Dillard’s, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the three and nine months ended November 2, 2019, not 2018 Q3 as stated in the request metadata. Comparative periods ended November 3, 2018. Dollar amounts below are in millions unless noted.
Business context and reporting period
Dillard’s operates department stores and an in-house general contracting business, CDI Contractors. At November 2, 2019, it operated 289 stores, including 30 clearance centers, and one internet store. Retail is seasonal, with a significant portion of sales and income typically generated in the fiscal fourth quarter.
Financial performance and position
- Third quarter: Net sales were $1,388.3, down 2.2% year over year. Comparable retail sales were flat. Net income was $5.5, or $0.22 per diluted share, versus $7.4, or $0.27 per share.
- First nine months: Net sales were $4,280.6, down 1.5%. Net income was $43.4, or $1.69 per share, versus $85.1, or $3.08 per share.
- Margins: Third-quarter gross margin was 33.2% of net sales, up 53 basis points; retail gross margin improved 13 basis points to 34.5%. Nine-month gross margin fell 125 basis points to 32.6%, primarily due to increased markdowns. SG&A was 30.1% of sales in the quarter and 28.8% year to date, increases of 60 and 41 basis points, respectively.
- Cash flow and investment: Nine-month operating cash flow was $23.0, versus $69.7 a year earlier. Capital expenditures were $70.9 versus $114.2. Cash, cash equivalents and restricted cash totaled $87.5 at period-end; the period’s decrease was $36.0.
- Liquidity and debt: Working capital was $849.0. Total debt was $664.3, excluding finance and operating lease liabilities; this included $98.6 of revolver borrowings, $365.7 of long-term debt and $200.0 of subordinated debentures. The $800 facility had $680.8 of unused availability after borrowings and letters of credit. The company reported covenant compliance.
- Other balance-sheet items: Inventory was $1,970.0, down 4% year over year. Adoption of lease accounting added $48.6 of operating lease assets and $48.2 of operating lease liabilities at quarter-end.
Material changes versus prior comparable periods
- Retail sales declined about 1% in both the quarter and nine-month period, while comparable retail sales were essentially flat. Construction revenue fell 30.1% in the quarter and 19.5% year to date, reflecting reduced activity.
- Quarterly retail gross margin improved modestly, but year-to-date retail gross margin declined 148 basis points, primarily from markdowns. Management said a 1% change in markdowns would affect net income by approximately $3 million for the quarter and $9 million year to date.
- Nine-month net income included a $12.0 gain, principally from sales of three store properties; the prior-year period recorded a $0.1 loss on asset disposals. Lower year-to-date interest expense partly offset weaker operating results.
- Operating cash flow declined $46.7, primarily due to changes in accounts payable, accrued expenses and other liabilities, partly offset by changes in inventory and income taxes.
Outlook, commentary, risks and unusual items
- Management described the quarter as a substantial sequential improvement from Q2: retail gross margin recovered from a 319-basis-point second-quarter decline, comparable sales were flat, and inventory was down year over year.
- For fiscal 2019, management expected capital expenditures of approximately $115 million and an effective tax rate of approximately 20%–21% for the remainder of the year. It expected to fund capital spending, working capital and repurchases through cash, operating cash flow and the credit facility.
- Planned store investments included expansions or replacements in Killeen, Texas; Columbia, Missouri; and Waco, Texas. The company had closed stores in Boardman, Ohio, and Muskogee, Oklahoma, and announced additional closures. Management said further underperforming-store closures may occur and could entail closing costs.
- Quarterly results included a $0.3 pretax store-property disposal loss and approximately $2.8 of state tax benefits. The prior-year quarter included approximately $2.9 of tax benefits. Year-to-date 2019 results included the $12.0 property-disposal gain.
- The company repurchased $101.5 of stock in the first nine months, including $35.2 in the quarter; $305.4 remained under the repurchase authorization. The filing does not provide earnings guidance.
- Risks cited include retail and macroeconomic conditions, competition, consumer spending and credit availability, merchandise sourcing and costs, data security, financing availability, interest rates and the LIBOR transition. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers Q3 2019, not Q3 2018.
- Assess whether flat comparable retail sales and the sequential margin recovery can continue, given year-to-date markdown pressure and higher SG&A as a share of sales.
- Monitor the construction backlog, which was $307.9 million, down about 7% year over year, and management’s expected timing for earning it.
- Review cash generation, inventory levels and the use of revolver capacity alongside continued share repurchases and planned capital expenditures.
- Distinguish recurring earnings from property-sale gains and tax benefits, and track announced store closures and replacement-property transactions.