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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended January 31,
    2004                                              
|           |  | OR                                                                                          
|[  ]       |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from                 to                                       

Commission File Number 000-26207

BELK, INC.

(Exact name of registrant as specified in its
charter)


|                                                     |  |                                  
|---------------------------------------------------- |  | ---------------------------------
|Delaware                                             |  | 56-2058574                       
|(State of incorporation)                             |  | (IRS Employer Identification No.)
|                                                    
|2801 West Tyvola Road, Charlotte, North
    Carolina |  | 28217-4500                       
|(Address of Principal Executive Offices)             |  | (Zip Code)                       

Registrants telephone number, including
area code:

(704) 357-1000


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

|                                      |  |                                     
|------------------------------------- |  | ------------------------------------
|Title of each class                   |  | Name of Exchange on which registered
|                                      |  |                                     
|Class A Common Stock, $0.01 per share |  | None                                
|Class B Common Stock, $0.01 per share |  | None                                



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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes x     No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. x

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes x     No o

The aggregate market value of the common equity
held by non-affiliates of the Registrant (assuming for these
purposes, but without conceding, that all executive officers and
directors are affiliates of the Registrant) as of
August 2, 2003 (based on the price at which the common
equity was last sold as of the last business day of the
Companys most recently completed second fiscal quarter)
was $180,440,017. 51,999,326 shares of common stock were
outstanding as of April 1, 2004, comprised of
50,942,382 shares of the registrants Class A
Common Stock, par value $0.01, and 1,056,944 shares of the
registrants Class B Common Stock, par value $0.01.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 26, 2004 are
incorporated herein by reference in Part III.



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BELK, INC.

TABLE OF CONTENTS

|         |  |                                                                                                        |  |  |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------ |  |  | -- | 
|         |  |                                                                                                       
|Item No. |  | Page No.                                                                                              
|         |  |                                                                                                       
|Part I  
|1.       |  | Business                                                                                               |  |  | 2  | 
|2.       |  | Properties                                                                                             |  |  | 9  | 
|3.       |  | Legal Proceedings                                                                                      |  |  | 10 | 
|4.       |  | Submission of Matters to a
    Vote of Security Holders                                                |  |  | 10 | 
|        
|Part II 
|5.       |  | Market Information for
    Registrants Common Equity and Related Stockholder
    Matters              |  |  | 11 | 
|6.       |  | Selected Financial Data                                                                                |  |  | 11 | 
|7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |  | 12 | 
|7a.      |  | Quantitative and Qualitative
    Disclosure About Market Risk                                          |  |  | 21 | 
|8.       |  | Financial Statements and
    Supplementary Data                                                        |  |  | 22 | 
|9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |  | 45 | 
|9A.      |  | Controls and Procedures                                                                                |  |  | 45 | 
|        
|Part III
|10.      |  | Directors and Executive
    Officers of the Registrant                                                 |  |  | 45 | 
|11.      |  | Executive Compensation                                                                                 |  |  | 45 | 
|12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |  | 45 | 
|13.      |  | Certain Relationships and
    Related Transactions                                                     |  |  | 46 | 
|14.      |  | Principal Accountant Fees
    and Services                                                             |  |  | 46 | 
|        
|Part IV 
|15.      |  | Exhibits, Financial
    Statements, Schedules and Reports on Form 8-K                                  |  |  | 46 | 



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THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS

Certain statements made in this report, and other
written or oral statements made by or on behalf of the Company,
may constitute forward-looking statements within the
meaning of the federal securities laws. Statements regarding
future events and developments and the Companys future
performance, as well as our expectations, beliefs, plans,
estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws. You
can identify these forward-looking statements through our use of
words such as may, will,
intend, project, expect,
anticipate, believe,
estimate, continue or other similar
words. Forward-looking statements include information concerning
possible or assumed future results from merchandising, marketing
and advertising in our stores and through the internet, our
ability to be competitive in the retail industry, our ability to
execute profitability and efficiency strategies, our ability to
execute our growth strategies, anticipated benefits from the
consolidation of our operating divisions and distribution
facilities, the expected benefit of our new systems and
technology, the expected increase in our sales and revenues
generated through our proprietary charge card program and the
anticipated benefits from the Merchandising Restructuring (as
described herein). These forward-looking statements are subject
to certain risks and uncertainties that may cause our actual
results to differ significantly from the results we discuss in
such forward-looking statements. We believe that these
forward-looking statements are reasonable. However, you should
not place undue reliance on such statements.

Risks and uncertainties that might cause our
results to differ from those we project in our forward-looking
statements include, but are not limited to:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic and business conditions, both
    nationally and in our market areas;                                                                                                                                                    
|
| |  | levels of consumer debt and bankruptcies;                                                                                                                                                                                                 
|
| |  | changes in interest rates;                                                                                                                                                                                                                
|
| |  | changes in buying, charging and payment behavior
    among our customers;                                                                                                                                                                 
|
| |  | the effects of weather conditions on seasonal
    sales in our market areas;                                                                                                                                                              
|
| |  | seasonal fluctuations in net income due to
    increased consumer spending during the holiday season, timing of
    new store openings, merchandise mix, the timing and level of
    markdowns and historically low first quarter results;
|
| |  | competition among department and specialty stores
    and other retailers, including luxury goods retailers, general
    merchandise stores, internet retailers, mail order retailers and
    off-price and discount stores;              
|
| |  | the competitive pricing environment within the
    department and specialty store industries;                                                                                                                                             
|
| |  | our ability to compete on merchandise mix,
    quality, style, service, convenience and credit availability;                                                                                                                              
|
| |  | the effectiveness of our advertising, marketing
    and promotional campaigns;                                                                                                                                                            
|
| |  | our ability to determine and implement
    appropriate merchandising strategies, merchandise flow and
    inventory turnover levels;                                                                                                      
|
| |  | our realization of planned synergies and cost
    savings through the consolidation of our distribution facilities
    and functions;                                                                                                     
|
| |  | the effectiveness of our e-commerce and gift
    registry strategies;                                                                                                                                                                     
|
| |  | our ability to contain costs;                                                                                                                                                                                                             
|
| |  | our ability to accomplish our logistics and
    distribution strategies;                                                                                                                                                                  
|
| |  | the effectiveness of our merchandising and sales
    promotion consolidation and the implementation of our planning
    and allocation functions;                                                                                         
|
| |  | changes in our business strategy or development
    plans;                                                                                                                                                                                

1



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| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to hire and retain key personnel;                                                                                                                                                    
|
| |  | changes in laws and regulations, including
    changes in accounting standards, tax statutes or regulations,
    environmental and land use regulations, and uncertainties of
    litigation; and
|
| |  | our ability to obtain capital to fund any growth
    or expansion plans.                                                                                                                         

Our other filings with the Securities and
Exchange Commission (SEC) may contain additional
information concerning the risks and uncertainties listed above,
and other factors you may wish to consider. Upon request, we
will provide copies of these filings to you free of charge.

Our forward-looking statements are based on
current expectations and speak only as of the date of such
statements. We undertake no obligation to publicly update or
revise any forward-looking statement, even if future events or
new information may impact the validity of such statements.




PART I






|        |         
|------- | --------
|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 $2.26
billion for the fiscal year ended January 31, 2004. The
Company and its predecessors have been successfully operating
department stores since 1888 by seeking to provide 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 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 | 

As of the end of its fiscal year 2004, the
Company operated 221 retail department stores in
13 states primarily in the southeastern United States. Belk
stores seek to provide customers the convenience of one-stop
shopping, with an appealing 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
14.7 million square feet of selling 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. These divisions are not considered segments for
reporting purposes.

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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,
merchandise planning and allocation, 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.

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. 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 as well as its home business. 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 revealed 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 rigorous financial and strategic 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.

3



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During fiscal year 2004, a Company-wide profit
improvement initiative begun in fiscal year 2002 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.

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 believes that significant
opportunities for growth exist in Belk markets where the Belk
name and reputation are well known and in contiguous markets
where Belk can distinguish its stores from the competition.
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 2004, the Company opened eight new
stores that have a combined selling space of approximately
465,000 square feet and completed major renovations of four
existing stores.

In fiscal year 2005, Belk plans to open fourteen
new stores that will have a combined selling space of
approximately 964,000 square feet. The Company also will
complete expansions of three existing stores and major
renovations of five existing stores.

New stores and major renovations completed in
fiscal year 2004 include:

New Stores

|                                               |  |               |        |         |  |                 |         |  |  |  |     | 
|---------------------------------------------- |  | ------------- | ------ | ------- |  | --------------- | ------- |  |  |  | --- | 
|                                               |  | Size (Selling |        | Opening |  | New or Existing
|Location                                       |  | Sq. Ft.)      |        | Date    |  | Market         
|                                               |  |               |        |         |  |                
|Gulfport, MS (Crossroads Center)               |  |               | 60,000 |         |  |                 | 3/12/03 |  |  |  | New | 
|Gallatin, TN (Village Green Commons)           |  |               | 52,300 |         |  |                 | 9/10/03 |  |  |  | New | 
|Columbia, TN (The Shoppes of Columbia)         |  |               | 58,800 |         |  |                 | 9/10/03 |  |  |  | New | 
|Springfield, TN (Centre Stage Shopping Center) |  |               | 46,500 |         |  |                 | 9/10/03 |  |  |  | New | 
|Lufkin, TX                                     |  |               | 56,300 |         |  |                 | 9/10/03 |  |  |  | New | 
|Hot Springs, AR (Cornerstone Market Place)     |  |               | 64,100 |         |  |                 | 11/5/03 |  |  |  | New | 
|Destin, FL (Destin Commons)                    |  |               | 59,600 |         |  |                 | 11/5/03 |  |  |  | New | 
|Conway, AR (Conway Commons)                    |  |               | 67,300 |         |  |                 | 11/5/03 |  |  |  | New | 

4



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Renovations

|                                   |  |               |         |         |  |                 |           |  |  |  |          | 
|---------------------------------- |  | ------------- | ------- | ------- |  | --------------- | --------- |  |  |  | -------- | 
|                                   |  | Size (Selling |         | Opening |  | New or Existing
|Location                           |  | Sq. Ft.)      |         | Date    |  | Market         
|                                   |  |               |         |         |  |                
|Greensboro, NC (Four Seasons Mall) |  |               | 174,200 |         |  |                 | Fall 2003 |  |  |  | Existing | 
|Shelby, NC (Cleveland Mall)        |  |               | 77,500  |         |  |                 | Fall 2003 |  |  |  | Existing | 
|Westminster, MD (Town Mall)        |  |               | 52,800  |         |  |                 | Fall 2003 |  |  |  | Existing | 
|Winston-Salem, NC (Hanes Mall)     |  |               | 200,700 |         |  |                 | Fall 2003 |  |  |  | Existing | 

New stores, store expansions and major store
renovations scheduled for completion in fiscal year 2005 include:

New Stores

|                                     |  |               |         |              |  |                 |         |  |  |  |          | 
|------------------------------------ |  | ------------- | ------- | ------------ |  | --------------- | ------- |  |  |  | -------- | 
|                                     |  | Size (Selling |         | Scheduled    |  | New or Existing
|Location                             |  | Sq. Ft.)      |         | Opening Date |  | Market         
|                                     |  |               |         |              |  |                
|Waco, TX (Central Texas MarketPlace) |  |               | 86,500  |              |  |                 | 3/10/04 |  |  |  | New      | 
|Mandeville, LA (Stirling Mandeville) |  |               | 67,300  |              |  |                 | 3/10/04 |  |  |  | New      | 
|Beaufort, SC (Cross Creek Plaza)     |  |               | 58,600  |              |  |                 | 3/10/04 |  |  |  | Existing | 
|Kerrville, TX (River Hills Mall)     |  |               | 50,300  |              |  |                 | 3/10/04 |  |  |  | New      | 
|Sherman, TX (Sherman Town Center)    |  |               | 67,300  |              |  |                 | 3/10/04 |  |  |  | New      | 
|Myrtle Beach, SC (Coastal Grand)     |  |               | 127,000 |              |  |                 | 3/17/04 |  |  |  | Existing | 
|Lenoir, NC (Festival Centre)         |  |               | 49,800  |              |  |                 | 3/24/04 |  |  |  | Existing | 
|Cumming, GA (Lakeland Plaza)         |  |               | 79,200  |              |  |                 | 9/15/04 |  |  |  | Existing | 
|Sevierville, TN (River Place)        |  |               | 58,500  |              |  |                 | 9/15/04 |  |  |  | New      | 
|McKinney, TX (Eldorado Plaza)        |  |               | 59,300  |              |  |                 | 9/15/04 |  |  |  | New      | 
|Marietta, GA (Village Green)         |  |               | 59,300  |              |  |                 | 9/15/04 |  |  |  | New      | 
|Clermont, FL (Citrus Tower Village)  |  |               | 59,300  |              |  |                 | 11/3/04 |  |  |  | New      | 
|Viera, FL (The Avenue Viera)         |  |               | 59,300  |              |  |                 | 11/3/04 |  |  |  | New      | 
|Auburn, AL (Colonial Mall)           |  |               | 82,400  |              |  |                 | 11/3/04 |  |  |  | New      | 

Store Expansions

|                                      |  |               |        |              |  |                 |         |  |  |  |          | 
|------------------------------------- |  | ------------- | ------ | ------------ |  | --------------- | ------- |  |  |  | -------- | 
|                                      |  | Size (Selling |        | Scheduled    |  | New or Existing
|Location                              |  | Sq. Ft.)      |        | Opening Date |  | Market         
|                                      |  |               |        |              |  |                
|Corinth, MS (Southgate Plaza)         |  |               | 27,300 |              |  |                 | 4/21/04 |  |  |  | Existing | 
|Cullman, AL (Cullman Shopping Center) |  |               | 76,100 |              |  |                 | 6/9/04  |  |  |  | Existing | 

Store Renovations

|                                    |  |               |         |              |  |                 |          |  |  |  |          | 
|----------------------------------- |  | ------------- | ------- | ------------ |  | --------------- | -------- |  |  |  | -------- | 
|                                    |  | Size (Selling |         | Scheduled    |  | New or Existing
|Location                            |  | Sq. Ft.)      |         | Opening Date |  | Market         
|                                    |  |               |         |              |  |                
|Savannah, GA (Oglethorpe Mall)      |  |               | 139,300 |              |  |                 | 10/13/04 |  |  |  | Existing | 
|N. Charleston, SC (Northwoods Mall) |  |               | 94,000  |              |  |                 | 10/13/04 |  |  |  | Existing | 
|Sumter, SC (Sumter Mall)            |  |               | 57,600  |              |  |                 | 11/3/04  |  |  |  | Existing | 
|Winchester, VA (Apple Blossom Mall) |  |               | 66,700  |              |  |                 | 11/3/04  |  |  |  | Existing | 
|Athens, GA (Georgia Square)         |  |               | 102,000 |              |  |                 | 11/3/04  |  |  |  | Existing | 

5



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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,
fashionable assortments with depth in style, selection and value.

Belk stores offer complete assortments of many
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 categories 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 2004, the Company significantly expanded its private
brand business as a percentage of total sales and achieved
excellent sales and gross margin performance.

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 consolidation has enabled the Company to achieve more
unified and consistent execution of its merchandising, marketing
and advertising strategies and provide more focused merchandise
assortments at the store level. The consolidation has also
produced cost savings and greater operating efficiencies. The
consolidation was substantially completed in the third quarter
of fiscal year 2003.

Marketing

The Company employs 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, Charity Day and Seniors Day) and magazine,
newspaper and billboard advertising. The Company also provides
information about the Company and its bridal gift registry on
the www.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

6



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##### 



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 twelve hair styling
salons in various store locations, nine of which also offer spa
services. 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. In fiscal year 2005, the
Company plans to open one additional Carmen! Carmen!
Prestige Salon and Spa at Belk at Belk of Coastal Grand
Myrtle Beach, Myrtle Beach, SC.

Belk Gift Registry

The Companys gift registry offers a wide
assortment of bridal merchandise that can be registered and
purchased online at www.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 www.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.

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. The benefits and services include $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, improve
operating efficiency and support its overall business strategy.
The Company has prioritized the development and implementation
of computerized systems to support its merchandising, marketing,
sales floor, inventory management, logistics, finance,
operations and human resources 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 2004, the Company
began development of a new information system to support its
merchandise planning and allocation organization; began
development of a coupon management system that enables the
scanning of bar coded coupons at the point of sale; expanded

7



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##### 



and added enhanced capabilities to its customer
data warehouse, including broadcast reporting and web access to
information; implemented capability for electronic transmittal
of bulk purchase orders to vendors; implemented a new company
wide human resources information system (Belk HR Online);
enhanced its point of sale system to simplify and speed up
customers merchandise return transactions; replaced its
fixed asset system to improve control of capital budgeting and
spending; implemented a new check authorization system to reduce
costs and improve point of sale efficiency; enhanced its radio
frequency technology applications for store pricing, inventory
and merchandise transfers; implemented new technologies for
selected stores, including customer service call buttons,
customer price checking, and sales floor kiosks that enable
customers to locate merchandise and allow stores to issue
instant credit Belk charge applications; and
converted corporate and division offices telephone systems to
voice over IP technology that enables the Company to
use data lines for long distance voice communications.


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 2004, the Company continued its
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
Company reduced on-hand carton inventory and aging, decreased
the number of freight carriers used, and continued to enforce
new standards of performance.

The Central Distribution Center, working in
conjunction with the Companys inventory management systems
and floor ready initiatives, continued to reduce
merchandise cycle time, improve merchandise margin and reduce
expenses. The Companys Store Ready processes
for store merchandise receiving enable stores to receive and
process merchandise shipments and move goods to the sales floor
quickly and efficiently, thus ensuring the ongoing timely
delivery of fresh goods to meet customers shopping needs.

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 for cash registers, but also for
other equipment. UES provides these services to the Company
pursuant to contracts with BSS.

Industry and Competition

The Company operates retail department stores in
the highly competitive 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., Target Corp., Kohls Corporation,
The May Department Stores Company, Dillards, Inc., Saks,
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.

8



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##### 



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 January 31, 2004, the Company had
approximately 17,200 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.






|        |           
|------- | ----------
|ITEM 2. | Properties

Store Locations

As of January 31, 2004, the Company operated
a total of 221 retail stores, with approximately
14.7 million selling square feet, in the following states:

|             |  |                     |  |                  
|------------ |  | ------------------- |  | -----------------
|Alabama  4  |  | Maryland  2        |  | Tennessee  7    
|Arkansas  5 |  | Mississippi  2     |  | Texas  4        
|Florida  20 |  | North Carolina  75 |  | Virginia  19    
|Georgia  40 |  | South Carolina  37 |  | West Virginia  2
|Kentucky  4 |  |                     |  |                  

Belk stores are located in regional malls (117),
strip shopping centers (89), power centers
(6) and lifestyle centers (4). Additionally,
there are five freestanding stores. Approximately 82% of the
gross square footage of the typical Belk store is devoted to
selling space to ensure maximum operating efficiencies. A
majority of the stores are either new or have undergone
renovations within the past ten years. The new and renovated
stores feature the latest in retail design, including updated
exteriors and interiors. The interiors are designed to create an
exciting, comfortable and convenient shopping environment for
customers. They include the latest lighting and merchandise
fixturing, as well as quality decorative floor and wall
coverings and other special decor. The store layout is designed
for ease of shopping, and store signage is used to help
customers identify and locate merchandise.

