Dillard’s, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2022 Q3, but the filing is for the quarter ended October 28, 2023, with comparisons to October 29, 2022. Amounts below are in millions unless otherwise noted.
Business context and reporting period
Dillard’s operates department stores and an internet store, as well as a general contracting construction business. At October 28, 2023, it operated 273 stores, including 27 clearance centers, versus 277 stores a year earlier. Results are seasonal, with a significant portion of sales and income typically occurring in the fiscal fourth quarter.
Financial performance and position
| Metric | Three months ended October 28, 2023 | Prior-year quarter | Nine months ended October 28, 2023 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1,476.4 | $1,544.1 | $4,627.7 | $4,744.4 |
| Income before taxes | $199.4 | $242.7 | $634.1 | $777.3 |
| Net income | $155.3 | $187.9 | $488.3 | $602.5 |
| Diluted EPS | $9.49 | $10.96 | $29.38 | $34.05 |
| Net income as a percentage of net sales | 10.5% | 12.2% | 10.6% | 12.7% |
- Quarterly retail comparable sales declined 6%; nine-month comparable sales declined 4%. Retail sales transactions fell 9% in the quarter and 8% year to date, while average dollars per transaction rose 3% and 4%, respectively.
- Quarterly total gross margin was 43.5% of net sales, down from 44.6%; retail gross margin was 45.3%, down from 45.7%. Nine-month total gross margin was 42.0%, down from 44.0%.
- SG&A was $421.8 million in the quarter and $1,240.7 million year to date; it rose to 28.6% and 26.8% of sales, respectively, from 26.8% and 25.6%. Higher payroll and related costs were the principal driver.
- Net cash from operating activities was $447.1 million for the nine months, down from $558.4 million. Capital expenditures were $104.7 million, compared with $94.8 million.
- At period-end, cash and equivalents were $842.0 million and short-term investments were $51.3 million. Working capital was $1,463.4 million; merchandise inventory was $1,629.2 million, down 1% year over year.
- Total debt, including subordinated debentures, was $521.4 million: $321.4 million of long-term debt and $200.0 million of subordinated debentures. No borrowings were outstanding under the $800 million revolving facility; $780.7 million remained available after letters of credit.
- The company repurchased 0.9 million shares for $265.2 million in the nine-month period. $410.2 million of authorization remained under the May 2023 plan. Cash dividends paid were $10.1 million.
Material changes and unusual items
- Quarterly net sales declined 4.4% and net income declined 17.3% year over year. Retail operations sales fell about 6% in the quarter and 5% year to date; construction sales increased about 48% and 83%, respectively, but remain a smaller part of the business.
- Management said sales weakened particularly from September amid a challenging sales environment. Most retail categories declined in the quarter; cosmetics sales increased slightly.
- Quarterly net income included a $4.0 million pretax gain, primarily from a store-property sale. Nine-month gains on asset disposals were $6.0 million, principally from two store-property sales.
- Interest and debt expense became net income: net interest and debt income was $1.8 million for the quarter and $1.5 million year to date, primarily reflecting higher interest income. Other expense increased, mainly due to higher pension-plan interest cost and amortization of actuarial losses.
- The company closed three stores or clearance locations during the nine-month period and reported no material associated costs. It opened a 100,000-square-foot store expansion in Lincoln, Nebraska.
Outlook, risks and contingencies
- Management expects the fiscal 2023 federal and state effective tax rate to be approximately 21%, subject to results differing from expectations. The estimate includes an expected tax benefit related to the special dividend paid to the company’s investment and employee stock ownership plan.
- On November 16, 2023, the board declared a $20-per-share special dividend, payable January 8, 2024 to holders of record December 15, 2023. The company expects to fund it from operating cash flows.
- The Wells Fargo private-label card alliance expires in November 2024. Wells Fargo’s November 6 non-renewal notice was described as an administrative step to prevent automatic renewal. Dillard’s is negotiating a proposed third-party purchase of program assets and a new card and servicing agreement, but says there is no assurance negotiations will conclude or a comparable alternative will be available. The company cannot estimate the financial impact if no alternative is secured.
- Management cited inflation, rising interest costs, consumer spending and credit conditions, labor availability and costs, competition, mall traffic, supply-chain disruption, and geopolitical and other macroeconomic conditions among forward-looking risks.
- Routine legal matters were not expected to materially affect financial position, cash flows, or results. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting period: this filing covers the quarter ended October 28, 2023, not 2022 Q3.
- Track comparable sales, transaction counts, gross margin and SG&A as the business enters its seasonally important fourth quarter.
- Assess the cash-flow effect and funding of the $20-per-share special dividend alongside repurchases and planned capital spending.
- Monitor progress on the credit-card program transition before the Wells Fargo alliance expires in November 2024, including the terms and certainty of a successor arrangement.
- Review the sustainability of liquidity and earnings, including inventory needs, pension costs, interest income, and exposure to inflation and consumer demand.