating activities is a primary source of liquidity that is adversely affected when the industry faces economic challenges. Furthermore, operating cash flow can be negatively affected when new and existing competitors seek areas of growth to expand their businesses.

• Pricing - If our customers do not purchase our merchandise offerings in sufficient quantities, we respond by taking markdowns. If we have to reduce our prices, the cost of goods sold on our income statement will correspondingly rise, thus reducing our income.

• Success of brand - The success of our exclusive brand merchandise as well as merchandise we source from national vendors is dependent upon customer fashion preferences.

• Sourcing - Our store merchandise selection is dependent upon our ability to acquire compelling products from a number of sources. Our ability to attract and retain compelling vendors as well as in-house design talent combined with adequate and stable availability of materials and production facilities from which we source our merchandise has a significant impact on our merchandise mix and, thus, our ability to sell merchandise at profitable prices.

• Store growth - Although store growth is presently not a near-term goal, such growth is dependent upon a number of factors which could impede our ability to open new stores, such as the identification of suitable markets and locations and the availability of shopping developments, especially in a weakened economic environment.

General

Net sales. Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on CDI contracts. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores, sales from new stores opened in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.

Service charges and other income. Service charges and other income include income generated through the long-term marketing and servicing alliance ("Alliance") between the Company and GE Consumer Finance ("GE"). Other income relates to rental income, shipping and handling fees and lease income on leased departments.

Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific vendor allowances 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.

Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general 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.

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

Rentals. Rentals include expenses for store leases and data processing and other equipment rentals.

Interest and debt expense, net. Interest and debt expense includes interest, net of interest income, relating to the Company's unsecured notes, mortgage notes, term note and the guaranteed beneficial interests in the Company's subordinated debentures, gains and losses on note repurchases, amortization of financing costs, call premiums and interest on capital lease obligations.

Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment.

Asset impairment and store closing charges. Asset impairment and store closing charges consist of write-downs to fair value of under-performing properties and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

Equity in losses of joint ventures. Equity in losses of joint ventures includes the Company's portion of the income or loss of the Company's unconsolidated joint ventures, including the equity in earnings of CDI prior to the purchase of its remaining interest and subsequent consolidation on August 29, 2008.

Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2009. As disclosed in this note, the preparation of financial statements in conformity with 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 will 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 condensed consolidated financial statements.

Merchandise inventory. Approximately 97% of the inventories are valued at the lower of cost or market using the retail last-in, first-out ("LIFO") inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross

margins. Management believes that the Company's RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 3% of the inventories are valued at the lower of cost or market using the average cost and specific identified cost methods. A 1% change in markdowns would have impacted the net loss by approximately $3 million and $5 million for the three and six months ended August 1, 2009, respectively.

The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of merchandise inventory. Complete physical inventories of all of the Company's stores and warehouses are performed no less frequently than annually, with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts. The differences between the estimated amounts of shrinkage and the actual amounts realized have been insignificant.

Revenue recognition. The Company's retail operations segment recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns. The provision for sales returns is based on historical evidence of our return rate. We recorded an allowance for sales returns of $6.6 million and $7.3 million as of August 1, 2009 and August 2, 2008, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision were insignificant for the three and six months ended August 1, 2009 and August 2, 2008.

The Company's share of income earned under the Alliance with GE involving the Dillard's branded proprietary credit cards is included as a component of service charges and other income. The Company received income of approximately $41.7 million and $53.5 million from GE during the six months ended August 1, 2009 and August 2, 2008, respectively. Further pursuant to this Alliance, the Company has no continuing involvement other than to honor the proprietary credit cards in its stores. Although not obligated to a specific level of marketing commitment, the Company participates in the marketing of the proprietary credit cards and accepts payments on the proprietary credit cards in its stores as a convenience to customers who prefer to pay in person rather than by mailing their payments to GE.

Revenue from CDI construction contracts is generally recognized by applying percentages of completion for each period to the total estimated revenue for the respective contracts. The length of contract varies but is typically nine to eighteen months. The percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts.

Merchandise vendor allowances. The Company receives concessions from its merchandise vendors through a variety of programs and arrangements, including co-operative advertising, payroll reimbursements and margin maintenance programs.

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. Similarly, we are not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue 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 method of accounting for inventory, a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory. The amounts recognized as a reduction in cost of sales have not varied significantly for the three and six months ended August 1, 2009 and August 2, 2008.

Insurance accruals. The Company's condensed consolidated balance sheets include liabilities with respect to self-insured workers' compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $1 million per claim) claims. 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 August 1, 2009 and August 2, 2008, insurance accruals of $54.4 million and $56.4 million, respectively, were recorded in trade accounts payable

and accrued expenses and other liabilities. Adjustments resulting from changes in historical loss trends have reduced expenses during the three and six months ended August 1, 2009 and August 2, 2008, partially due to new Company programs that have helped decrease both the number and cost of claims. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. A 10% change in our self-insurance reserve would have affected net earnings by $3.5 million for the three and six months ended August 1, 2009, respectively.

Finite-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, 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:

• Significant changes in the manner of our use of assets or the strategy for the overall business;

• Significant negative industry or economic trends; or

• Store closings.