As of January 31, 2004, the Company owned 60
store buildings, leased 147 store buildings under operating
leases and owned 24 store buildings under ground leases. The
typical operating lease has an initial term of between 15 and
20 years, with four renewal periods of five years each,
exercisable at the Companys option. The typical ground
lease has an initial term of 20 years, with a minimum of
four renewal periods of five years each, exercisable at the
Companys option.

9



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##### 



Non-Store Facilities

The Company also owns or leases the following
distribution centers, division offices and headquarters
facilities:

|                                   |  |                |  |           |       | 
|---------------------------------- |  | -------------- |  | --------- | ----- | 
|Belk Property                      |  | Location       |  | Own/Lease
|                                   |  |                |  |          
|Belk, Inc. Western Division Office |  | Greenville, SC |  |           | Lease | 
|Belk, Inc. Corporate Offices       |  | Charlotte, NC  |  |           | Own   | 
|Belk Central Distribution Center   |  | Blythewood, SC |  |           | Lease | 

Other

The Company owns or leases various other real
properties, including primarily former store locations and
distribution centers. Such property is not material, either
individually or in the aggregate, to the Companys
consolidated financial position or results of operations.






|        |                  
|------- | -----------------
|ITEM 3. | Legal Proceedings

The Company is engaged from time to time in
various legal actions in the ordinary course of its business.
Management of the Company believes that none of the various
actions and proceedings involving the Company will have a
material adverse effect on the Companys consolidated
financial position or results of operations.




ITEM 4.Submission
of Matters to a Vote of Security Holders

No matters were submitted to a vote of the
security holders during the fourth quarter of the fiscal year
ended January 31, 2004.

10



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##### 






PART II






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 5. | Market Information for Registrants
    Common Equity and Related Stockholder Matters

Neither the Class A Common Stock, par value
$.01 per share (the Class A Common Stock) nor
the Class B Common Stock, par value $.01 per share (the
Class B Common Stock) was listed or traded on a
public market during any part of fiscal year 2004. There is no
established public trading market for either class of the
Registrants common stock. As of January 31, 2004,
there were approximately 560 holders of record of the
Class A Common Stock and 261 holders of record of
Class B Common Stock. On March 10, 2004, the Company
declared a regular dividend of $0.275 and a special one-time
dividend of $0.20 on each share of the Class A and
Class B Common Stock outstanding on that date. On
March 13, 2003, the Company declared a regular dividend of
$0.275 on each share of the Class A and Class B Common
Stock outstanding on that date. The amount of dividends paid out
with respect to fiscal year 2005 and each subsequent year will
be determined at the sole discretion of the Board of Directors
based upon the Companys results of operations, financial
condition, cash requirements and other factors deemed relevant
by the Board of Directors. For a discussion of the
Companys debt facilities and their restrictions on
dividend payments, see Liquidity and Capital
Resources in Managements Discussion and
Analysis of Financial Condition and Results of Operations.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

|                                                        |                            |                                                  |           |             |  |             |           |             |  |             |           |           |  |   |           |           |  |   |           |           | 
|------------------------------------------------------- | -------------------------- | ------------------------------------------------ | --------- | ----------- |  | ----------- | --------- | ----------- |  | ----------- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                                        |                            | 52 Weeks                                         |           | 52 Weeks    |  | 52 Weeks    |           | 53 Weeks    |  | 52 Weeks   
|                                                        |                            | Ended                                            |           | Ended       |  | Ended       |           | Ended       |  | Ended      
|                                                        |                            | January 31,                                      |           | February 1, |  | February 2, |           | February 3, |  | January 29,
|                                                        |                            | 2004                                             |           | 2003        |  | 2002        |           | 2001        |  | 2000       
|                                                        |                            |                                                  |           |             |  |             |           |             |  |            
|                                                        |                            |                                                 
|                                                        |                            | (dollars in thousands, except per share amounts)
|SELECTED STATEMENT OF INCOME DATA:                      |                            |                                                  |           |             |  |             |           |             |  |             |           |           |  |   |           |           |  |   |           |          
|Revenues                                                |                            | $                                                | 2,264,907 |             |  | $           | 2,241,555 |             |  | $           | 2,236,054 |           |  | $ | 2,263,801 |           |  | $ | 2,138,959 |          
|Cost of goods sold                                      |                            |                                                  | 1,506,905 |             |  |             | 1,512,045 |             |  |             | 1,536,506 |           |  |   | 1,566,599 |           |  |   | 1,456,696 |          
|Depreciation and amortization                           |                            |                                                  | 91,007    |             |  |             | 89,312    |             |  |             | 83,625    |           |  |   | 74,102    |           |  |   | 65,117    |          
|Operating income                                        |                            |                                                  | 192,766   |             |  |             | 167,461   |             |  |             | 137,144   |           |  |   | 132,288   |           |  |   | 144,323   |          
|Income from continuing operations                       |                            |                                                  | 111,547   |             |  |             | 84,017    |             |  |             | 64,641    |           |  |   | 57,626    |           |  |   | 72,706    |          
|Loss from discontinued operations(1)                    |                            |                                                  |          |             |  |             |          |             |  |             | (221      | )         |  |   | (292      | )         |  |   | (1,543    | )        
|Net income                                              |                            |                                                  | 111,547   |             |  |             | 84,017    |             |  |             | 63,382    |           |  |   | 57,333    |           |  |   | 71,163    |          
|Basic and diluted income per share:                     |                            |                                                  |           |             |  |             |           |             |  |             |           |           |  |   |           |           |  |   |           |          
|                                                        | From continuing operations |                                                  |           | 2.11        |  |             |           | 1.53        |  |             |           | 1.18      |  |   |           | 1.05      |  |   |           | 1.31      | 
|                                                        | Net income                 |                                                  |           | 2.11        |  |             |           | 1.53        |  |             |           | 1.16      |  |   |           | 1.04      |  |   |           | 1.28      | 
|Cash dividends per share                                |                            |                                                  | 0.275     |             |  |             | 0.25      |             |  |             | 0.25      |           |  |   | 0.25      |           |  |   | 0.24      |          
|SELECTED BALANCE SHEET DATA:                            |                            |                                                  |           |             |  |             |           |             |  |             |           |           |  |   |           |           |  |   |           |          
|Accounts receivable, net                                |                            |                                                  | 311,141   |             |  |             | 334,440   |             |  |             | 343,247   |           |  |   | 339,591   |           |  |   | 340,061   |          
|Merchandise inventory                                   |                            |                                                  | 496,242   |             |  |             | 487,490   |             |  |             | 495,744   |           |  |   | 542,262   |           |  |   | 501,033   |          
|Working capital                                         |                            |                                                  | 684,794   |             |  |             | 670,448   |             |  |             | 610,514   |           |  |   | 619,055   |           |  |   | 591,054   |          
|                                                        | Total assets               |                                                  |           | 1,730,263   |  |             |           | 1,736,102   |  |             |           | 1,707,380 |  |   |           | 1,734,744 |  |   |           | 1,631,646 | 
|Short-term debt                                         |                            |                                                  |          |             |  |             |          |             |  |             | 6,089     |           |  |   | 9,715     |           |  |   | 7,854     |          
|Long-term debt and capitalized lease obligations        |                            |                                                  | 308,488   |             |  |             | 365,553   |             |  |             | 410,587   |           |  |   | 452,579   |           |  |   | 405,357   |          
|Stockholders equity                                    |                            |                                                  | 969,499   |             |  |             | 954,284   |             |  |             | 898,242   |           |  |   | 865,070   |           |  |   | 822,094   |          
|SELECTED OPERATING DATA:                                |                            |                                                  |           |             |  |             |           |             |  |             |           |           |  |   |           |           |  |   |           |          
|Number of stores at end of period                       |                            |                                                  | 221       |             |  |             | 214       |             |  |             | 207       |           |  |   | 207       |           |  |   | 206       |          
|Comparable store net revenue increase
    (decrease)(2) |                            |                                                  | (0.9%     | )           |  |             | (3.2%     | )           |  |             | (2.1%     | )         |  |   | 4.4%      |           |  |   | 2.4%      |          






|    |                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss from discontinued operations represents the
    operating results of TAGS, LLC, which owned and operated outlet
    stores.

11



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##### 





|    |                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | On a 52 versus 52 week basis, comparable
    store net revenues decreased 0.7% in fiscal year 2002 and
    increased 3.2% in fiscal year 2001. Comparable store net revenue
    includes sales from stores open during the entire fiscal year in
    both the current and prior year, excluding stores that have been
    expanded in either fiscal year.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

Belk, together with its subsidiaries, is the
largest privately owned department store business in the United
States, with total revenues of approximately $2.26 billion
for the fiscal year ended January 31, 2004. The Company and
its predecessors have been successfully operating department
stores since 1888 by seeking to provide 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 2005 refer to the fiscal year ending
January 29, 2005; references to fiscal year
2004 refer to the period ended January 31, 2004;
references to fiscal year 2003 refer to the period
ended February 1, 2003; and references to fiscal year
2002 refer to the period ended February 2, 2002.

As of the end of its fiscal year 2004, the
Company operated 221 retail department stores in 13 states
primarily in the southeastern United States. Belk stores seek to
provide customers the convenience of one-stop shopping, with an
appealing 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.

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.

The Company operates retail department stores in
the highly competitive retail apparel industry. The
Companys primary competitors are traditional department
stores, mass merchandisers, national apparel chains, individual
specialty apparel stores and direct merchant firms. In addition
to intense competition, the retail industry has experienced
downward sales pressure in recent years due primarily to
national, regional and local economic conditions.

Management believes that significant
opportunities for growth exist in Belk markets where the Belk
name and reputation are well known and in contiguous markets
where Belk can distinguish its stores from the competition.
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. One of the more
significant challenges currently facing the Companys
management team is to continue to identify new Belk markets and
to effectively increase the Companys net store selling
square footage. In fiscal year 2004, the Company increased net
store selling square footage by 343,700 square feet, or 2.4%,
and plans to expand by an additional 733,800 square feet, or
5.0%, in 2005.

The Company focuses on four key indicators to
assess performance and growth. These key indicators are:
(1) comparable store sales, (2) gross profit rate,
(3) expense rate, and (4) net square footage growth.
The Companys progress against these indicators is
discussed throughout Managements Discussion and Analysis
(MD&A).

12



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##### 



Results of Operations

The following table sets forth, for the periods
indicated, the percentage relationship to revenues of certain
items in the Companys consolidated statements of income
and other pertinent financial and operating data.

|                                             |        |                       |        |             |     |             |        |    |     |   |        |    |     | 
|-------------------------------------------- | ------ | --------------------- | ------ | ----------- | --- | ----------- | ------ | -- | --- | - | ------ | -- | --- | 
|                                             |        | 52 Weeks              |        | 52 Weeks    |     | 52 Weeks   
|                                             |        | Ended                 |        | Ended       |     | Ended      
|                                             |        | January 31,           |        | February 1, |     | February 2,
|                                             |        | 2004                  |        | 2003        |     | 2002       
|                                             |        |                       |        |             |     |            
|SELECTED FINANCIAL DATA                      |        |                       |        |             |     |             |        |    |     |   |        |   
|Revenues                                     |        |                       | 100.0  | %           |     |             | 100.0  | %  |     |   | 100.0  | % 
|Cost of goods sold                           |        |                       | 66.5   |             |     |             | 67.5   |    |     |   | 68.7   |   
|Selling, general and administrative expenses |        |                       | 24.9   |             |     |             | 24.7   |    |     |   | 24.5   |   
|Asset impairment and store closing costs     |        |                       |       |             |     |             |       |    |     |   | 0.6    |   
|Restructuring charge                         |        |                       | 0.1    |             |     |             | 0.4    |    |     |   |       |   
|Operating income                             |        |                       | 8.5    |             |     |             | 7.5    |    |     |   | 6.1    |   
|Interest expense, net                        |        |                       | 1.7    |             |     |             | 1.6    |    |     |   | 1.8    |   
|Income taxes                                 |        |                       | 2.6    |             |     |             | 2.2    |    |     |   | 1.7    |   
|Income from continuing operations            |        |                       | 4.9    |             |     |             | 3.7    |    |     |   | 2.9    |   
|Net income                                   |        |                       | 4.9    |             |     |             | 3.7    |    |     |   | 2.8    |   
|SELECTED OPERATING DATA:                     |        |                       |        |             |     |             |        |    |     |   |        |   
|Selling square footage (in thousands)        |        |                       | 14,653 |             |     |             | 14,310 |    |     |   | 13,821 |   
|Store revenues per selling sq. ft            |        | $                     | 155    |             |     | $           | 157    |    |     | $ | 162    |   
|Comparable store net revenue decrease        |        |                       | (0.9   | )%          |     |             | (3.2   | )% |     |   | (2.1   | )%
|Number of stores                             |        |                       |        |             |     |             |        |    |     |   |        |   
|                                             | Opened |                       |        | 8           |     |             |        | 9  |     |   |        | 4  |    
|                                             | Closed |                       |        | (1          | )   |             |        | (2 | )   |   |        | (4 | )  
|                                             |        | Total  end of period |        |             | 221 |             |        |    | 214 |   |        |    | 207 | 

Comparison of Fiscal Years Ended
January 31, 2004 and February 1, 2003

Revenues.In fiscal
year 2004, the Companys revenues increased 1.0%, or
$23.4 million, to $2.265 billion from $2.242 billion.
The increase resulted from additional revenue of
$39.6 million from new, expanded and remodeled stores and
from improved comparable store sales in the fourth quarter of
fiscal year 2004. The increase was partially offset by a 0.9%
decrease in revenue from comparable stores due to a soft economy
and a difficult sales environment during the first half of
fiscal year 2004.

Expansion and replacement stores are excluded
from the comparable store net revenue change disclosed above.
Including the expansion and replacement stores as comparable
stores, comparable store net revenue decreased by 0.5% for the
twelve months ended January 31, 2004. Beginning in fiscal
year 2005, the Companys definition of comparable stores
sales will no longer exclude replacement and expansion stores.
Non-comparable stores will only include closing stores and new
stores that have not reached the one-year anniversary of their
opening prior to the beginning of the fiscal year in which they
were constructed. The Company believes this revised measure is a
more accurate indicator of existing store performance and is a
common basis used by other retailers.

Cost of Goods Sold.As a percentage of revenues, cost of goods sold decreased to
66.5% in fiscal year 2004 as compared to 67.5% in fiscal year
2003. The decrease is primarily attributable to improved margin
on inventory purchases, improved operating efficiencies and a
0.15% reduction in direct costs as a percentage of revenues
resulting from the Companys Merchandising Restructuring
completed during fiscal year 2003.

Selling, General and Administrative
Expenses.Selling, general and
administrative (SG&A) expenses were
$563.2 million in fiscal year 2004, compared to
$553.4 million in fiscal year 2003. As a percentage of
revenues, SG&A increased to 24.9% in fiscal year 2004 from
24.7% in fiscal year 2003. The increase in SG&A expenses as
a percentage of revenues resulted primarily from increases in
pension costs and casualty insurance costs as a percentage of
revenues of approximately 0.22% each, and an increase in bad
debt expense as a percentage of revenues of 0.08%. These
increases were partially offset by a decrease in payroll costs
as a percentage of revenues of 0.12%, a 0.08% increase in income
as a percentage of revenues generated from the

13



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Companys proprietary credit card, and a
0.09% decrease in recruiting and relocation expenses as a
percentage of revenues due to one-time costs incurred in fiscal
year 2003 associated with the Merchandise Restructuring.


During fiscal years 2004 and 2003, the
Companys bad debt expense, net of recoveries, associated
with the issuance of credit on the Belk proprietary credit
cards, was $17.5 million and $15.6 million, respectively.
During fiscal years 2004 and 2003, finance charge income on the
outstanding Belk proprietary credit card receivables was
$63.0 million and $60.9 million, respectively.
Accounts receivable management and collection services expenses
for fiscal years 2004 and 2003 were $18.8 million and
$19.9 million, respectively.

Asset Impairment and Store Closing
Costs.During fiscal year 2003, the
Company recorded $0.5 million of exit costs related to the
closing of one store in fiscal year 2003 and one store in the
first quarter of fiscal year 2004. The exit costs consisted
primarily of post-closing real estate lease obligations and
severance costs. The Company did not incur any charges related
to asset impairment or store closings in fiscal year 2004.

Restructuring
Charges.In fiscal year 2004 and 2003,
the Company recorded a $2.0 million and $0.8 million
charge, respectively, in connection with the restructuring of
its logistics network. The charges are due to increases in
projected costs related to post-closing real estate lease
obligations.

During fiscal year 2003, the Company recorded a
restructuring charge of $7.1 million in connection with the
consolidation of its divisional merchandising and marketing
functions into a single organization located at the
Companys corporate offices in Charlotte, NC The
consolidation also included implementation of a central planning
and allocation function to oversee the distribution and
allocation of merchandise to the stores. The charge consisted of
$5.1 million of employee severance costs, $1.5 million
of post-closing real estate lease obligation costs, and
$0.5 million for the reduction to fair value of excess
assets.

Gain (loss) on property, equipment and
investments.The gain on property,
equipment and investments increased to $14.8 million for
the fiscal year ended January 31, 2004, compared to losses
of $0.4 million for the fiscal year ended February 1,
2003. The current year gain is primarily due to a
$19.3 million gain recognized on the sale of property
located in Charlotte, North Carolina, partially offset by a
$6.5 million loss on the dedesignation of two interest rate
swaps.

Income taxes.For
fiscal year 2004, the Company experienced a decrease in its
effective tax rate from 37.2% to 34.6%. The decrease in rate is
primarily attributable to an increase in non-taxable income and
deductible expenses that qualify as permanent differences and a
decrease in the effective state income tax rates.

Comparison of Fiscal Years Ended
February 1, 2003 and February 2, 2002

Revenues.In fiscal
year 2003, the Companys revenues increased 0.2%, or
$5.5 million, to $2.242 billion from
$2.236 billion. The increase resulted primarily from
additional revenues of $73.7 million generated from new,
expanded and remodeled stores, offset by a 3.2% decrease in net
revenues from comparable stores due to an overall downward trend
in department store sales experienced during the third and
fourth quarters of fiscal year 2003.

Cost of Goods Sold.As a percentage of revenues, cost of goods sold decreased to
67.5% in fiscal year 2003 as compared to 68.7% in fiscal year
2002. The decrease is primarily attributable to improved margin
on inventory purchases and improved operating efficiencies
related to the consolidation of the Companys distribution
facility and merchandising function in fiscal years 2002 and
2003, respectively.

