Dillard’s, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended August 3, 2019 (fiscal 2019 second quarter), not 2018 Q2 as stated in the request metadata. Financial statements are unaudited.
Business context and reporting period
Dillard’s operates department stores and a general contracting construction business. At August 3, 2019, it operated 289 stores, including 29 clearance centers, and one internet store. Retail operations represented 97% of quarterly net sales; construction represented 3%.
Key financial results
| Metric | Three months ended August 3, 2019 | Prior-year quarter | Six months ended August 3, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,426.9 million | $1,468.0 million | $2,892.3 million | $2,926.3 million |
| Gross profit | $394.8 million | $450.8 million | $932.5 million | $1,005.4 million |
| Gross margin | 27.7% | 30.7% | 32.2% | 34.4% |
| SG&A | $409.1 million | $408.4 million | $814.3 million | $814.2 million |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $(18.6) million | $(15.4) million |
| Net income (loss) | $(40.7) million | $(2.9) million | $37.9 million | $77.7 million |
| Diluted EPS | $(1.59) | $(0.10) | $1.46 | $2.80 |
Quarterly comparable-store sales declined 2%, versus a 1% increase a year earlier. Retail gross margin fell 319 basis points, primarily due to increased markdowns. SG&A was 28.7% of net sales, up from 27.8%. The quarter’s $4.9 million pretax asset-disposal gain (about $3.8 million after tax, or $0.15 per share) partly offset the loss. For the six-month period, the company recorded a $12.3 million pretax disposal gain.
At August 3, cash and cash equivalents were $118.1 million, with another $17.2 million restricted in escrow. Working capital was $861.6 million. Total debt, excluding finance and operating lease liabilities, was $565.6 million: $117.9 million of short-term revolver borrowings and $365.6 million of long-term debt, plus $200.0 million of subordinated debentures. The company reported $661.5 million of unused revolver availability and compliance with its credit covenants. Operating lease liabilities of $52.1 million were recognized following adoption of the new lease standard.
Material changes versus comparable periods
- Quarterly net sales fell 2.8%; retail and comparable-store sales each declined 2%. Transactions decreased 3%, while average transaction value rose 1%.
- Quarterly gross profit declined $56.0 million, and consolidated gross margin contracted 304 basis points. Six-month gross profit decreased $72.8 million, with margin down 212 basis points.
- Quarterly net loss widened to $40.7 million from $2.9 million. Six-month net income fell to $37.9 million from $77.7 million.
- Six-month operating cash use increased to $18.6 million from $15.4 million. Inventory was essentially flat year over year; capital expenditures were $38.0 million versus $86.0 million.
- The company repurchased 1.1 million shares for $66.3 million in the six months, compared with 0.5 million shares for $37.9 million in the prior-year period. $340.6 million remained authorized.
- The company adopted ASC 842 lease accounting on February 3, 2019, recording $57.0 million of operating lease assets and $56.2 million of liabilities at adoption; management said the income-statement and cash-flow effects were immaterial.
Outlook, commentary, and risks
- Management characterized second-quarter performance as disappointing, citing weaker comparable sales and markdown pressure on gross margin.
- Fiscal 2019 capital expenditures were expected to be approximately $125 million, versus $137 million in fiscal 2018. The company expected to fund capital spending, working capital and repurchases from cash, operating cash flow and revolver borrowings.
- Management expected a fiscal 2019 federal and state effective tax rate of approximately 21%–22%. No specific full-year sales or earnings guidance was provided in the supplied filing text.
- The company closed stores in Boardman, Ohio, and Muskogee, Oklahoma, during the six-month period and said it remained committed to closing underperforming stores where appropriate.
- Construction backlog was $324.5 million, about 3% below February 2, 2019 and 33% above a year earlier; management expected it to be earned over the next 9–24 months.
- Risks highlighted include retail and macroeconomic conditions, competition, customer spending and credit availability, merchandise sourcing and costs, data security and systems, financing availability, and LIBOR’s expected phaseout. The revolving facility’s variable borrowing rate was LIBOR plus 1.375%.
- Routine legal proceedings were pending, but management did not expect them to have a material adverse effect. The filing reported no material changes to the prior 10-K risk factors and no material changes to market-risk disclosures.
Important facts for investors to verify
- Confirm the period: this filing covers fiscal 2019 Q2, ended August 3, 2019, rather than 2018 Q2.
- Assess whether markdowns and margin pressure persisted after the quarter, given their substantial impact on quarterly profitability.
- Review the cash-flow and working-capital trend, including inventory, operating cash use, and reliance on short-term revolver borrowings.
- Track the remaining $340.6 million share-repurchase authorization against liquidity needs and operating performance.
- Verify the timing and use of $17.2 million of restricted sale proceeds and the execution of replacement-property acquisitions under like-kind exchange arrangements.
- Monitor store closures, construction backlog conversion, and the impact of the Wells Fargo card alliance, whose six-month income declined to $42.3 million from $43.4 million.