The Company performs an analysis of the anticipated undiscounted future net cash flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company's strategies 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, new store locations 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 facts become known or as circumstances change.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes("FIN 48"), clarifies the accounting for uncertainty in income tax recognized in an entity's financial statements in accordance with SFAS No. 109. The total amount of unrecognized tax benefits as of August 1, 2009 and August 2, 2008 was $27.6 million and $24.9 million, respectively, of which $19.8 million and $17.0 million, respectively, would, if recognized, affect the effective tax rate. The total amount of accrued interest and penalties as of August 1, 2009 and August 2, 2008 was $9.7 million and $9.3 million, respectively. The Company classifies accrued interest and penalties relating to income tax in the financial statements as income tax expense.

During fiscal 2008, the IRS completed its examination of the Company's federal income tax returns for the fiscal tax years 2003 through 2005. Certain issues relating to this examination are currently under appeal. The Company is also under examination by various state and local taxing jurisdictions for various fiscal years. The tax years that remain subject to examination for major tax jurisdictions are fiscal tax years 2003 and forward, with the exception of fiscal 1997 through 2002 amended state and local tax returns related to the reporting of federal audit adjustments. At this time, the Company does not expect the results from any income tax audit to have a material impact on the Company's financial statements.

The Company has taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the finalization of the Company's federal and various state income tax audits. The Company's federal income tax audit uncertainties primarily relate to research and development credits, while various state income tax audit uncertainties primarily relate to income from intangibles. The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $1 million and $4 million. Changes in the Company's assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.

Discount rate. The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate increased to 6.6% as of January 31, 2009 from 6.3% as of February 2, 2008. We believe that these assumptions have been appropriate and that, based on

these assumptions, the pension liability of $114 million was appropriately stated as of January 31, 2009; 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 generate an experience gain or loss of approximately $6.8 million.

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 each fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results during the periods presented; however, there can be no assurance that our business will not be affected by such in the future.

RESULTS OF OPERATIONS

The following table sets forth the results of operations, expressed as a
percentage of net sales, for the periods indicated.



                                              Three Months Ended                   Six Months Ended
                                          August 1,         August 2,         August 1,         August 2,
                                            2009              2008              2009              2008
Net sales                                     100.0 %           100.0 %           100.0 %           100.0 %
Service charges and other income                1.9               2.4               2.0               2.3

                                              101.9             102.4             102.0             102.3
Cost of sales                                  70.1              70.2              68.3              68.5
Advertising, selling, administrative
and general expenses                           27.8              29.8              27.9              29.2
Depreciation and amortization                   4.6               4.6               4.5               4.4
Rentals                                         1.0               0.9               1.0               0.9
Interest and debt expense, net                  1.3               1.4               1.3               1.4
Gain on disposal of assets                     (0.0 )            (1.1 )            (0.0 )            (0.5 )
Asset impairment and store closing
charges                                         0.0               0.6               0.0               0.3


Loss before income taxes and equity
in losses of joint ventures                    (2.9 )            (4.0 )            (1.0 )            (1.9 )
Income tax benefit                             (1.0 )            (1.7 )            (0.3 )            (0.8 )
Equity in losses of joint ventures             (0.0 )            (0.1 )            (0.0 )            (0.0 )

Net loss                                       (1.9 )%           (2.4 )%           (0.7 )%           (1.1 )%

Net Sales



                                         Three Months Ended
                                       August 1,     August 2,
          (in thousands of dollars)      2009          2008        $ Change
          Net sales:
          Retail operations segment   $ 1,365,858   $ 1,607,823   $ (241,965 )
          Construction segment             61,913            -        61,913

          Total net sales             $ 1,427,771   $ 1,607,823   $ (180,052 )

The percent change by category in the Company's retail operations segment sales for the three months ended August 1, 2009 compared to the three months ended August 2, 2008 as well as the percentage by segment and category to total net sales is as follows:

                                                    Three Months
                                              % Change         % of
                                               09-08         Net Sales
            Retail operations segment
            Cosmetics                            (11.2 )%           13 %
            Ladies' apparel and accessories      (14.7 )            39
            Juniors' and children's apparel      (18.5 )             8
            Men's apparel and accessories        (12.5 )            17
            Shoes                                (13.2 )            13
            Home and furniture                   (28.9 )             6

                                                                    96
            Construction segment                                     4

            Total                                                  100 %

Net sales from the retail operations segment decreased $242.0 million or 15% during the three months ended August 1, 2009 compared to the three months ended August 2, 2008 while sales in comparable stores declined 13% between the same periods. All merchandise categories experienced significant declines.

Net sales were negatively impacted by a decline in mall store traffic. The net sales decrease reflected a 17% decrease in the number of sales transactions while the average dollars per sales transaction were up moderately.

                                          Six Months Ended
                                       August 1,     August 2,
          (in thousands of dollars)      2009          2008        $ Change
          Net sales:
          Retail operations segment   $ 2,780,549   $ 3,283,377   $ (502,828 )
          Construction segment            121,092            -       121,092

          Total net sales             $ 2,901,641   $ 3,283,377   $ (381,736 )

The percent change by category in the Company's retail operations segment sales for the six months ended August 1, 2009 compared to the six months ended August 2, 2008 as well as the percentage by segment and category to total net sales is as follows:

                                                     Six Months
                                              % Change         % of
                                               09-08         Net Sales
            Retail operations segment
            Cosmetics                             (9.7 )%           15 %
            Ladies' apparel and accessories      (15.4 )            38
            Juniors' and children's apparel      (17.9 )             8
            Men's apparel and accessories        (15.6 )            16
            Shoes                                (12.7 )            13
            Home and furniture                   (27.6 )             6

                                                                    96
            Construction segment                                     4

            Total                                                  100 %

. . .