Selling, General and Administrative
Expenses.SG&A expenses were
$553.4 million in fiscal year 2003, compared to $548.3
million in fiscal year 2002, an increase of 0.9%. As a
percentage of revenues, SG&A increased to 24.7% in fiscal
year 2003 from 24.5% in fiscal year 2002. The increase in
SG&A expenses as a percentage of revenues resulted primarily
from incremental SG&A expenses of $8.5 million
associated with the Merchandising Restructuring that do not
qualify as restructuring expense. The majority of these expenses
related to relocation costs for associates and accelerated
amortization over the remaining useful life of abandoned
leasehold improvements in the division offices. SG&A
expenses were also negatively impacted by additional
depreciation associated with the new stores and store expansions
and an increase in overall

14



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employee benefit costs. The increases in SG&A
expenses were partially offset by lower store payroll costs
resulting from improved operating efficiencies and increased
finance charge income and lower bad debt expense from the
Companys proprietary credit cards.


During fiscal years 2003 and 2002, the
Companys bad debt expense, net of recoveries, associated
with the issuance of credit on the Belk proprietary credit
cards, was $15.6 million and $18.7 million,
respectively. During fiscal years 2003 and 2002, finance charge
income on the outstanding Belk proprietary credit card
receivables was $60.9 million and $57.7 million,
respectively. Accounts receivable management and collection
services expenses for fiscal years 2003 and 2002 were
$19.9 million and $22.0 million, respectively.

Asset Impairment and Store Closing
Costs.During fiscal year 2003 the
Company recorded $0.5 million of exit costs related to the
planned closing of one store in fiscal year 2003 and one store
in fiscal year 2004. The exit costs consisted primarily of
post-closing real estate lease obligations and severance costs.

During fiscal year 2002, the Company recorded a
pre-tax charge of $13.5 million for asset impairment and
store closing costs. The charge included (i) an
$8.6 million reduction to fair value of the historical cost
of assets associated with the Companys e-commerce
initiative as a result of reduced revenues and earnings
projections for Belk.com and (ii) $1.6 million of exit
costs and a $3.3 million reduction to fair value of
long-term assets for four stores closed during fiscal years 2002
and 2003.

Restructuring
Charges.During fiscal year 2003, the
Company recorded a restructuring charge of $7.1 million in
connection with the consolidation of its divisional
merchandising and marketing functions into a single organization
located at the Companys corporate offices in Charlotte, NC
The consolidation also included implementation of a central
planning and allocation function to oversee the distribution and
allocation of merchandise to the stores. The charge consisted of
$5.1 million of employee severance costs, $1.5 million
of post-closing real estate lease obligation costs, and
$0.5 million for the reduction to fair value of excess
assets.

For fiscal years 2003 and 2002, the Company
recorded a $0.8 million and $0.1 million charge,
respectively, in connection with the Logistics Restructuring.
The charges primarily related to additional estimated liability
associated with post-closing real estate lease obligations.

During fiscal year 2002, the Company recorded a
$0.5 million charge in connection with the consolidation of
its thirteen operating divisions into four expanded regional
divisions in June 1999. The charges resulted from increases in
estimated costs associated with post closing lease obligations.

Discontinued
Operations.During fiscal year 2002,
the Company recognized after-tax losses on disposal of
discontinued operations of $0.2 million as a result of
increases in the estimated costs associated with the disposal of
the TAGS leased property and did not incur any additional
charges related to discontinued operations in fiscal year 2003.

Cumulative effect of change in accounting
principle.In connection with the
implementation of Statement of Financial Accounting Standards
(SFAS) SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, the Company
recorded a $1.0 million charge to net income as of the
beginning of fiscal year 2002 related to its interest rate swap
contracts with option provisions. The adjustment represented the
fair market value, net of tax benefit, of these contracts as of
February 4, 2001.

Seasonality and Quarterly
Fluctuations

The Company has historically experienced and
expects to continue to experience seasonal fluctuations in its
revenues, operating income and net income due to the seasonal
nature of the retail business. The highest revenue period for
the Company is the fourth quarter, which includes the Christmas
selling season. 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.
If for any reason the Companys revenues were below
seasonal norms during the fourth quarter, the Companys
annual results of operations could be adversely affected. The
Companys inventory levels generally reach their highest
levels in anticipation of increased revenues during these months.

15



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The following table illustrates the seasonality
of revenues by quarter as a percentage of the full year for the
fiscal years indicated.

|               |  |      |      |      |  |      |      |   |  |  |      |  
|-------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|               |  | 2004 |      | 2003 |  | 2002
|               |  |      |      |      |  |     
|First quarter  |  |      | 22.2 | %    |  |      | 23.8 | % |  |  | 22.9 | %
|Second quarter |  |      | 21.7 |      |  |      | 22.1 |   |  |  | 21.8 |  
|Third quarter  |  |      | 22.5 |      |  |      | 22.1 |   |  |  | 22.6 |  
|Fourth quarter |  |      | 33.6 |      |  |      | 32.0 |   |  |  | 32.7 |  

The Companys quarterly results of
operations could also fluctuate significantly as a result of a
variety of factors, including the timing of new store openings.

Liquidity and Capital Resources

The Companys primary sources of liquidity
are cash on hand, cash flow from operations and borrowings under
debt facilities. The Companys debt facilities consist of a
$250 million variable rate note, a $125 million
ten-year variable rate bond facility, a $200 million
revolving line of credit and a $127 million standby letter
of credit, of which $0 was outstanding at January 31, 2004.
The debt facilities place certain restrictions on mergers,
consolidations, acquisitions, sales of assets, indebtedness,
transactions with affiliates, leases, liens, investments,
dividends and distributions, exchange and issuance of capital
stock and guarantees, and require maintenance of minimum
financial ratios. As of January 31, 2004, the Company was
in compliance with all covenants and does not anticipate that
compliance with the covenants will impact the Companys
liquidity in fiscal year 2005. The $250 million variable
rate note is collateralized by the Companys customer
accounts receivable and limits borrowings under the facility to
approximately 72% of the Companys customer accounts
receivable. The $250 million variable rate note expires in
April 2005 and the Company intends to renew the facility and
utilize it as long-term financing. The revolving credit facility
and standby letter of credit facility expire in July 2005.

Because the interest rates on some of the
Companys debt agreements vary with LIBOR or commercial
paper rates, the Company has entered into interest rate swap
agreements with a financial institution to manage the exposure
to changes in interest rates. The notional amount of the
interest rate swaps is $300 million for fiscal years 2004
through 2009, $125 million for fiscal years 2010 through
2012, and $50 million for fiscal year 2013. Due to reduced
borrowing needs, during the third quarter of fiscal year 2004,
the Company dedesignated two interest rate swaps with a combined
notional amount of $50 million that had previously been
accounted for as cash flow hedges. The swaps will mature in
fiscal year 2009; however the Company may choose to terminate
the dedesignated interest rate swaps prior to their maturity. As
of January 31, 2004, the cost to terminate the swaps would
have been $5.8 million. A fluctuation of 1% in the LIBOR
interest rate would increase or decrease the termination cost by
approximately $2.2 million.

Operating activities provided cash of
$273.0 million during fiscal year 2004, as compared to
$203.3 million in fiscal year 2003. The increase in cash
provided by operating activities compared to the prior period
was principally due to a $27.5 increase in net income, decreases
in accounts receivable and increases in accounts payable and
accrued expenses.

Investing activities used cash of $96.9 million
during fiscal year 2004, as compared to $67.1 million in
fiscal year 2003. The increase in cash used for investing
activities was primarily due to a $52.0 million increase in
purchases of property and equipment, partially offset by a
$22.1 million increase in proceeds from the sale of
property, equipment, and investments. The current year proceeds
consist primarily of $25.6 million related to the sale of
investment property described in Note 9 of the Notes to the
Consolidated Financial Statements.

Expenditures for property and equipment were
$127.1 million during fiscal year 2004, compared to
$75.0 million in fiscal year 2003. During fiscal year 2004,
the Companys capital expenditures included expenditures
for opening eight new stores and making significant renovations
to and/or expansions of four existing stores. The Company
currently projects capital expenditures over the next three
fiscal years to average approximately $140 million per year.

16



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Net cash used by financing activities amounted to
$101.3 million and $67.3 million during fiscal years
2004 and 2003, respectively. The increase is a result of
reductions in outstanding debt and the repurchase of 2,808,998
shares of common stock at a cost of $26.7 million.

Management of the Company believes that cash
flows from operations and its credit facilities will be
sufficient to cover working capital needs, capital expenditures
and debt service agreements for the next 12 months.

Related Party Transactions

In October 2001, the Company extended loans to
Mr. Thomas M. Belk, Jr., Mr. H.W. McKay
Belk and Mr. John R. Belk in the principal amounts of
$2.5 million, $2.5 million and $2.0 million,
respectively. In February 2002, the loan to
Mr. John R. Belk was increased to $2.5 million.
The loans are being repaid to the Company in equal annual
installments of $1.5 million plus interest in cash or stock
over a five-year period that began January 3, 2003. The
loans bear interest at LIBOR plus 1.5%. The Company received the
second of the five payments, including principal and interest,
from the three executives on January 3, 2004. The
Sarbanes-Oxley Act of 2002 prohibits extensions of credit to
executive officers and directors and the material
modification of any term of a loan that was extended
before July 30, 2002. The Company entered into these loans
in October 2001 and February 2002, before the Sarbanes-Oxley Act
of 2002 was enacted. Since that time, the Company has not made
any new extensions of credit to executive officers or directors
nor materially modified the terms of any existing loans.

Contractual Obligations and Commercial
Commitments

To facilitate an understanding of the
Companys contractual obligations and commercial
commitments, the following data is provided:

|                          |                                    |                        |         |          |  |             |        |             |  |               |         |         |  |   |         |         |  |   |        |         | 
|------------------------- | ---------------------------------- | ---------------------- | ------- | -------- |  | ----------- | ------ | ----------- |  | ------------- | ------- | ------- |  | - | ------- | ------- |  | - | ------ | ------- | 
|                          |                                    |                       
|                          |                                    | Payments Due by Period
|                          |                                    |                       
|                          |                                    |                        |         | Within 1 |  |            
|                          |                                    | Total                  |         | Year     |  | 2 - 3 Years |        | 4 - 5 Years |  | After 5 Years
|                          |                                    |                        |         |          |  |             |        |             |  |              
|                          |                                    |                       
|                          |                                    | (in thousands)        
|Contractual Obligations   |                                    |                        |         |          |  |             |        |             |  |               |         |         |  |   |         |         |  |   |        |        
|Long-Term Debt            |                                    | $                      | 273,994 |          |  | $           | 4,873  |             |  | $             | 144,121 |         |  | $ | 125,000 |         |  | $ |       |        
|Capital Lease Obligations |                                    |                        | 56,299  |          |  |             | 5,265  |             |  |               | 9,751   |         |  |   | 9,618   |         |  |   | 31,665 |        
|Operating Leases          |                                    |                        | 214,674 |          |  |             | 30,876 |             |  |               | 51,913  |         |  |   | 39,477  |         |  |   | 92,408 |        
|Purchase Obligations(a)   |                                    |                        | 154,698 |          |  |             | 66,515 |             |  |               | 52,123  |         |  |   | 36,060  |         |  |   |       |        
|                          |                                    |                        |         |          |  |             |        |             |  |               |         |         |  |   |         |         |  |   |        |        
|                          | Total Contractual Cash Obligations |                        | $       | 699,665  |  |             | $      | 107,529     |  |               | $       | 257,908 |  |   | $       | 210,155 |  |   | $      | 124,073 | 
|                          |                                    |                        |         |          |  |             |        |             |  |               |         |         |  |   |         |         |  |   |        |        

|                             |                              |                                            |         |          |  |             |        |             |  |               |         |         |  |   |   |   |  |   |   |   | 
|---------------------------- | ---------------------------- | ------------------------------------------ | ------- | -------- |  | ----------- | ------ | ----------- |  | ------------- | ------- | ------- |  | - | - | - |  | - | - | - | 
|                             |                              |                                           
|                             |                              | Amount of Commitment Expiration per Period
|                             |                              |                                           
|                             |                              | Total                                      |         |         
|                             |                              | Amounts                                    |         | Within 1 |  |            
|                             |                              | Committed                                  |         | Year     |  | 2 - 3 Years |        | 4 - 5 Years |  | After 5 Years
|                             |                              |                                            |         |          |  |             |        |             |  |              
|                             |                              |                                           
|                             |                              | (in thousands)                            
|Other Commercial Commitments |                              |                                            |         |          |  |             |        |             |  |               |         |         |  |   |   |   |  |   |   |  
|Standby Letters of Credit(b) |                              | $                                          | 132,398 |          |  | $           |       |             |  | $             | 132,398 |         |  | $ |  |   |  | $ |  |  
|Import Letters of Credit     |                              |                                            | 19,003  |          |  |             | 19,003 |             |  |               |        |         |  |   |  |   |  |   |  |  
|                             |                              |                                            |         |          |  |             |        |             |  |               |         |         |  |   |   |   |  |   |   |  
|                             | Total Commercial Commitments |                                            | $       | 151,401  |  |             | $      | 19,003      |  |               | $       | 132,398 |  |   | $ |  |  |   | $ |  | 
|                             |                              |                                            |         |          |  |             |        |             |  |               |         |         |  |   |   |   |  |   |   |  






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Purchase obligations include agreements to
    purchase goods or services that are enforceable and legally
    binding and that specify all significant terms, including: fixed
    or minimum quantities to be purchased; fixed, minimum or
    variable price provisions; and the approximate timing of the
    transaction. Agreements that are cancelable without penalty have
    been excluded. Purchase obligations relate primarily to
    purchases of property and equipment, information technology
    contracts, maintenance agreements and advertising contracts.
|   
|(b) |  | Standby letters of credit include a
    $127 million facility that supports the ten-year bond
    facility (accrued principal and interest) due July 2008.                                                                                                                                                                                                                                                                                                                                                                                                                     

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Obligations under the pension and postretirement
benefit plans are not included in the contractual obligations
table. The Companys pension plan funding policy is to
contribute amounts necessary to satisfy minimum pension funding
requirements plus such additional amounts from time to time as
are determined to be appropriate to improve the plans
funded status. The pension plans funded status is affected
by many factors including discount rates and the performance of
plan assets. The Company is not required to make minimum pension
funding payments in fiscal year 2005, but may make discretionary
contributions during the year based on the plans expected
November 1, 2004 funded status. During fiscal year 2004,
the Company made a $10 million voluntary contribution to
the pension plan. The Companys postretirement plan is not
funded in advance. Postretirement benefit payments during fiscal
year 2004 totaled $2.4 million.

Also excluded from the contractual obligations
table are payments the Company may make for employee medical
costs and workers compensation, general liability and automobile
claims.

Implementation of New Accounting
Standards

In April 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 149 (SFAS
No. 149), Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS
No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
provisions of SFAS No. 149 are effective for all
derivatives and hedging activity entered into after
June 30, 2003. The adoption of SFAS No. 149 did not
have an impact on the Companys consolidated financial
position or results of operations.

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150 (SFAS
No. 150) Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003.
The adoption of SFAS No. 150 did not have an impact on the
Companys consolidated financial position or results of
operations.

Impact of Inflation

While it is difficult to determine the precise
effects of inflation, management of the Company does not believe
inflation had a material impact on the consolidated financial
statements for the periods presented.

Critical Accounting Policies

Managements Discussion and Analysis
discusses the results of operations and financial condition as
reflected in the Companys consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP). As discussed in Note 1 to the
Companys consolidated financial statements, the
preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and
reported amounts of revenues and expenses during the reporting
period. On an ongoing basis, management evaluates its estimates
and judgments, including those related to inventory valuation,
vendor allowances, the allowance for doubtful accounts, useful
lives of depreciable assets, recoverability of long-lived
assets, including intangible assets, restructuring and store
closing reserves and the calculation of pension and
postretirement obligations and self-insurance reserves.
Management bases its estimates and judgments on its substantial
historical experience and other relevant factors, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. See Note 1 to the Companys
consolidated financial statements for a discussion of the
Companys significant accounting policies.

18



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While the Company believes that the historical
experience and other factors considered provide a meaningful
basis for the accounting policies applied in the preparation of
the consolidated financial statements, the Company cannot
guarantee that its estimates and assumptions will be accurate,
which could require the Company to make adjustments to these
estimates in future periods.

The following critical accounting policies are
used in the preparation of the consolidated financial statements:

Inventory Valuation.Inventories are valued using the lower of cost or market value,
determined by the retail inventory method. Under the retail
inventory method (RIM), 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. RIM is an averaging method that is widely used in
the retail industry due to its practicality. Also, it is
recognized that the use of the retail inventory method will
result in valuing inventories at 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 and estimates including, among
others, merchandise markon, markup, markdowns and shrinkage,
which significantly impact the ending inventory valuation at
cost as well as resulting gross margins. These significant
estimates, coupled with the fact that the RIM is an averaging
process, can, under certain circumstances, produce distorted or
inaccurate costs. In addition, failure to take markdowns
currently can result in an overstatement of cost under the lower
of cost or market principle.

Vendor Allowances.The Company receives allowances from its vendors through a
variety of programs and arrangements, including markdown
reimbursement programs. These vendor allowances are generally
intended to offset the Companys costs of selling the
vendors products in its stores. Allowances are recognized
in the period in which the Company completes its obligations
under the vendor agreements. Most incentives are deducted from
amounts owed to the vendor at the time the Company completes its
obligations to the vendor or shortly thereafter. The following
summarizes the types of vendor incentives and the Companys
applicable accounting policy:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Advertising allowances  Represents
    reimbursement of advertising costs initially funded by the
    Company. Amounts are recognized as a reduction to selling,
    general and administrative expenses in the period that the
    advertising expense is incurred.                                                                                                                                                     
|
| |  | Markdown allowances  Represents
    reimbursement for the cost of markdowns to the selling price of
    the vendors merchandise. Amounts are recognized as a reduction
    to cost of goods sold in the later of the period that the
    merchandise is marked down or the reimbursement is negotiated.
    Amounts received prior to recognizing the markdowns are recorded
    as a reduction to the cost of inventory.
|
| |  | Payroll allowances  Represents
    reimbursement for payroll costs. Amounts are recognized as a
    reduction to SG&A expense in the period that the payroll
    cost is incurred.                                                                                                                                                                                                                                       

Allowance for Doubtful
Accounts.The Company provides an
allowance for doubtful accounts that is determined based on a
number of factors, including delinquency rates, bankruptcy
filings, historical charge-off patterns and management judgment.

Useful Lives of Depreciable
Assets.The Company makes judgments in
determining the estimated useful lives of its depreciable
long-lived assets which are included in the consolidated
financial statements. The estimate of useful lives is determined
by the Companys historical experience with the type of
asset purchased.

Recoverability of Long-Lived
Assets.Long-lived assets, including
intangible assets, are reviewed when facts and circumstances
indicate that the carrying value of the asset may not be
recoverable. When necessary, impaired assets are written down to
estimated fair value based on the best information available.
Estimated fair value is generally measured by discounting
estimated future cash flows. Where available, the Company would
also obtain individual appraisals or utilize other indicators of
fair value. Considerable management judgment is necessary to
estimate discounted future cash flows.

Restructuring and Store Closing
Reserves.The Company reduces the
carrying value of property and equipment to fair value for owned
locations or recognizes a reserve for future obligations for
leased facilities at the time the Company ceases using property
and/or equipment. The reserve includes future minimum lease

19



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payments and common area maintenance and taxes.
Additionally, the Company makes certain assumptions related to
potential subleases and lease buyouts that reduce the recorded
amount of the accrual. These assumptions are based on
managements knowledge of the market and other relevant
experience, including information provided by third party real
estate brokers. However, significant changes in the real estate
market and the inability to enter into the subleases or obtain
buyouts within the estimated time frame may result in increases
or decreases to these reserves.


Pension and Postretirement
Obligations.The Company utilizes
significant assumptions in determining its periodic pension and
postretirement expense and obligations that are included in the
consolidated financial statements. These assumptions include
determining an appropriate discount rate, investment earnings,
rate of compensation increase, as well as the remaining service
period of active employees. The Company utilizes a qualified
actuary to calculate the periodic pension and postretirement
expense and obligations based upon these assumptions and actual
employee census data.

The funded status of the Companys pension
plan has experienced significant declines in recent years, due
to the losses experienced in the stock market and the decrease
in interest rates during fiscal years 2003 and 2004. The losses
incurred on plan assets in fiscal years 2002 and 2003 amounted
to $46.6 million and had a significant impact on the fair
value of plan assets. The increases in the projected benefit
obligation (PBO) and accumulated benefit obligation
(ABO) have been attributable to reductions in the
discount rates used to value these obligations. As a result of
these factors, on November 1, 2003 (plan measurement date),
the fair market value of the Companys pension plan assets
fell below the ABO by approximately $8.1 million. The ABO
was determined using a 6.375% discount rate, which is 0.625%
lower than the rate used on November 1, 2002. The Company
charged off $62.9 million, net of a $36.9 million tax
benefit, of prepaid pension costs to equity during the fourth
quarter, recognized an intangible asset of $4.5 million for
unrecognized prior service costs and a liability of
approximately $8.1 million for accrued pension costs. This
non-cash charge did not impact the Companys liquidity. If
the fair market value of the pension plan assets exceeds the ABO
at a future valuation date, the charge off would be reversed and
the remaining prepaid pension costs would be re-established as
an asset on the consolidated balance sheets.

The Company maintained the investment earnings
assumption of 8.5% to determine its fiscal year 2005 expense.
The Company believes that this assumption is appropriate given
the composition of its plan assets and historical market returns
thereon. Due to these factors and assumptions, pension expense
for fiscal year 2005 is expected to increase to approximately
$14.8 million, compared to $9.6 million in fiscal year
2004.

Significant changes in actual results from the
aforementioned assumptions may result in increases or decreases
to pension and postretirement expenses in fiscal year 2006 and
later years.

The Company has evaluated the funded status of
the pension plan and does not believe the underfunded position
will materially affect the Companys cash flow in fiscal
year 2005 or future years. No contributions to the plan are
required during fiscal year 2005, based on the plans
current funding status.

Self Insurance
Reserves.The Company purchases
third-party insurance for workers compensation, general
liability and automobile claims that exceed certain dollar
limits. The Company is responsible for the payment of
workers compensation, general liability and automobile
claims under the insured limits. The Company records a liability
for its obligation associated with incurred losses utilizing
information from a third-party insurance broker. The broker
utilizes historical data and industry accepted loss analysis
standards to estimate the loss development factors used to
project the future development of incurred losses. The loss
estimates are adjusted based upon actual reported and settled
claims.

Stock Based
Compensation.In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 requires expanded and more prominent
disclosure in both annual and interim financial statements about
the method of accounting for stock-based employee compensation
and the effect of the method on reported results. SFAS
No. 148 is effective for financial statements for fiscal
years ending after December 15, 2002.

20



---



##### 



The Company has adopted the disclosure
requirements of SFAS No. 148 for the fiscal year ended
January 31, 2004. The Company is not required to adopt a
method under SFAS No. 148 to expense stock awards but
rather continues to apply the recognition and measurement
provisions of APB Opinion No. 25.


As of January 31, 2004, the Company had two
stock based compensation programs that are described in
Note 16.






|         |                                                              
|-------- | -------------------------------------------------------------
|ITEM 7a. | Quantitative and Qualitative Disclosure
    About Market Risk

The Company is exposed to market risk from
changes in interest rates on its variable rate debt. The Company
uses interest rate swaps to manage the interest rate risk
associated with its borrowings and to manage the Companys
allocation of fixed and variable rate debt. The Company does not
use financial instruments for trading or other speculative
purposes and is not a party to any leveraged derivative
instruments. The Companys net exposure to interest rate
risk is based on the difference between the outstanding variable
rate debt and the notional amount of its interest rate swaps. At
January 31, 2004, the Company had $250 million of
variable rate debt and $300 million of offsetting, receive
variable rate, pay fixed rate swaps.

Due to reduced borrowing needs, during the third
quarter of fiscal year 2004, the Company dedesignated two
interest rate swaps with a combined notional amount of
$50 million that had previously been accounted for as cash
flow hedges. The swaps will mature in fiscal year 2009; however
the Company may choose to terminate the dedesignated interest
rate swaps prior to their maturity.

Prior to the dedesignation, the changes in fair
values of effective interest rate swaps were recorded as
adjustments to interest rate swap liability on the accompanying
consolidated balance sheets with the offset recorded in
accumulated other comprehensive loss. Subsequent to the
dedesignation date, changes in the fair value of the
dedesignated interest rate swap contracts are recognized in the
consolidated statement of income as a loss on investments. As of
January 31, 2004, the fair market value of the swaps was a
liability of $5.8 million. A fluctuation of 1% in the LIBOR
interest rate would increase or decrease fair market value by
approximately $2.2 million.

The Company also owns marketable equity
securities that are subject to market risk. A discussion of the
Companys accounting policies for derivative financial
instruments and equity securities is included in the Summary of
Significant Accounting Policies in Note 1 to the Companys
consolidated financial statements.

21



---



##### 






ITEM 8.     Financial Statements and Supplementary Data

|                                                                                        |  |      |    | 
|--------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                        |  | Page
|                                                                                        |  |     
|Independent Auditors Report                                                            |  |      | 23 | 
|Consolidated Statements of Income                                                       |  |      | 24 | 
|Consolidated Balance Sheets                                                             |  |      | 25 | 
|Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Income |  |      | 26 | 
|Consolidated Statements of Cash Flows                                                   |  |      | 27 | 
|Notes to Consolidated Financial Statements                                              |  |      | 28 | 

22



---



##### 



INDEPENDENT AUDITORS REPORT

We have audited the accompanying consolidated
balance sheets of Belk, Inc. and subsidiaries as of
January 31, 2004 and February 1, 2003, and the related
consolidated statements of income, changes in stockholders
equity and comprehensive income and cash flows for each of the
years in the three-year period ended January 31, 2004.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Belk, Inc. and subsidiaries
as of January 31, 2004 and February 1, 2003, and the
results of their operations and their cash flows for each of the
years in the three-year period ended January 31, 2004, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in note 1 to the consolidated
financial statements, the Company changed its method of
accounting for derivative instruments and hedging activities
during the year ended February 2, 2002.



| |         
| | --------
| | KPMG LLP

Charlotte, North Carolina

March 5, 2004, except as to


Note 20, which is as of April 1, 2004


23



---



##### 



BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share
amounts)


|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |       |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ----------------- | ---------- | ----------- |  | ----------- | ---------- | ---- |  | - | ---------- | ----- | -
|                                                                                           |                                                                                    |                  
|                                                                                           |                                                                                    | Fiscal Year Ended
|                                                                                           |                                                                                    |                  
|                                                                                           |                                                                                    | January 31,       |            | February 1, |  | February 2,
|                                                                                           |                                                                                    | 2004              |            | 2003        |  | 2002       
|                                                                                           |                                                                                    |                   |            |             |  |            
|Revenues                                                                                   |                                                                                    | $                 | 2,264,907  |             |  | $           | 2,241,555  |      |  | $ | 2,236,054  |      
|Cost of goods sold (including occupancy and
    buying expenses)                           |                                                                                    |                   | 1,506,905  |             |  |             | 1,512,045  |      |  |   | 1,536,506  |      
|Selling, general and administrative expenses                                               |                                                                                    |                   | 563,225    |             |  |             | 553,390    |      |  |   | 548,261    |      
|Asset impairment and store closing costs                                                   |                                                                                    |                   |           |             |  |             | 561        |      |  |   | 13,451     |      
|Restructuring charge                                                                       |                                                                                    |                   | 2,011      |             |  |             | 8,098      |      |  |   | 692        |      
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Operating income                                                                           |                                                                                    |                   | 192,766    |             |  |             | 167,461    |      |  |   | 137,144    |      
|Interest expense                                                                           |                                                                                    |                   | (38,806    | )           |  |             | (35,849    | )    |  |   | (41,854    | )    
|Interest income                                                                            |                                                                                    |                   | 1,518      |             |  |             | 968        |      |  |   | 1,363      |      
|Gain (loss) on property, equipment and investments                                         |                                                                                    |                   | 14,843     |             |  |             | (402       | )    |  |   | 3,472      |      
|Other income, net                                                                          |                                                                                    |                   | 326        |             |  |             | 1,639      |      |  |   | 1,836      |      
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Income from continuing operations before income
    taxes                                  |                                                                                    |                   | 170,647    |             |  |             | 133,817    |      |  |   | 101,961    |      
|Income taxes                                                                               |                                                                                    |                   | 59,100     |             |  |             | 49,800     |      |  |   | 37,320     |      
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Income from continuing operations                                                          |                                                                                    |                   | 111,547    |             |  |             | 84,017     |      |  |   | 64,641     |      
|Discontinued operations:                                                                   |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|                                                                                           | Loss on disposal of discontinued operations, net
    of income tax benefit of $127 |                   |            |            |  |             |            |     |  |   |            | (221  | )
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Income before cumulative effect of change in
    accounting principle                      |                                                                                    |                   | 111,547    |             |  |             | 84,017     |      |  |   | 64,420     |      
|Cumulative effect of change in accounting
    principle, net of income tax benefit of $610 |                                                                                    |                   |           |             |  |             |           |      |  |   | (1,038     | )    
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Net income                                                                                 |                                                                                    | $                 | 111,547    |             |  | $           | 84,017     |      |  | $ | 63,382     |      
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Basic and diluted income per share:                                                        |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|                                                                                           | Income from continuing operations                                                  |                   | $          | 2.11        |  |             | $          | 1.53 |  |   | $          | 1.18  |  
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|                                                                                           | Discontinued operations                                                            |                   | $          |            |  |             | $          |     |  |   | $          |      |  
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|                                                                                           | Cumulative effect of change in accounting
    principle                            |                   | $          |            |  |             | $          |     |  |   | $          | (0.02 | )
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|                                                                                           | Net income                                                                         |                   | $          | 2.11        |  |             | $          | 1.53 |  |   | $          | 1.16  |  
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      
|Weighted average shares outstanding                                                        |                                                                                    |                   | 52,755,577 |             |  |             | 54,742,994 |      |  |   | 54,741,241 |      
|                                                                                           |                                                                                    |                   |            |             |  |             |            |      |  |   |            |      

See accompanying notes to consolidated financial
statements.

24



---



##### 



BELK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |         |           | 
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------- | --------- |  | ------- | ------- | --------- | 
|                                                                                 |                                                                                                                                     | January 31,                                |         | February 1,
|                                                                                 |                                                                                                                                     | 2004                                       |         | 2003       
|                                                                                 |                                                                                                                                     |                                            |         |            
|ASSETS                                                                          
|Current assets:                                                                  |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 | Cash and cash equivalents                                                                                                           |                                            | $       | 166,071     |           |  | $       | 91,286  |          
|                                                                                 | Accounts receivable, net                                                                                                            |                                            |         | 311,141     |           |  |         | 334,440 |          
|                                                                                 | Merchandise inventory                                                                                                               |                                            |         | 496,242     |           |  |         | 487,490 |          
|                                                                                 | Prepaid income taxes                                                                                                                |                                            |         | 98          |           |  |         | 595     |          
|                                                                                 | Prepaid expenses and other current assets                                                                                           |                                            |         | 17,188      |           |  |         | 16,245  |          
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 |                                                                                                                                     | Total current assets                       |         |             | 990,740   |  |         |         | 930,056   | 
|                                                                                 | Investment securities                                                                                                               |                                            |         | 6,975       |           |  |         | 6,437   |          
|                                                                                 | Property and equipment, net                                                                                                         |                                            |         | 702,682     |           |  |         | 672,807 |          
|                                                                                 | Pension assets                                                                                                                      |                                            |         | 4,487       |           |  |         | 99,360  |          
|                                                                                 | Other assets                                                                                                                        |                                            |         | 25,379      |           |  |         | 27,442  |          
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 |                                                                                                                                     | Total assets                               |         | $           | 1,730,263 |  |         | $       | 1,736,102 | 
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                        
|Current liabilities:                                                             |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 | Accounts payable                                                                                                                    |                                            | $       | 160,013     |           |  | $       | 157,640 |          
|                                                                                 | Accrued expenses                                                                                                                    |                                            |         | 100,801     |           |  |         | 64,195  |          
|                                                                                 | Accrued income taxes                                                                                                                |                                            |         | 36,499      |           |  |         | 25,082  |          
|                                                                                 | Deferred income taxes                                                                                                               |                                            |         | 785         |           |  |         | 2,797   |          
|                                                                                 | Current installments of long-term debt and
    capital lease obligations                                                            |                                            |         | 7,848       |           |  |         | 9,894   |          
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 |                                                                                                                                     | Total current liabilities                  |         |             | 305,946   |  |         |         | 259,608   | 
|Deferred income taxes                                                            |                                                                                                                                     |                                            | 18,540  |             |           |  | 36,527  |        
|Long-term debt and capital lease obligations,
    excluding current installments |                                                                                                                                     |                                            | 300,640 |             |           |  | 355,658 |        
|Interest rate swap liability                                                     |                                                                                                                                     |                                            | 35,367  |             |           |  | 40,888  |        
|Deferred compensation and other noncurrent
    liabilities                       |                                                                                                                                     |                                            | 100,271 |             |           |  | 89,137  |        
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 |                                                                                                                                     | Total liabilities                          |         |             | 760,764   |  |         |         | 781,818   | 
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|Stockholders equity:                                                            |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 | Preferred stock                                                                                                                     |                                            |         |            |           |  |         |        |          
|                                                                                 | Common stock, 51.9 and 54.6 million shares
    issued and outstanding as of January 31, 2004 and
    February 1, 2003, respectively |                                            |         | 519         |           |  |         | 546     |          
|                                                                                 | Paid-in capital                                                                                                                     |                                            |         | 530,612     |           |  |         | 554,917 |          
|                                                                                 | Retained earnings                                                                                                                   |                                            |         | 517,721     |           |  |         | 421,203 |          
|                                                                                 | Accumulated other comprehensive loss                                                                                                |                                            |         | (79,353     | )         |  |         | (22,382 | )        
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 |                                                                                                                                     | Total stockholders equity                 |         |             | 969,499   |  |         |         | 954,284   | 
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        
|                                                                                 |                                                                                                                                     | Total liabilities and stockholders equity |         | $           | 1,730,263 |  |         | $       | 1,736,102 | 
|                                                                                 |                                                                                                                                     |                                            |         |             |           |  |         |        

See accompanying notes to consolidated financial
statements.

25



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##### 



BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN

STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME


(dollars in thousands)


|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |         |        | 
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------- | --- | ------- |  | -------- | ------- | ------------- |  | ----- | ------- | ------- |  | - | ------- | ------- | - | - | ------- | ------- | ------ | 
|                                          |                                                                                                             |                            |     |         |  |          |         | Accumulated   |  |      
|                                          |                                                                                                             |                            |     |         |  |          |         | Other         |  |      
|                                          |                                                                                                             |                            |     |         |  |          |         | Comprehensive |  |      
|                                          |                                                                                                             | Common                     |     | Paid-in |  | Retained |         | Income        |  |      
|                                          |                                                                                                             | Stock                      |     | Capital |  | Earnings |         | (Loss)        |  | Total
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |      
|Balance at February 3, 2001               |                                                                                                             | $                          | 547 |         |  | $        | 562,408 |               |  | $     | 301,364 |         |  | $ | 751     |         |   | $ | 865,070 |        
|Comprehensive income:                     |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|                                          | Net income                                                                                                  |                            |     |        |  |          |         |              |  |       |         | 63,382  |  |   |         |        |   |   |         | 63,382  |       
|                                          | Reclassification adjustment for investment gains
    included in net income, net of $133 income tax benefit |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | (226    | ) |   |         | (226    | )     
|                                          | Unrealized gain on investments, net of $118
    income tax expense                                          |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | 203     |   |   |         | 203     |       
|                                          | Net unrealized loss on interest rate swaps, net
    of income tax benefit of $5,833                         |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | (8,894  | ) |   |         | (8,894  | )     
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|                                          |                                                                                                             | Total comprehensive income |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |         | 54,465 | 
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|Cash dividends                            |                                                                                                             |                            |    |         |  |          |        |               |  |       | (13,870 | )       |  |   |        |         |   |   | (13,870 | )      
|Stockholder notes receivable              |                                                                                                             |                            |    |         |  |          | (7,500  | )             |  |       |         |         |  |   |         |         |   |   | (7,500  | )      
|Common stock issued                       |                                                                                                             |                            |    |         |  |          | 77      |               |  |       |        |         |  |   |        |         |   |   | 77      |        
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|Balance at February 2, 2002               |                                                                                                             | $                          | 547 |         |  | $        | 554,985 |               |  | $     | 350,876 |         |  | $ | (8,166  | )       |   | $ | 898,242 |        
|Comprehensive income:                     |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|                                          | Net income                                                                                                  |                            |     |        |  |          |         |              |  |       |         | 84,017  |  |   |         |        |   |   |         | 84,017  |       
|                                          | Reclassification adjustment for investment gains
    included in net income, net of $61 income tax benefit  |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | (104    | ) |   |         | (104    | )     
|                                          | Unrealized gain on investments, net of $250
    income tax expense                                          |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | 436     |   |   |         | 436     |       
|                                          | Unrealized loss on interest rate swaps, net of
    income tax benefit of $8,544                             |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | (14,548 | ) |   |         | (14,548 | )     
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|                                          |                                                                                                             | Total comprehensive income |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |         | 69,801 | 
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|Cash dividends                            |                                                                                                             |                            |    |         |  |          |        |               |  |       | (13,690 | )       |  |   |        |         |   |   | (13,690 | )      
|Common stock issued and redeemed, net     |                                                                                                             |                            | (1  | )       |  |          | (68     | )             |  |       |        |         |  |   |        |         |   |   | (69     | )      
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|Balance at February 1, 2003               |                                                                                                             | $                          | 546 |         |  | $        | 554,917 |               |  | $     | 421,203 |         |  | $ | (22,382 | )       |   | $ | 954,284 |        
|Comprehensive income:                     |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|                                          | Net income                                                                                                  |                            |     |        |  |          |         |              |  |       |         | 111,547 |  |   |         |        |   |   |         | 111,547 |       
|                                          | Reclassification adjustment for investment gains
    included in net income, net of $136 income tax benefit |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | (231    | ) |   |         | (231    | )     
|                                          | Unrealized gain on investments, net of $476
    income tax expense                                          |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | 811     |   |   |         | 811     |       
|                                          | Unrealized gain on interest rate swaps, net of
    income tax expense of $2,074                             |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | 3,528   |   |   |         | 3,528   |       
|                                          | Reclassification adjustment for interest rate
    swap dedesignation, net of income tax expense of $2,398   |                            |     |         |  |          |         |               |  |       |         |         |  |   |         | 4,083   |   |   |         | 4,083   |       
|                                          | Pension asset adjustment, net of income tax
    benefit of $38,269                                          |                            |     |        |  |          |         |              |  |       |         |        |  |   |         | (65,162 | ) |   |         | (65,162 | )     
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|                                          |                                                                                                             | Total comprehensive income |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |         | 54,576 | 
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|Cash dividends                            |                                                                                                             |                            |    |         |  |          |        |               |  |       | (15,029 | )       |  |   |        |         |   |   | (15,029 | )      
|Common stock issued                       |                                                                                                             |                            | 3   |         |  |          | 3,906   |               |  |       |         |         |  |   |         |         |   |   | 3,909   |        
|Repurchase and retirement of common stock |                                                                                                             |                            | (30 | )       |  |          | (28,211 | )             |  |       |        |         |  |   |        |         |   |   | (28,241 | )      
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        
|Balance at January 31, 2004               |                                                                                                             | $                          | 519 |         |  | $        | 530,612 |               |  | $     | 517,721 |         |  | $ | (79,353 | )       |   | $ | 969,499 |        
|                                          |                                                                                                             |                            |     |         |  |          |         |               |  |       |         |         |  |   |         |         |   |   |         |        

See accompanying notes to consolidated financial
statements.

26



---



##### 



BELK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(dollars in thousands)


|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |          |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------- | -------- | ----------- | ------ | ----------- | ------- | -------- | ------- | - | -------- | -------- | ------- | -
|                                                                                      |                                                                             |                                            
|                                                                                      |                                                                             | Fiscal Year Ended                          
|                                                                                      |                                                                             |                                            
|                                                                                      |                                                                             | January 31,                                 |          | February 1, |        | February 2,
|                                                                                      |                                                                             | 2004                                        |          | 2003        |        | 2002       
|                                                                                      |                                                                             |                                             |          |             |        |            
|Cash flows from operating activities:                                                 |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|                                                                                      | Net income                                                                  |                                             | $        | 111,547     |        |             | $       | 84,017   |         |   | $        | 63,382   |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|                                                                                      | Asset impairment and store closing costs                                    |                                             |          |            |        |             |         | 561      |         |   |          | 13,451   |        
|                                                                                      | Cumulative effect of change in accounting
    principle, net of tax         |                                             |          |            |        |             |         |         |         |   |          | 1,038    |        
|                                                                                      | Deferred income taxes                                                       |                                             |          | 12,796      |        |             |         | 5,959    |         |   |          | 779      |        
|                                                                                      | Depreciation and amortization                                               |                                             |          | 91,007      |        |             |         | 89,312   |         |   |          | 83,625   |        
|                                                                                      | Restructuring charge                                                        |                                             |          | 2,011       |        |             |         | 8,098    |         |   |          | 692      |        
|                                                                                      | Loss on disposal of discontinued operations, net                            |                                             |          |            |        |             |         |         |         |   |          | 221      |        
|                                                                                      | (Gain) loss on sale of property, equipment and
    investments              |                                             |          | (14,843     | )      |             |         | 402      |         |   |          | (3,472   | )      
|                                                                                      | (Increase) decrease in:                                                     |                                             |          |             |        |             |         |          |         |   |          |          |        
|                                                                                      |                                                                             | Accounts receivable, net                    |          |             | 23,299 |             |         |          | 8,807   |   |          |          | 880     |  
|                                                                                      |                                                                             | Merchandise inventory                       |          |             | (8,752 | )           |         |          | 8,254   |   |          |          | 46,518  |  
|                                                                                      |                                                                             | Prepaid income taxes                        |          |             | 497    |             |         |          | 1,307   |   |          |          | 10      |  
|                                                                                      |                                                                             | Prepaid expenses and other assets           |          |             | (6,770 | )           |         |          | 3,219   |   |          |          | (4,321  | )
|                                                                                      | Increase (decrease) in:                                                     |                                             |          |             |        |             |         |          |         |   |          |          |        
|                                                                                      |                                                                             | Accounts payable and accrued expenses       |          |             | 39,370 |             |         |          | (1,342  | ) |          |          | (48,849 | )
|                                                                                      |                                                                             | Accrued income taxes                        |          |             | 11,417 |             |         |          | (10,687 | ) |          |          | 12,843  |  
|                                                                                      |                                                                             | Deferred compensation and other liabilities |          |             | 11,379 |             |         |          | 5,406   |   |          |          | 9,206   |  
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Net cash provided by operating activities                                             |                                                                             |                                             | 272,958  |             |        |             | 203,313 |          |         |   | 176,003  |         
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Cash flows from investing activities:                                                 |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|                                                                                      | Purchases of investments                                                    |                                             |          |            |        |             |         | (135     | )       |   |          | (82      | )      
|                                                                                      | Proceeds from sales of investments                                          |                                             |          | 2,475       |        |             |         | 4,081    |         |   |          | 11,892   |        
|                                                                                      | Purchases of property and equipment                                         |                                             |          | (127,053    | )      |             |         | (75,023  | )       |   |          | (132,165 | )      
|                                                                                      | Proceeds from sales of property and equipment                               |                                             |          | 27,671      |        |             |         | 3,936    |         |   |          | 6,945    |        
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Net cash used by investing activities                                                 |                                                                             |                                             | (96,907  | )           |        |             | (67,141 | )        |         |   | (113,410 | )       
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Cash flows from financing activities:                                                 |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|                                                                                      | Proceeds from issuance of long-term debt                                    |                                             |          | 53,436      |        |             |         | 59,971   |         |   |          | 26,993   |        
|                                                                                      | Principal payments on long-term debt and capital
    lease obligations      |                                             |          | (112,988    | )      |             |         | (107,491 | )       |   |          | (69,694  | )      
|                                                                                      | Net payments on line of credit                                              |                                             |          |            |        |             |         | (6,089   | )       |   |          | (3,626   | )      
|                                                                                      | Dividends paid                                                              |                                             |          | (15,029     | )      |             |         | (13,690  | )       |   |          | (13,870  | )      
|                                                                                      | Stockholder notes receivable                                                |                                             |          |            |        |             |         |         |         |   |          | (7,500   | )      
|                                                                                      | Repurchase of common stock                                                  |                                             |          | (26,685     | )      |             |         |         |         |   |          |         |        
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Net cash used by financing activities                                                 |                                                                             |                                             | (101,266 | )           |        |             | (67,299 | )        |         |   | (67,697  | )       
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Net increase (decrease) in cash and cash
    equivalents                              |                                                                             |                                             | 74,785   |             |        |             | 68,873  |          |         |   | (5,104   | )       
|Cash and cash equivalents at beginning of period                                      |                                                                             |                                             | 91,286   |             |        |             | 22,413  |          |         |   | 27,517   |         
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Cash and cash equivalents at end of period                                            |                                                                             | $                                           | 166,071  |             |        | $           | 91,286  |          |         | $ | 22,413   |         
|                                                                                      |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|Supplemental disclosures of cash flow information:                                    |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|                                                                                      | Interest paid                                                               |                                             | $        | 26,693      |        |             | $       | 27,665   |         |   | $        | 35,614   |        
|                                                                                      | Income taxes paid, net                                                      |                                             |          | 35,695      |        |             |         | 52,227   |         |   |          | 23,035   |        
|Supplemental schedule of noncash investing and
    financing activities:              |                                                                             |                                             |          |             |        |             |         |          |         |   |          |         
|                                                                                      | Increase in property and equipment through
    assumption of capital leases |                                             |          | 2,571       |        |             |         | 2,487    |         |   |          |         |        
|                                                                                      | Increase in investments through receipt of stock
    dividends              |                                             |          |            |        |             |         |         |         |   |          | 636      |        

See accompanying notes to consolidated financial
statements.

27



---



##### 



BELK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(dollars in thousands, except per share
amounts)


(1) Summary of Significant Accounting
Policies

Description of Business and Basis of
Presentation

Belk, Inc. and its subsidiaries (the
Company) operate retail department stores in the
southeastern United States. The Company has one operating
segment that comprises its department stores and an outlet store
subsidiary that is presented as a discontinued operation. All
significant intercompany transactions and balances have been
eliminated in consolidation.

During the second quarter of fiscal year 2003,
the Company implemented a new accounting policy related to its
reward program where customers earn coupons (reward
certificates) based on certain volumes of cumulative purchases
using the Companys proprietary credit card. Effective
August 3, 2002, the company established a reserve of $1.1
million representing the estimated liability for reward
certificates issued and outstanding. The adoption of the new
policy resulted in an increase to revenues of $0.4 million and a
decrease to revenues of $2.5 million for fiscal years 2004 and
2003, respectively. The impact of this program on the
consolidated financial statements for prior periods was
immaterial.

Certain prior period amounts have been
reclassified to conform with the current year presentation.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Significant estimates are required as part of
determining the allowance for doubtful accounts, depreciation,
amortization and recoverability of long-lived assets,
establishing restructuring and other reserves, and calculating
retirement benefits.

Revenues

Revenues include sales of merchandise and the net
revenue received from leased departments of $7,563, $7,568, and
$6,615 for fiscal years 2004, 2003 and 2002, respectively. Sales
from retail operations are recorded at the time of delivery and
reported net of merchandise returns. The reserve for returns is
calculated as a percentage of sales based on historical return
percentages.

Cost of Goods Sold

Cost of goods sold includes occupancy and buying
expenses. Occupancy expenses include rent, utilities and real
estate taxes. Buying expenses include payroll and travel
expenses associated with the buying function.

Finance Charges

Selling, general and administrative expenses in
the consolidated statements of income are reduced by finance
charge and late fee revenue arising from customer accounts
receivable. Finance charge and late fee revenues were $63,030,
$60,910, and $57,678 in fiscal years 2004, 2003 and 2002,
respectively.

Pre-Opening Costs

Store pre-opening costs are expensed as incurred.

28



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Advertising

Advertising costs, net of co-op recoveries from
suppliers, are expensed as incurred and amounted to $63,253,
$62,456, and $62,651 in fiscal years 2004, 2003 and 2002,
respectively.

Long-Lived Asset Recoverability

Long-lived assets, including intangible assets,
are reviewed when facts and circumstances indicate that the
carrying value of the asset may not be recoverable. When
necessary, impaired assets are written down to estimated fair
value based on the best information available. Estimated fair
value is generally based on either appraised value or measured
by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future
cash flows. Accordingly, actual results could vary significantly
from such estimates.

No impairment charges were incurred for fiscal
years 2004 and 2003. For fiscal year 2002, the carrying value of
long-lived assets was reduced by $11,878, for impairment charges
incurred as a result of this analysis.

Cash Equivalents

Cash equivalents include liquid investments with
an original maturity of 90 days or less.

Merchandise Inventory

Merchandise inventory is stated at the lower of
average cost or market as determined by the retail inventory
method.

Investments

The Company accounts for investments in
accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Securities classified as available-for-sale
are valued at fair value, while securities that the Company has
the ability and positive intent to hold to maturity are valued
at amortized cost. The Company includes unrealized holding gains
and losses for available-for-sale securities in other
comprehensive income. Realized gains and losses are recognized
on a specific identification basis and are included in income.
Declines in value that are considered to be other than temporary
are reported in gain (loss) on property, equipment and
investments.

Property and Equipment, Net

Property and equipment owned by the Company is
stated at cost less accumulated depreciation. Property and
equipment leased by the Company under capital leases is stated
at an amount equal to the present value of the minimum lease
payments less accumulated amortization. Depreciation and
amortization are provided utilizing straight-line and various
accelerated methods over the shorter of estimated asset lives or
related lease terms.

Stock Based Compensation

The Company applies Accounting Principles Board
(APB) Opinion No. 25 and related
interpretations (see Note 16) in measuring compensation
cost under its Incentive Stock Plan. Accordingly, compensation
expense is recorded over the performance period based on the
estimated fair market value of the stock.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensa-

29



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


tion, to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, SFAS No. 148 requires expanded and more prominent
disclosure in both annual and interim financial statements about
the method of accounting for stock-based employee compensation
and the effect of the method on reported results. SFAS
No. 148 is effective for financial statements for fiscal
years ending after December 15, 2002. The Company adopted
the disclosure requirements of SFAS No. 148 for the fiscal
year ended February 1, 2003. The Company is not required to
adopt a method under SFAS No. 148 to expense stock awards
but rather continues to apply the recognition and measurement
provisions of APB Opinion No. 25. If the Company had
adopted the provisions of SFAS No. 123, the impact on net
income and net income per share would have been immaterial for
fiscal years 2004, 2003, and 2002.

As of January 31, 2004, the Company had two
stock based compensation programs that are described in
Note 16.

Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement bases and the
respective tax bases of the assets and liabilities and operating
loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized.

Intangible Assets, Net

Leasehold intangibles, which represent the excess
of fair value over the carrying value of leaseholds, are
amortized on a straight-line basis over the remaining terms of
the lease agreements and are included in property and equipment,
net. The carrying value of intangible assets is periodically
reviewed by the Companys management to assess the
recoverability of the assets.

Derivative Financial Instruments

The Company utilizes derivative financial
instruments (interest rate swap agreements) to manage the
interest rate risk associated with its borrowings. The
counterparties to these instruments are major financial
institutions. These agreements are used to reduce the potential
impact of increases in interest rates on variable rate long-term
debt. The differential to be paid or received is accrued as
interest rates change and is recognized as an adjustment to
interest expense.

During fiscal year 2004, the Company dedesignated
two interest rate swaps with a combined notional amount of $50
million that had previously been accounted for as cash flow
hedges and repaid the associated variable rate debt.
Accordingly, the Company recorded in loss on investments a
non-cash charge of $4.1 million, net of a $2.4 million tax
benefit.

Prior to the dedesignation, the changes in fair
values of effective interest rate swaps were recorded as
adjustments to interest rate swap liability on the accompanying
consolidated balance sheets with the offset recorded in
accumulated other comprehensive loss. Subsequent to the
dedesignation date, the increase in fair value of the
dedesignated interest rate swap contracts of $0.1 million was
recognized in the consolidated statement of income.

30



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


In fiscal year 2002, the Company adopted SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain
Hedge Activities. SFAS No. 133 sets forth accounting
and reporting standards for derivative instruments and hedging
activities, requiring the recognition of all derivative
instruments (including certain derivatives embedded in other
contracts) as either assets or liabilities in the balance sheet
measured at fair value. SFAS No. 133 establishes criteria
for a derivative to qualify as a hedge for accounting purposes.

The adoption of SFAS No. 133 resulted in a
$1.0 million reduction to earnings, net of a $0.6 million
tax benefit, recorded as a cumulative effect of change in
accounting principle; a charge to accumulated other
comprehensive income (loss) of $8.9 million, net of a
$5.8 million tax benefit, and an increase to interest rate
swap liability of $17.1 million. The change to accumulated
other comprehensive income is amortized into interest expense on
a straight-line basis through maturity. The Company anticipates
amortizing approximately $0.3 million of accumulated other
comprehensive loss, net of $0.2 million income tax benefit,
during the next twelve months.

The Company holds $250 million of interest
rate swaps, which are used as a cost-effective means to manage
the interest rate and cash flow risks associated with its
borrowings. These swaps hedge the Companys
$125 million bond facility and a series of forecasted
borrowings through maturity in 2012. As of January 31, 2004
and February 1, 2003, the Company had swaps with a negative
fair value of $35.4 million and $40.9 million,
respectively, designated as a cash flow hedge of forecasted cash
flows associated with the Companys borrowings. For fiscal
year 2004, $0.9 million of the Companys
$35.4 million swap liability related to contracts with
option provisions that are excluded from hedge accounting
treatment under SFAS No. 133. For fiscal year 2003,
$1.3 million of the Companys $40.9 million swap
liability, related to contracts with option provisions that are
excluded from hedge accounting treatment under SFAS
No. 133. Any hedge ineffectiveness is recorded as a
component of interest expense. During fiscal years 2004 and
2003, there was no hedge ineffectiveness recorded by the
Company. The change in the swap liability for contracts with
option provisions is recorded in interest expense on the
consolidated statement of income. The Company recorded
$0.4 million and $2.4 million as an offset to interest
expense related to the change in swap liability for contracts
with option provisions for the twelve months ended
January 31, 2004 and February 1, 2003, respectively.

Implementation of New Accounting
Standards

In April 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 149 (SFAS
No. 149), Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS
No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
provisions of SFAS No. 149 are effective for the Company
for all derivatives and hedging activity entered into after
June 30, 2003. The adoption of SFAS No. 149 did not
have an impact on the Companys consolidated financial
position or results of operations.

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150 (SFAS
No. 150) Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003.
The adoption of SFAS No. 150 did not have an impact on the
Companys consolidated financial position or results of
operations.

31



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


(2) Asset Impairment and Store Closing
Costs

During fiscal year 2003, the Company recognized
$0.5 million of exit costs associated with the announcement
of two store closings. The exit costs consist primarily of
post-closing real estate obligations and severance costs. The
long-term assets in the stores are primarily leasehold
improvements and fixtures that were abandoned, discarded or sold.

During fiscal year 2002, the Company recorded a
pre-tax charge of $13.5 million for asset impairment and
store closing costs. The charge included (i) an
$8.6 million reduction to fair value of the historical cost
of assets associated with the Companys e-commerce
initiative as a result of reduced revenues and earnings
projections for Belk.com and (ii) $1.6 million of exit
costs and a $3.3 million reduction to fair value of
long-term assets for four stores closed during fiscal years 2002
and 2003. The exit costs primarily consisted of post-closing
real estate lease obligations. The long-term assets in the
stores are primarily leasehold improvements and fixtures that
were abandoned, discarded or sold when the stores were closed.

As of January 31, 2004 the remaining reserve
balance for post-closing real estate lease obligations was
$0.4 million. The Company does not anticipate incurring
significant additional exit costs in connection with the store
closings.

(3) Restructuring Charge

The Merchandising Restructuring

During fiscal year 2003, the Company recorded a
restructuring charge of $7.1 million in connection with the
consolidation of its divisional merchandising and marketing
functions into a single organization located at the
Companys corporate offices in Charlotte, NC (the
Merchandising Restructuring). The consolidation also
included implementation of a central planning and allocation
function to oversee the distribution and allocation of
merchandise to the stores. The charge consisted of
$5.1 million of employee severance costs, $1.5 million
of post-closing real estate lease obligation costs, and
$0.5 million for the reduction to fair value of excess
assets. Approximately 260 merchandising, marketing and
administrative personnel accepted severance effective
August 3, 2002 as a result of the restructuring. The
Company relocated its division offices from their previous
locations into smaller facilities and sold or sublet the
previous division office locations. The Company sold excess
property and equipment from the division offices with a net book
value of approximately $1.4 million. The consolidation was
substantially completed in the third quarter of fiscal year 2003.

The Logistics Restructuring

During fiscal year 2001, the Company constructed
a new 371,000 square foot central distribution center in
Blythewood, SC as part of the restructuring of the
Companys merchandise distribution and logistics network
(the Logistics Restructuring). During fiscal year
2002, the Company completed the consolidation of its
distribution centers located in Charlotte, NC, Morrisville, NC,
Greensboro, NC, Mauldin, SC, Summerville, SC and Fayetteville,
NC, together with store merchandise receiving and processing
functions in 91 stores not previously serviced by a
distribution center, into the new Blythewood center.

During fiscal year 2004 and 2003, the Company
increased the estimated post-closing real estate lease
obligations associated with the consolidation of its
distribution centers by $2.0 million and $0.8 million,
respectively.

The Division Restructuring

During fiscal year 2000, the Company recorded a
restructuring charge of $7.6 million in connection with the
consolidation of its thirteen operating divisions into four
expanded regional divisions (the Division

32



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Restructuring). The Company closed excess
facilities and eliminated 340 positions as a result of
streamlining operations related to the restructuring. Closure of
the facilities and elimination of the positions occurred during
the second quarter of fiscal year 2000. Excess property and
equipment was discarded or sold. Additional charges of
$0.5 million and $0.6 million were recorded during
fiscal years 2002 and 2001, respectively, as a result of
increases in the estimated costs associated with post closing
real estate lease obligations.

(4) Discontinued Operations

In September 1997, the managers and the advisory
board of TAGS Stores, LLC (TAGS), the Companys
discount outlet store subsidiary, adopted a formal plan to
liquidate its operations during the 1997 Christmas retailing
season. Accordingly, the results of operations of TAGS are
presented as discontinued operations. During the years ended
February 2, 2002 and February 3, 2001, additional
losses of $0.2 million, net of income tax benefit of
$0.1 million and $0.3 million, net of income tax
benefit of $0.2 million, respectively were recorded as a
result of increases in the estimated costs associated with
post-closing real estate lease obligations.

(5) Accumulated Other Comprehensive
Loss

The following table sets forth the components of
accumulated other comprehensive loss:

|                                                                                                                                                       |  |             |         |             |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | ----------- |  | - | ------- | -
|                                                                                                                                                       |  | January 31, |         | February 1,
|                                                                                                                                                       |  | 2004        |         | 2003       
|                                                                                                                                                       |  |             |         |            
|Unrealized loss on interest rate swaps, net of
    $9,296 and $13,768 income tax benefit as of January 31,
    2004 and February 1, 2003, respectively |  | $           | (15,831 | )           |  | $ | (23,442 | )
|Unrealized gains on investments, net of $948 and
    $608 income tax expense as of January 31, 2004 and
    February 1, 2003, respectively             |  |             | 1,640   |             |  |   | 1,060   |  
|Pension asset adjustment, net of income tax
    expense of $38,269                                                                                     |  |             | (65,162 | )           |  |   |        |  
|                                                                                                                                                       |  |             |         |             |  |   |         |  
|Accumulated other comprehensive loss                                                                                                                   |  | $           | (79,353 | )           |  | $ | (22,382 | )
|                                                                                                                                                       |  |             |         |             |  |   |         |  

(6) Accounts Receivable, Net

Customer receivables arise primarily under
open-end revolving credit accounts used to finance purchases of
merchandise from the Company. These accounts have various
billing and payment structures, including varying minimum
payment levels. Installments of deferred payment accounts
receivable maturing after one year are included in current
assets in accordance with industry practice.

The Company provides an allowance for doubtful
accounts that is determined based on a number of factors,
including delinquency rates, bankruptcy filings, historical
charge-off patterns and management judgment.

Accounts receivable, net consists of:

|                                     |                          |             |         |             |  |   |         |         | 
|------------------------------------ | ------------------------ | ----------- | ------- | ----------- |  | - | ------- | ------- | 
|                                     |                          | January 31, |         | February 1,
|                                     |                          | 2004        |         | 2003       
|                                     |                          |             |         |            
|Customer receivables                 |                          | $           | 309,058 |             |  | $ | 326,419 |        
|Other receivables                    |                          |             | 15,119  |             |  |   | 19,750  |        
|Less allowance for doubtful accounts |                          |             | (13,036 | )           |  |   | (11,729 | )      
|                                     |                          |             |         |             |  |   |         |        
|                                     | Accounts receivable, net |             | $       | 311,141     |  |   | $       | 334,440 | 
|                                     |                          |             |         |             |  |   |         |        

33



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Changes in the allowance for doubtful accounts
are as follows:

|                                       |                      |                |         |                |  |                |         |        |  |   |         |        | 
|-------------------------------------- | -------------------- | -------------- | ------- | -------------- |  | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                                       |                      | 52 Weeks Ended |         | 52 Weeks Ended |  | 52 Weeks Ended
|                                       |                      | January 31,    |         | February 1,    |  | February 2,   
|                                       |                      | 2004           |         | 2003           |  | 2002          
|                                       |                      |                |         |                |  |               
|Balance, beginning of year             |                      | $              | 11,729  |                |  | $              | 12,318  |        |  | $ | 10,812  |       
|Charged to expense                     |                      |                | 17,536  |                |  |                | 15,554  |        |  |   | 18,680  |       
|Net uncollectible balances written off |                      |                | (16,229 | )              |  |                | (16,143 | )      |  |   | (17,174 | )     
|                                       |                      |                |         |                |  |                |         |        |  |   |         |       
|                                       | Balance, end of year |                | $       | 13,036         |  |                | $       | 11,729 |  |   | $       | 12,318 | 
|                                       |                      |                |         |                |  |                |         |        |  |   |         |       

(7) Investment Securities

Held-to-maturity securities consist of federal,
state and local debt securities. Details of investments in
held-to-maturity securities are as follows:

|                       |            |             |     |             |  |   |     |     | 
|---------------------- | ---------- | ----------- | --- | ----------- |  | - | --- | --- | 
|                       |            | January 31, |     | February 1,
|                       |            | 2004        |     | 2003       
|                       |            |             |     |            
|Amortized cost         |            | $           | 360 |             |  | $ | 387 |    
|Gross unrealized gains |            |             | 15  |             |  |   | 13  |    
|                       |            |             |     |             |  |   |     |    
|                       | Fair value |             | $   | 375         |  |   | $   | 400 | 
|                       |            |             |     |             |  |   |     |    

At January 31, 2004, scheduled maturities of
held-to-maturity securities are as follows:

|                  |  |            |     |           |  |   |     | 
|----------------- |  | ---------- | --- | --------- |  | - | --- | 
|                  |  |            |     | Amortized
|                  |  | Fair Value |     | Cost     
|                  |  |            |     |          
|One to five years |  | $          | 101 |           |  | $ | 100 | 
|Six to ten years  |  |            |    |           |  |   |    | 
|After ten years   |  |            | 274 |           |  |   | 260 | 
|                  |  |            |     |           |  |   |     | 
|                  |  | $          | 375 |           |  | $ | 360 | 
|                  |  |            |     |           |  |   |     | 

Available-for-sale securities consist primarily
of equity investments. Details of investments in
available-for-sale securities are as follows:

|                        |                          |             |       |             |  |   |       |       | 
|----------------------- | ------------------------ | ----------- | ----- | ----------- |  | - | ----- | ----- | 
|                        |                          | January 31, |       | February 1,
|                        |                          | 2004        |       | 2003       
|                        |                          |             |       |            
|Cost                    |                          | $           | 4,007 |             |  | $ | 6,559 |      
|Gross unrealized gains  |                          |             | 2,608 |             |  |   | 1,655 |      
|Gross unrealized losses |                          |             |      |             |  |   |      |      
|                        |                          |             |       |             |  |   |       |      
|                        | Fair value of securities |             | $     | 6,615       |  |   | $     | 8,214 | 
|                        |                          |             |       |             |  |   |       |      

Approximately $2,197 of available-for-sale
securities were classified as prepaid expenses and other current
assets on the Companys consolidated balance sheet as of
February 1, 2003.

34



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Details of realized gains and losses are as
follows:

|                                                             |  |                |       |                |  |                |       |   |  |   |       |  
|------------------------------------------------------------ |  | -------------- | ----- | -------------- |  | -------------- | ----- | - |  | - | ----- | -
|                                                             |  | 52 Weeks Ended |       | 52 Weeks Ended |  | 52 Weeks Ended
|                                                             |  | January 31,    |       | February 1,    |  | February 2,   
|                                                             |  | 2004           |       | 2003           |  | 2002          
|                                                             |  |                |       |                |  |               
|Gain on sale of real estate partnership                      |  | $              |      |                |  | $              |      |   |  | $ | 4,467 |  
|Gross realized gains on sales of securities                  |  |                | 1,000 |                |  |                | 1,713 |   |  |   | 1,133 |  
|Gross realized losses on sales of securities                 |  |                | (1    | )              |  |                | (175  | ) |  |   | (254  | )
|Losses on other than temporary declines in market
    values |  |                |      |                |  |                | (78   | ) |  |   | (588  | )
|                                                             |  |                |       |                |  |                |       |   |  |   |       |  
|Net realized gain                                            |  | $              | 999   |                |  | $              | 1,460 |   |  | $ | 4,758 |  
|                                                             |  |                |       |                |  |                |       |   |  |   |       |  

(8) Property and Equipment, net

Details of property and equipment, net are as
follows:

|                                               |                             |           |       |             |  |             |           |         |  |   |           |         | 
|---------------------------------------------- | --------------------------- | --------- | ----- | ----------- |  | ----------- | --------- | ------- |  | - | --------- | ------- | 
|                                               |                             | Estimated |       | January 31, |  | February 1,
|                                               |                             | lives     |       | 2004        |  | 2003       
|                                               |                             |           |       |             |  |            
|Land                                           |                             |           | n/a   |             |  | $           | 23,329    |         |  | $ | 28,160    |        
|Buildings                                      |                             |           | 30-40 |             |  |             | 673,707   |         |  |   | 644,711   |        
|Furniture, fixtures and equipment              |                             |           | 3-7   |             |  |             | 603,826   |         |  |   | 577,363   |        
|Property under capital leases                  |                             |           | 5-19  |             |  |             | 73,468    |         |  |   | 71,104    |        
|Construction in progress                       |                             |           | n/a   |             |  |             | 35,826    |         |  |   | 8,556     |        
|                                               |                             |           |       |             |  |             |           |         |  |   |           |        
|                                               |                             |           |       |             |  |             | 1,410,156 |         |  |   | 1,329,894 |        
|Less accumulated depreciation and amortization |                             |           |       |             |  |             | (707,474  | )       |  |   | (657,087  | )      
|                                               |                             |           |       |             |  |             |           |         |  |   |           |        
|                                               | Property and equipment, net |           |       |             |  |             | $         | 702,682 |  |   | $         | 672,807 | 
|                                               |                             |           |       |             |  |             |           |         |  |   |           |        

(9) Sale of Investment Property

During fiscal year 2004, the Company sold
investment property located in downtown Charlotte, North
Carolina and land located in Greenville, South Carolina for a
net sales price of $21.9 million and $3.7 million,
respectively. The Company recognized a gain of
$12.5 million, net of $7.4 million tax expense, on the
sale of these properties, which is included in gain
(loss) on property, equipment and investments on the
consolidated statement of income.

35



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


(10) Accrued Expenses

Accrued expenses are comprised of the following:

|                                      |                  |             |        |             |  |   |        |        | 
|------------------------------------- | ---------------- | ----------- | ------ | ----------- |  | - | ------ | ------ | 
|                                      |                  | January 31, |        | February 1,
|                                      |                  | 2004        |        | 2003       
|                                      |                  |             |        |            
|Salaries, wages and employee benefits |                  | $           | 20,069 |             |  | $ | 16,470 |       
|Interest                              |                  |             | 2,953  |             |  |   | 3,145  |       
|Rent                                  |                  |             | 4,436  |             |  |   | 3,739  |       
|Taxes, other than income              |                  |             | 7,238  |             |  |   | 4,758  |       
|Reserve for restructuring             |                  |             | 3,025  |             |  |   | 2,151  |       
|Self insurance reserves               |                  |             | 14,968 |             |  |   | 7,690  |       
|Accrued capital expenditures          |                  |             | 22,136 |             |  |   | 4,454  |       
|Other                                 |                  |             | 25,976 |             |  |   | 21,788 |       
|                                      |                  |             |        |             |  |   |        |       
|                                      | Accrued Expenses |             | $      | 100,801     |  |   | $      | 64,195 | 
|                                      |                  |             |        |             |  |   |        |       

(11) Borrowings

Long-term debt, principally due to banks, and
capital lease obligations consist of the following:

|                                                                                 |  |             |         |             |  |   |         |  
|-------------------------------------------------------------------------------- |  | ----------- | ------- | ----------- |  | - | ------- | -
|                                                                                 |  | January 31, |         | February 1,
|                                                                                 |  | 2004        |         | 2003       
|                                                                                 |  |             |         |            
|Bond facility                                                                    |  | $           | 125,000 |             |  | $ | 125,000 |  
|Note payable                                                                     |  |             | 125,007 |             |  |   | 175,055 |  
|Sale/leaseback financing                                                         |  |             | 23,652  |             |  |   | 28,122  |  
|Capital lease agreements through August 2020                                     |  |             | 34,495  |             |  |   | 36,974  |  
|Unsecured notes payable                                                          |  |             | 334     |             |  |   | 401     |  
|                                                                                 |  |             |         |             |  |   |         |  
|                                                                                 |  |             | 308,488 |             |  |   | 365,552 |  
|Less current installments                                                        |  |             | (7,848  | )           |  |   | (9,894  | )
|                                                                                 |  |             |         |             |  |   |         |  
|Long-term debt and capital lease obligations,
    excluding current installments |  | $           | 300,640 |             |  | $ | 355,658 |  
|                                                                                 |  |             |         |             |  |   |         |  

The annual maturities of long-term debt and
capital lease obligations over the next five years as of
January 31, 2004 are $7,848, $132,643, $15,905, $2,197 and
$127,392, respectively.

The bond facility matures in July 2008 and bears
interest at a variable rate based on the market for the bonds
that has historically approximated one-month LIBOR plus 70 basis
points. The note payable bears interest at a rate that
approximates one month LIBOR plus 50 basis points, is
collateralized by the Companys customer accounts
receivable and limits borrowings to the lesser of $250 million
or approximately 72% of the Companys customer accounts
receivable. The note payable expires in April 2005 and,
accordingly, the balance as of January 31, 2004 has been
included in annual maturities of long-term debt for fiscal year
2006. However, the note may be renewed by mutual consent of the
parties and it is the Companys intent to utilize the note
payable as long-term financing. At January 31, 2004, one
month LIBOR was 1.10%.

On April 30, 1999, the Company sold certain
leasehold improvements for $42 million and is leasing them
back through fiscal year 2008. The Company has the option to
repurchase the leasehold improvements at the end of the lease.
In accordance with SFAS No. 98, Accounting for
Leases, and SFAS No. 66, Accounting

36



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


for Sales of Real Estate, the Company is
accounting for the sale-leaseback as financing. The effective
interest rate on the facility is 7.27%.

The Companys loan agreements place
restrictions on mergers, consolidations, acquisitions, sales of
assets, indebtedness, transactions with affiliates, leases,
liens, investments, dividends and distributions, exchange and
issuance of capital stock, and guarantees. They also contain
leverage ratio, tangible net worth and fixed charge coverage
ratio requirements. The bond facility requires the Company to
maintain a $126.8 million supporting letter of credit. The
Company is in compliance with all debt covenants.

The Company has entered into interest rate swap
agreements with various financial institutions to manage the
exposure to changes in interest rates on its variable rate
indebtedness. The amount of indebtedness covered by the interest
rate swaps is $250 million for fiscal years 2004 through
2009, $125 million for fiscal years 2010 through 2012 and
$50 million for fiscal year 2013 (see note 1).

In June 2002 the Company replaced its $175
million seasonal line of credit and $127 million standby
letter of credit with a combined $200 million revolving
credit and $127 million standby letter of credit facility.
The revolving credit facility is at a variable interest rate
based on LIBOR plus 87.5 basis points. The agreement expires in
July 2005. There were no outstanding borrowings under revolving
credit agreements at January 31, 2004 and February 1,
2003. The average interest rates on short-term borrowings during
the years ended January 31, 2004 and February 1, 2003
were 2.1% and 2.6%, respectively.

(12) Leases

The Company leases certain of its stores,
warehouse facilities and equipment. The majority of these leases
will expire over the next 15 years. The leases usually
contain renewal options and provide for payment by the lessee of
real estate taxes and other expenses and, in certain instances,
contingent rentals determined on the basis of a percentage of
sales in excess of stipulated minimums for certain store
facilities. Assets under capital lease and accumulated
amortization were $73,468 and $44,431, respectively, at
January 31, 2004 and are included in property and
equipment, net.

Future minimum lease payments under
non-cancelable leases, net of future minimum sublease rental
income under noncancelable subleases, as of January 31,
2004 were as follows:

|                                        |       |         |         |           |  |   |         |         | 
|--------------------------------------- | ----- | ------- | ------- | --------- |  | - | ------- | ------- | 
|Fiscal Year                             |       | Capital |         | Operating
|                                        |       |         |         |          
|2005                                    |       | $       | 5,265   |           |  | $ | 30,876  |        
|2006                                    |       |         | 4,840   |           |  |   | 27,699  |        
|2007                                    |       |         | 4,911   |           |  |   | 24,214  |        
|2008                                    |       |         | 4,939   |           |  |   | 21,133  |        
|2009                                    |       |         | 4,679   |           |  |   | 18,344  |        
|After 2009                              |       |         | 31,665  |           |  |   | 92,408  |        
|                                        |       |         |         |           |  |   |         |        
|                                        | Total |         |         | 56,299    |  |   |         | 214,674 | 
|Less sublease rental income             |       |         |        |           |  |   | (1,894  | )      
|                                        |       |         |         |           |  |   |         |        
|Net rentals                             |       |         | 56,299  |           |  | $ | 212,780 |        
|                                        |       |         |         |           |  |   |         |        
|Less imputed interest                   |       |         | (21,804 | )         |  |   |         |        
|                                        |       |         |         |           |  |   |         |        
|Present value of minimum lease payments |       |         | 34,495  |           |  |   |         |        
|Less current portion                    |       |         | (2,976  | )         |  |   |         |        
|                                        |       |         |         |           |  |   |         |        
|                                        |       | $       | 31,519  |           |  |   |         |        
|                                        |       |         |         |           |  |   |         |        

37



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Net rental expense for all operating leases
consists of the following:

|           |                        |                          |       |                |        |                |       |        |        |  |       |        |        | 
|---------- | ---------------------- | ------------------------ | ----- | -------------- | ------ | -------------- | ----- | ------ | ------ |  | ----- | ------ | ------ | 
|           |                        | 52 Weeks Ended           |       | 52 Weeks Ended |        | 52 Weeks Ended
|           |                        | January 31,              |       | January 31,    |        | February 2,   
|           |                        | 2004                     |       | 2003           |        | 2002          
|           |                        |                          |       |                |        |               
|Buildings: |                        |                          |       |                |        |                |       |        |        |  |       |       
|           | Minimum rentals        |                          | $     | 29,834         |        |                | $     | 29,737 |        |  | $     | 29,622 |       
|           | Contingent rentals     |                          |       | 3,323          |        |                |       | 3,368  |        |  |       | 4,306  |       
|           | Sublease rental income |                          |       | (663           | )      |                |       | (876   | )      |  |       | (900   | )     
|Equipment  |                        |                          | 1,657 |                |        |                | 2,359 |        |        |  | 3,860 |       
|           |                        |                          |       |                |        |                |       |        |        |  |       |       
|           |                        | Total net rental expense |       | $              | 34,151 |                |       | $      | 34,588 |  |       | $      | 36,888 | 
|           |                        |                          |       |                |        |                |       |        |        |  |       |       

(13) Income Taxes

Federal and state income tax expense from
continuing operations was as follows:

|             |         |                |        |                |  |                |        |        |  |   |        |        | 
|------------ | ------- | -------------- | ------ | -------------- |  | -------------- | ------ | ------ |  | - | ------ | ------ | 
|             |         | 52 Weeks Ended |        | 52 Weeks Ended |  | 52 Weeks Ended
|             |         | January 31,    |        | February 1,    |  | February 2,   
|             |         | 2004           |        | 2003           |  | 2002          
|             |         |                |        |                |  |               
|Current:     |         |                |        |                |  |                |        |        |  |   |        |       
|             | Federal |                | $      | 41,689         |  |                | $      | 38,181 |  |   | $      | 27,484 | 
|             | State   |                |        | 3,953          |  |                |        | 5,252  |  |   |        | 3,853  | 
|             |         |                |        |                |  |                |        |        |  |   |        |       
|             |         |                | 45,642 |                |  |                | 43,433 |        |  |   | 31,337 |       
|             |         |                |        |                |  |                |        |        |  |   |        |       
|Deferred:    |         |                |        |                |  |                |        |        |  |   |        |       
|             | Federal |                |        | 12,292         |  |                |        | 5,597  |  |   |        | 5,247  | 
|             | State   |                |        | 1,166          |  |                |        | 770    |  |   |        | 736    | 
|             |         |                |        |                |  |                |        |        |  |   |        |       
|             |         |                | 13,458 |                |  |                | 6,367  |        |  |   | 5,983  |       
|             |         |                |        |                |  |                |        |        |  |   |        |       
|Income taxes |         | $              | 59,100 |                |  | $              | 49,800 |        |  | $ | 37,320 |       
|             |         |                |        |                |  |                |        |        |  |   |        |       

A reconciliation between income taxes from
continuing operations and income tax expense computed using the
federal statutory income tax rate of 35% is as follows:

|                                                                 |  |                |        |                |  |                |        |   |  |   |        |  
|---------------------------------------------------------------- |  | -------------- | ------ | -------------- |  | -------------- | ------ | - |  | - | ------ | -
|                                                                 |  | 52 Weeks Ended |        | 52 Weeks Ended |  | 52 Weeks Ended
|                                                                 |  | January 31,    |        | February 1,    |  | February 2,   
|                                                                 |  | 2004           |        | 2003           |  | 2002          
|                                                                 |  |                |        |                |  |               
|Income tax at the statutory federal rate                         |  | $              | 59,727 |                |  | $              | 46,836 |   |  | $ | 35,686 |  
|State income taxes, net of federal income tax
    benefit        |  |                | 3,328  |                |  |                | 3,914  |   |  |   | 2,982  |  
|Increase in Cash Surrender Value of
    Officers Life Insurance |  |                | (3,297 | )              |  |                | (1,892 | ) |  |   | (2,037 | )
|Other                                                            |  |                | (658   | )              |  |                | 942    |   |  |   | 689    |  
|                                                                 |  |                |        |                |  |                |        |   |  |   |        |  
|Income taxes                                                     |  | $              | 59,100 |                |  | $              | 49,800 |   |  | $ | 37,320 |  
|                                                                 |  |                |        |                |  |                |        |   |  |   |        |  

38



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Deferred taxes based upon differences between the
financial statement and tax bases of assets and liabilities and
available tax carryforwards consist of:

|                               |                                  |                              |        |             |        |  |         |        |        | 
|------------------------------ | -------------------------------- | ---------------------------- | ------ | ----------- | ------ |  | ------- | ------ | ------ | 
|                               |                                  | January 31,                  |        | February 1,
|                               |                                  | 2004                         |        | 2003       
|                               |                                  |                              |        |            
|Deferred tax assets:           |                                  |                              |        |             |        |  |         |       
|                               | Prepaid pension costs            |                              | $      | 1,368       |        |  | $       |       |       
|                               | Benefit plan costs               |                              |        | 27,850      |        |  |         | 27,180 |       
|                               | Restructuring and other reserves |                              |        | 10,596      |        |  |         | 7,061  |       
|                               | Inventory capitalization         |                              |        | 5,848       |        |  |         | 5,633  |       
|                               | Allowance for doubtful accounts  |                              |        | 4,886       |        |  |         | 4,342  |       
|                               | Tax carryovers                   |                              |        | 2,757       |        |  |         | 2,891  |       
|                               | Interest rate swaps              |                              |        | 10,880      |        |  |         | 15,374 |       
|                               | Other                            |                              |        | 5,111       |        |  |         | 5,737  |       
|                               |                                  |                              |        |             |        |  |         |       
|Gross deferred tax assets      |                                  |                              | 69,296 |             |        |  | 68,218  |       
|Less valuation allowance       |                                  |                              | (768   | )           |        |  | (820    | )     
|                               |                                  |                              |        |             |        |  |         |       
|                               |                                  | Net deferred tax assets      |        |             | 68,528 |  |         |        | 67,398 | 
|                               |                                  |                              |        |             |        |  |         |       
|Deferred tax liabilities       |                                  |                              |        |             |        |  |         |       
|                               | Prepaid pension costs            |                              |        |            |        |  |         | 37,359 |       
|                               | Property and equipment           |                              |        | 64,533      |        |  |         | 47,986 |       
|                               | Inventory                        |                              |        | 20,162      |        |  |         | 18,294 |       
|                               | Investment securities            |                              |        | 2,542       |        |  |         | 2,274  |       
|                               | Other                            |                              |        | 616         |        |  |         | 809    |       
|                               |                                  |                              |        |             |        |  |         |       
|Gross deferred tax liabilities |                                  |                              | 87,853 |             |        |  | 106,722 |       
|                               |                                  |                              |        |             |        |  |         |       
|                               |                                  | Net deferred tax liabilities |        | $           | 19,325 |  |         | $      | 39,324 | 
|                               |                                  |                              |        |             |        |  |         |       

In assessing the realization of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the temporary differences becoming deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment.

As of January 31, 2004, the Company has net
operating loss carryforwards for federal and state income tax
purposes of $1,387 and $4,333, respectively, and state job
credits of $2,362, which are available to offset future taxable
income, if any. These carryforwards expire at various intervals
through fiscal year 2019. Some of the loss carryforwards are
limited to an annual deduction of approximately $300 under a
provision of IRC Section 382. In addition, the Company has
alternative minimum tax net operating loss carryforwards of
$2,790, which are available to reduce future alternative minimum
taxable income at various intervals expiring through fiscal year
2011.

(14) Pension And Postretirement
Benefits

The Company has a defined benefit pension plan
covering substantially all of its employees. The benefits are
based on years of service and the employees compensation.
In fiscal year 2001, a plan amendment changed the averaging
period of employees compensation from calendar years 1994,
1995 and 1996 to calendar years 1998, 1999 and 2000, or the
first three years of participation if employed after 1998. The
cost of pension benefits has been determined by the projected
unit credit actuarial method in accordance with SFAS
No. 87, Employers Accounting for
Pensions. The assets held by the plan consist of 66%
equities and 34% fixed income investments. No additional funding
of the plan is anticipated in fiscal year 2005.

39



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


The Company also has a defined benefit health
care plan that provides postretirement medical and life
insurance benefits to certain retired full-time employees. The
Company accounts for postretirement benefits by recognizing the
cost of these benefits over an employees estimated term of
service with the Company, in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other than Pensions.

The change in the projected benefit obligation,
change in plan assets, funded status, amounts recognized and
unrecognized, net periodic benefit cost and actuarial
assumptions are as follows:

|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |        |  
|---------------------------------------------------------------------------- | ---------------------------------------------- | ---------------- | ------- | ----------------------- | - | ----------- | ------ | ----------- | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                             |                                                |                  |         |                        
|                                                                             |                                                | Pension Benefits |         | Postretirement Benefits
|                                                                             |                                                |                  |         |                        
|                                                                             |                                                | January 31,      |         | February 1,             |   | January 31, |        | February 1,
|                                                                             |                                                | 2004             |         | 2003                    |   | 2004        |        | 2003       
|                                                                             |                                                |                  |         |                         |   |             |        |            
|Change in projected benefit obligation:                                      |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             | Benefit obligation at beginning of year        |                  | $       | 293,649                 |   |             | $      | 267,579     |   |   | $       | 27,991 |   |   | $       | 29,644 |  
|                                                                             | Service cost                                   |                  |         | 11,521                  |   |             |        | 13,056      |   |   |         | 290    |   |   |         | 404    |  
|                                                                             | Interest cost                                  |                  |         | 20,630                  |   |             |        | 20,329      |   |   |         | 1,931  |   |   |         | 2,226  |  
|                                                                             | Actuarial (gain) loss                          |                  |         | 28,018                  |   |             |        | 13,685      |   |   |         | (3,272 | ) |   |         | (2,298 | )
|                                                                             | Benefits paid                                  |                  |         | (20,872                 | ) |             |        | (21,000     | ) |   |         | (2,509 | ) |   |         | (1,985 | )
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             | Benefit obligation at end of year              |                  |         | 332,946                 |   |             |        | 293,649     |   |   |         | 24,431 |   |   |         | 27,991 |  
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|Change in plan assets:                                                       |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             | Fair value of plan assets at beginning of year |                  |         | 290,362                 |   |             |        | 337,670     |   |   |         |       |   |   |         |       |  
|                                                                             | Actual return on plan assets                   |                  |         | 34,817                  |   |             |        | (26,308     | ) |   |         |       |   |   |         |       |  
|                                                                             | Contributions to plan                          |                  |         | 10,000                  |   |             |        |            |   |   |         | 2,509  |   |   |         | 1,985  |  
|                                                                             | Benefits paid                                  |                  |         | (20,872                 | ) |             |        | (21,000     | ) |   |         | (2,509 | ) |   |         | (1,985 | )
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             | Fair value of plan assets at end of year       |                  |         | 314,307                 |   |             |        | 290,362     |   |   |         |       |   |   |         |       |  
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|Funded Status                                                                |                                                |                  | (18,639 | )                       |   |             | (3,287 | )           |   |   | (24,431 | )      |   |   | (27,991 | )     
|Unrecognized net transition obligation                                       |                                                |                  |         |                         |   |             |       |             |   |   | 2,358   |        |   |   | 2,618   |       
|Unrecognized prior service costs                                             |                                                |                  | 4,487   |                         |   |             | 4,764  |             |   |   |        |        |   |   |        |       
|Unrecognized net (gain) loss                                                 |                                                |                  | 113,947 |                         |   |             | 97,883 |             |   |   | (6,238  | )      |   |   | (3,242  | )     
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|Net prepaid (accrued)                                                        |                                                | $                | 99,795  |                         |   | $           | 99,360 |             |   | $ | (28,311 | )      |   | $ | (28,615 | )     
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|Amounts recognized in the consolidated balance
    sheets consist of:        |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             | Minimum pension liability                      |                  | $       | (8,122                  | ) |             | $      |            |   |   |         |        |   |   |         |        |  
|                                                                             | Pension assets                                 |                  |         | 4,487                   |   |             |        | 99,360      |   |   |         |        |   |   |         |        |  
|                                                                             | Accumulated other comprehensive loss           |                  |         | 103,430                 |   |             |        |            |   |   |         |        |   |   |         |        |  
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             |                                                | $                | 99,795  |                         |   | $           | 99,360 |             |   |   |         |        |   |   |         |       
|                                                                             |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|Obligation and funded status at November 1,
    2003 and 2002, respectively: |                                                |                  |         |                         |   |             |        |             |   |   |         |        |   |   |         |       
|                                                                             | Projected benefit obligation                   |                  | $       | 332,946                 |   |             | $      | 293,649     |   |   | $       | 24,431 |   |   | $       | 27,991 |  
|                                                                             | Accumulated benefit obligation                 |                  |         | 322,430                 |   |             |        | 285,798     |   |   |         | N/A    |   |   |         | N/A    |  
|                                                                             | Fair value of plan assets                      |                  |         | 314,307                 |   |             |        | 290,362     |   |   |         |       |   |   |         |       |  

40



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Weighted average assumptions were:

|                               |  |              |       |                     |  |             |     |             |  |             |     |             |  |  |       |   |  |  |     |   |  |  |     |  
|------------------------------ |  | ------------ | ----- | ------------------- |  | ----------- | --- | ----------- |  | ----------- | --- | ----------- |  |  | ----- | - |  |  | --- | - |  |  | --- | -
|                               |  |              |       |                    
|                               |  | Pension Plan |       | Postretirement Plan
|                               |  |              |       |                    
|                               |  | January 31,  |       | February 1,         |  | February 2, |     | January 31, |  | February 1, |     | February 2,
|                               |  | 2004         |       | 2003                |  | 2002        |     | 2004        |  | 2003        |     | 2002       
|                               |  |              |       |                     |  |             |     |             |  |             |     |            
|Discount rates                 |  |              | 6.375 | %                   |  |             | 7.0 | %           |  |             | 7.5 | %           |  |  | 6.375 | % |  |  | 7.0 | % |  |  | 7.5 | %
|Rates of compensation increase |  |              | 4.0   |                     |  |             | 4.0 |             |  |             | 4.0 |             |  |  | N/A   |   |  |  | N/A |   |  |  | N/A |  
|Return on plan assets          |  |              | 8.5   |                     |  |             | 8.5 |             |  |             | 9.4 |             |  |  | N/A   |   |  |  | N/A |   |  |  | N/A |  

The measurement date for the defined benefit
pension plan and the defined benefit health care plan is
November 1. For measurement purposes, a 9.0% annual rate of
increase in the per capita cost of covered benefits (i.e.,
health care cost trend rate) was assumed for fiscal year 2004;
the rate was assumed to decrease to 5.5% gradually over the next
4 years and remain at that level for fiscal years
thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated postretirement
benefit obligation as of January 31, 2004 by $940 and the
aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended
January 31, 2004 by $118. Decreasing the assumed health
care cost trend rates by one percentage point would decrease the
accumulated postretirement benefit obligation as of
January 31, 2004 by $837 and the aggregate of the service
and interest cost components of net periodic postretirement
benefit cost for the year ended February 1, 2003 by $103.
The Companys investment earnings assumption is based on
the composition of plan assets and historical market returns
thereon.

The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed December 8,
2003 to make additional voluntary benefits available through
Medicare. The Company has elected not to recognize the effects
of the Act in these financial statements. The Company will be
evaluating the implications of the Act during fiscal year 2005
and recognize expected financial effects as prescribed by
accounting standards in effect for subsequent reporting periods.

The asset allocation for the pension plan at the
end of fiscal years 2004, 2003, and 2002, and the target
allocation for 2005, by asset category, are as follows:

|                  |  |            |     |                    |  |      |     |      |  |  |     |   |  |  |     |  
|----------------- |  | ---------- | --- | ------------------ |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | -
|                  |  |            |     |                   
|                  |  | Target     |     | Percentage of Plan
|                  |  | Allocation |     | Assets at Year End
|                  |  |            |     |                   
|                  |  | 2005       |     | 2004               |  | 2003 |     | 2002
|                  |  |            |     |                    |  |      |     |     
|Equity Securities |  |            | 65  | %                  |  |      | 66  | %    |  |  | 61  | % |  |  | 63  | %
|Debt Securities   |  |            | 35  | %                  |  |      | 34  | %    |  |  | 39  | % |  |  | 37  | %
|                  |  |            |     |                    |  |      |     |      |  |  |     |   |  |  |     |  
|Total             |  |            | 100 | %                  |  |      | 100 | %    |  |  | 100 | % |  |  | 100 | %

As of the Companys pension plan measurement
date of November 1, 2003, the pension plan accumulated
benefit obligation exceeded the fair market value of the plan
assets by $8,122. As a result, the prepaid pension asset, as of
the fiscal year ending January 31, 2004, of $99,795 was
substantially eliminated and an $8,122 minimum pension liability
and a $4,487 intangible pension assets was recorded, with a
corresponding charge of $65,162, net of tax, recognized in other
comprehensive income, a component of stockholders equity.

41



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


The components of net periodic benefit expense
(income) are as follows:

|                                    |                                   |                                       |         |                     |       |             |         |             |       |             |         |             |      |   |       |      |       |   |       |     |       |   |       |     |       | 
|----------------------------------- | --------------------------------- | ------------------------------------- | ------- | ------------------- | ----- | ----------- | ------- | ----------- | ----- | ----------- | ------- | ----------- | ---- | - | ----- | ---- | ----- | - | ----- | --- | ----- | - | ----- | --- | ----- | 
|                                    |                                   |                                       |         |                    
|                                    |                                   | Pension Plan                          |         | Postretirement Plan
|                                    |                                   |                                       |         |                    
|                                    |                                   | 52 Weeks                              |         | 52 Weeks            |       | 52 Weeks    |         | 52 Weeks    |       | 52 Weeks    |         | 52 Weeks   
|                                    |                                   | Ended                                 |         | Ended               |       | Ended       |         | Ended       |       | Ended       |         | Ended      
|                                    |                                   | January 31,                           |         | February 1,         |       | February 2, |         | January 31, |       | February 1, |         | February 2,
|                                    |                                   | 2004                                  |         | 2003                |       | 2002        |         | 2004        |       | 2003        |         | 2002       
|                                    |                                   |                                       |         |                     |       |             |         |             |       |             |         |            
|Service cost                        |                                   | $                                     | 11,521  |                     |       | $           | 13,056  |             |       | $           | 11,309  |             |      | $ | 290   |      |       | $ | 404   |     |       | $ | 377   |    
|Interest cost                       |                                   |                                       | 20,630  |                     |       |             | 20,329  |             |       |             | 18,986  |             |      |   | 1,931 |      |       |   | 2,226 |     |       |   | 2,251 |    
|Expected return on assets           |                                   |                                       | (26,537 | )                   |       |             | (30,975 | )           |       |             | (31,168 | )           |      |   |      |      |       |   |      |     |       |   |      |    
|Amortization of unrecognized items: |                                   |                                       |         |                     |       |             |         |             |       |             |         |             |      |   |       |      |       |   |       |     |       |   |       |    
|                                    | Net transition (asset) obligation |                                       |         |                    |       |             |         |            |       |             |         |            |      |   |       | 262  |       |   |       | 262 |       |   |       | 262 |      
|                                    | Prior service cost                |                                       |         | 276                 |       |             |         | 276         |       |             |         | 276         |      |   |       | (276 | )     |   |       |    |       |   |       |    |      
|                                    | Net losses                        |                                       |         | 3,674               |       |             |         |            |       |             |         |            |      |   |       |     |       |   |       |    |       |   |       |    |      
|                                    |                                   |                                       |         |                     |       |             |         |             |       |             |         |             |      |   |       |      |       |   |       |     |       |   |       |    
|                                    |                                   | Net periodic benefit expense (income) |         | $                   | 9,564 |             |         | $           | 2,686 |             |         | $           | (597 | ) |       | $    | 2,207 |   |       | $   | 2,892 |   |       | $   | 2,890 | 
|                                    |                                   |                                       |         |                     |       |             |         |             |       |             |         |             |      |   |       |      |       |   |       |     |       |   |       |    

(15) Other Employee Benefits

The Belk Employees Health Care Plan
provides medical and dental benefits to substantially all
full-time employees. This Plan is self-funded for
medical and dental benefits through a 501(c)(9) Trust. The
Group Life Insurance Plan and The Belk Employees Short Term
Disability Insurance Plan provide insurance to substantially all
full-time employees and are fully insured through contracts
issued by insurance companies. Contributions by the Company
under these plans amounted to approximately $28,373, $28,195,
and $25,585 in fiscal years 2004, 2003, and 2002, respectively.

The Belk 401(k) Savings Plan, a contributory,
defined contribution multi-employer plan, provides benefits for
substantially all employees. The contributions to the 401(k)
Savings Plan are comprised of a matching contribution, generally
50% of the employees contribution up to 6% of eligible
compensation, and a basic contribution, generally 2% of eligible
compensation, regardless of the employees contributions.
The cost of the plan was $9,472, $10,372 and $10,368 in fiscal
years 2004, 2003 and 2002, respectively. Effective
January 1, 2004, the plan was amended to provide that new
employees receive a 50% match of employee contributions up to 6%
of eligible annual compensation.

Effective January 1, 2004, the Company
established a non-qualified 401(k) Restoration Plan, for highly
compensated employees, as defined by ERISA. The Plan provides
contributions to a participants account of 4.5% of
eligible compensation and participants can contribute up to 25%
of eligible compensation.

The Supplemental Executive Retirement Plan
(SERP) is a non-qualified defined benefit retirement
plan that provides retirement and death benefits to certain
qualified executives of the Company. Total SERP costs charged to
operations were approximately $1,649, $1,990 and $1,850 in
fiscal years 2004, 2003, and 2002, respectively. The effective
discount rate used in determining the net periodic SERP
liability as of January 31, 2004, February 1, 2003 and
February 2, 2002 was 7.00%, 7.50% and 8.00%, respectively.
Actuarial gains and losses are amortized over the average
remaining service lives of the participants. As of
January 31, 2004 and February 1, 2003, the projected
benefit obligation was $22,074 and $16,861, respectively, and is
included in deferred compensation and other non-current
liabilities. The corresponding accrued obligation of $16,209 and
$15,818 as of January 31, 2004 and February 1, 2003,
respectively, has been recorded in deferred compensation and
other non-current liabilities.

42



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


Certain eligible employees participate in a
non-qualified Deferred Compensation Plan (DCP).
Participants in the DCP have elected to defer a portion of their
regular compensation subject to certain limitations prescribed
by the DCP. The Company is required to pay interest on the
employees deferred compensation at various rates that have
historically been between 8% and 15%. Total interest cost
related to the plan and charged to interest expense was
approximately $3,705, $3,640 and $3,609, in fiscal years 2004,
2003 and 2002, respectively.

(16) Stock-Based Compensation

In fiscal year 2001, the Company implemented the
Belk, Inc. 2000 Incentive Stock Plan (the Plan)
which is administered by the Companys Board of Directors.
Under the Plan, the Company is authorized to award up to 2.8
million shares of common stock for various types of equity
incentives to key employees. The Company applies Accounting
Principles Board Opinion No. 25 (APB 25)
in measuring compensation cost extended under the Plan.

During fiscal years 2002, 2003 and 2004, the
Company accrued compensation expense for performance based stock
awards to certain key executives. These performance based stock
awards will be granted at the end of three years if the Company
meets specified cumulative performance targets during that
period. No monetary consideration is paid by employees who
receive performance stock awards. Accordingly, compensation
expense is recorded over the performance period based on
estimates of performance levels and the estimated fair market
value of the stock. Performance based compensation expense was
$2,841, $1,618, and $411 for fiscal years 2004, 2003 and 2002,
respectively.

During fiscal year 2004, the Company accrued
compensation expense for non-performance based stock awards to
certain key executives. These stock awards are granted annually.
Compensation expense recorded related to this plan was $2,523
for fiscal year 2004.

If the Company had elected to follow the
measurement provisions of SFAS No. 123, Accounting
for Stock-based Compensation, in accounting for its
performance based stock awards, the change to net income and net
income per share would have been immaterial for fiscal years
2004, 2003 and 2002. The method for determining the fair value
of the stock is based on a third party valuation.

(17) Fair Value of Financial
Instruments

Carrying values approximate fair values for
financial instruments that are short-term in nature, such as
cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, notes payable and lines of credit.
The fair value of other financial instruments are as follows:

|                                              |  |                  |         |                  |  |          |         |       |  |   |         |  |  |   |         | 
|--------------------------------------------- |  | ---------------- | ------- | ---------------- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                                              |  |                  |         |                 
|                                              |  | January 31, 2004 |         | February 1, 2003
|                                              |  |                  |         |                 
|                                              |  | Carrying         |         | Fair             |  | Carrying |         | Fair 
|                                              |  | Value            |         | Value            |  | Value    |         | Value
|                                              |  |                  |         |                  |  |          |         |      
|Long-term debt (excluding capitalized leases) |  | $                | 273,994 |                  |  | $        | 264,606 |       |  | $ | 328,578 |  |  | $ | 320,550 | 
|Interest rate swap liability                  |  |                  | 35,367  |                  |  |          | 35,367  |       |  |   | 40,888  |  |  |   | 40,888  | 
|Investment securities                         |  |                  | 6,975   |                  |  |          | 6,990   |       |  |   | 6,437   |  |  |   | 6,450   | 

The fair value of the Companys fixed rate
long-term debt is estimated based on the current rates offered
to the Company for debt of the same remaining maturities. The
carrying value of the Companys variable rate long-term
debt approximates its fair value. The fair value of interest
rate swap agreements is the estimated amount that the Company
would pay or receive to terminate the swap agreement, taking
into account the current credit worthiness of the swap
counterparties. The fair value of investment securities is
primarily based on quoted market prices.

43



---



##### 



BELK, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(dollars in thousands, except per share
amounts)


(18) Stockholders Equity

Authorized capital stock of Belk, Inc. includes
200 million shares of Class A common stock, 200 million
shares of Class B common stock and 20 million shares of
preferred stock, all with par value of $.01 per share. At
January 31, 2004, there were 50,946,311 of Class A common
stock outstanding, 929,028 shares of Class B common stock
outstanding, and no shares of preferred stock outstanding.

Class A shares are convertible into
Class B shares on a 1 for 1 basis, in whole or in part, at
any time at the option of the holder. Class A and
Class B shares are identical in all respects, with the
exception that Class A stockholders are entitled to 10
votes per share and Class B stockholders are entitled to
one vote per share. There are restrictions on transfers of
Class A shares to any person other than a Class A
permitted holder. Each Class A share transferred to a
non-Class A permitted holder automatically converts into
one share of Class B.

On May 21, 2003, the Company completed the
self-tender offer authorized by the Board of Directors on
March 13, 2003 and repurchased 2,808,998 shares of
outstanding Class A and Class B common stock at a cost
of $26.7 million.

(19) Related Party Transactions



In October 2001, the Company extended loans to
Mr. Thomas M. Belk, Jr., Mr. H.W. McKay
Belk and Mr. John R. Belk in the principal amounts of
$2.5 million, $2.5 million and $2.0 million,
respectively. In February 2002, the loan to
Mr. John R. Belk was increased to $2.5 million.
The loans are being repaid to the Company in equal annual
installments of $1.5 million plus interest in cash or stock
over a five-year period that began January 3, 2003. The
loans bear interest at LIBOR plus 1.5%. The Company received the
second of the five payments, including principal and interest,
from the three executives on January 3, 2004. The
Sarbanes-Oxley Act of 2002 prohibits extensions of credit to
executive officers and directors and the material
modification of any term of a loan that was extended
before July 30, 2002. The Company entered into these loans
in October 2001 and February 2002, before the Sarbanes-Oxley Act
of 2002 was enacted. Since that time, the Company has not made
any new extensions of credit to executive officers or directors
nor materially modified the terms of any existing loans.

(20) Subsequent Event

On April 1, 2004, certain participants
elected to waive their benefits in the Companys
non-qualified defined benefit SERP in exchange for participation
in the Companys new non-qualified defined contribution
2004 Supplemental Executive Retirement Plan (2004 SERP). This
election will result in the curtailment and settlement of their
benefits in the defined benefit plan, which will be recognized
in the first quarter of fiscal year 2005.

44



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Disclosure controls and procedures are the
Companys controls and other procedures that are designed
to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended, (the Exchange Act)
is recorded, processed, summarized and reported, within the time
periods specified in SEC rules and forms. Disclosure controls
and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed in the reports that the Company files under the
Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.

As of the end of the period covered by this
report, the Company has evaluated under the supervision and with
the participation of the Companys management, including
the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), the effectiveness of the
design and operation of the Companys disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act). Based on the evaluation, the CEO and
CFO have concluded that the Companys disclosure controls
and procedures are effective to ensure that information required
to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.

During the period covered by this report, there
were no changes or corrective actions in the Companys
internal controls that materially affected, or are reasonably
likely to materially affect, the Companys internal
controls over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item with
respect to Directors and Executive Officers of the Registrant is
included in the sections entitled Election of
Directors, Management of the Company
Executive Compensation of the Proxy Statement for
the Annual Meeting of Stockholders to be held on May 26, 2004
and is incorporated herein by reference. The sections under the
headings Section 16(a) Beneficial Ownership Reporting
Compliance and Other Matters in the Proxy
Statement are also incorporated by reference.

In March 2004, the Company adopted a Code of
Ethics for Senior Executive and Financial Officers (the
Code of Ethics) that applies to the chief executive
officer, chief financial officer and chief accounting officer
and persons performing similar functions. The Code of Ethics is
filed as an exhibit to this Annual Report on Form 10-K.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is included
in the section entitled Executive Compensation of
the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 26, 2004 and is incorporated herein by
reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item is included
in the sections entitled Common Stock Ownership of
Management and Principal Stockholders and Executive
Compensation of the Proxy Statement for the Annual Meeting
of Stockholders to be held on May 26, 2004 and is
incorporated herein by reference.

45



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##### 








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item is included
in the Section entitled Executive Compensation 
Certain Transactions of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 26, 2004 and is
incorporated herein by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information set forth under the Section
entitled Selection of Independent Auditors, of the
Proxy Statement for the Registrants Annual Meeting of
Shareholders to be held on May 26, 2004, is incorporated
herein by reference.




PART IV






|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statements, Schedules
    and Reports on Form 8-K

(a) 1.Consolidated Financial
Statements



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Report of Independent Accountants                                                                                                                                     
|
| | Consolidated Balance Sheets  As of
    January 31, 2004 and February 1, 2003.                                                                                        
|
| | Consolidated Statements of Income 
    Years ended January 31, 2004, February 1, 2003 and
    February 2, 2002.                                                      
|
| | Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Income 
    Years ended January 31, 2004, February 1, 2003 and
    February 2, 2002.
|
| | Consolidated Statements of Cash Flows 
    Years ended January 31, 2004, February 1, 2003 and
    February 2, 2002.                                                  
|
| | Notes to Consolidated Financial Statements                                                                                                                            

2.Consolidated Financial Statement
Schedules

3.Exhibits

The following list of exhibits includes both
exhibits submitted with this Form 10-K as filed with the
Commission and those incorporated by reference to other filings:

|     |  |                                                                                                                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Form of Amended and Restated Certificate of
    Incorporation of the Company (incorporated by reference to
    pages B-24 to B-33 of the Companys Registration
    Statement on Form S-4, filed on March 5, 1998 (File
    No. 333-42935)).                                 
|3.2  |  | Form of Second Amended and Restated Bylaws of the
    Company.                                                                                                                                                                                                               
|4.1  |  | Articles Fourth, Fifth and Seventh of the Amended
    and Restated Certificate of Incorporation of the Company
    (incorporated by reference to pages B-24 to B-33 of the
    Companys Registration Statement on Form S-4, filed on
    March 5 1998 (File No. 333-42935)).
|4.2  |  | Articles I and IV of the Amended and
    Restated Bylaws of the Company (see Exhibit 3.2).                                                                                                                                                                                   
|10.1 |  | Belk, Inc. 2000 Incentive Stock Plan
    (incorporated by reference to Exhibit 10.13 to the
    Registrants Annual Report on Form 10-K, filed on
    April 28, 2000.                                                                                                        
|10.2 |  | Belk, Inc. 2004 Supplemental Executive Retirement
    Plan.                                                                                                                                                                                                                  
|10.3 |  | First Amendment to Credit Agreement, dated as of
    March 11, 2003, among Belk, Inc., certain Belk, Inc.
    subsidiaries and Wachovia Bank N.A. amending that certain credit
    agreement dated as of June 28, 2002.                                                      

46



---



##### 



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4 |  | Amendment Number 5 to Note Purchase
    Agreement, dated as of April 26, 2003, among Belk, Inc.,
    The Belk Center, Inc., Enterprise Funding Corporation, and Bank
    of America, N.A., amending that certain Note Purchase Agreement
    dated as of May 3, 1999 (incorporated by reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q, filed on May 3, 2003).
|10.5 |  | Second Amendment to Credit Agreement, dated as of
    June 16, 2003, among Belk, Inc., certain Belk, Inc.
    subsidiaries and Wachovia Bank N.A. amending that certain credit
    agreement dated as of June 28, 2002 (incorporated by
    reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q, filed on August 2,
    2003).                                       
|10.6 |  | Amendment Number 6 to Note Purchase
    Agreement, dated as of November 3, 2003, among Belk, Inc.,
    The Belk Center, Inc., Enterprise Funding Corporation, and Bank
    of America, N.A., amending that certain Note Purchase Agreement
    dated as of May 3, 1999.                                                                                                                          
|14.1 |  | Belk, Inc. Code of Ethics for Senior Executive
    and Financial Officers.                                                                                                                                                                                                                                                                                                                       
|21.1 |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                    
|23.1 |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                             
|31.1 |  | Certification of the Chief Executive Officer
    pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
    Securities Exchange Act of 1934, as amended, as adopted under
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                        
|31.2 |  | Certification of the Chief Financial Officer
    pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
    Securities Exchange Act of 1934, as amended, as adopted under
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                        
|32.1 |  | Certification of the Chief Executive Officer
    Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                   
|32.2 |  | Certification of the Chief Financial Officer
    Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                   

(b)Reports on Form 8-K



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on form 8-K furnished on
    December 3, 2003, contained disclosure under Item 7,
    Financial Statements, Pro Forma Financial Information and
    Exhibits, and Item 9, Regulation FD
    Disclosure.

47



---



##### 



SIGNATURES

Pursuant to requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 15th
day of April, 2004.



| |             
| | ------------
| | BELK, INC.  
| | (Registrant)



| |     |                 
| | --- | ----------------
| | By: | /s/ JOHN M. BELK

| |                                
| | -------------------------------
| |                                
| | John M. Belk                   
| | Chairman of the Board and Chief
| | Executive Officer              

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed by the
following persons on behalf of the Registrant and in the
capacities indicated on April 15, 2004.

|                                               |  |                                                                                    
|---------------------------------------------- |  | -----------------------------------------------------------------------------------
|Signature                                      |  | Title                                                                              
|                                               |  |                                                                                    
|                                              
|/s/ JOHN M. BELKJohn M. Belk                   |  | Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)
|                                              
|/s/ THOMAS M. BELK, JR.Thomas M. Belk, Jr.     |  | President and Director                                                             
|                                              
|/s/ H.W. MCKAY BELKH.W. McKay Belk             |  | President and Director                                                             
|                                              
|/s/ JOHN R. BELKJohn R. Belk                   |  | President and Director                                                             
|                                              
|/s/ B. FRANK MATTHEWS, IIB. Frank Matthews, II |  | Vice Chairman of the Board and Director                                            
|                                              
|/s/ SARAH BELK GAMBRELLSarah Belk Gambrell     |  | Director                                                                           
|                                              
|/s/ J. KIRK GLENN, JR.J. Kirk Glenn, Jr.       |  | Director                                                                           
|                                              
|/s/ THOMAS C. NELSONThomas C. Nelson           |  | Director                                                                           
|                                              
|/s/ JOHN A. KUHNEJohn A. Kuhne                 |  | Director                                                                           
|                                              
|/s/ BRIAN T. MARLEYBrian T. Marley             |  | Executive Vice President, Finance (Principal
    Financial Officer)                
|                                              
|/s/ EDWARD J. RECORDEdward J. Record           |  | Senior Vice President and Controller (Principal
    Accounting Officer)            

48