Dillard’s, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended May 4, 2019; comparative period ended May 5, 2018. The filing period is 2019, notwithstanding the request metadata indicating 2018. Financial statements are unaudited. Dillard’s operates department stores and a general contracting construction business.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $1,465.4 million | $1,458.3 million | Up 0.5% |
| Gross profit | $537.7 million | $554.5 million | Down 3.0% |
| Gross margin | 36.7% | 38.0% | Down 1.3 percentage points |
| SG&A | $405.2 million | $405.9 million | Down 0.2% |
| Income before taxes | $100.8 million | $103.2 million | Down 2.4% |
| Net income | $78.6 million | $80.5 million | Down 2.4% |
| Diluted EPS | $2.99 | $2.89 | Up 3.5% |
| Operating cash flow | $48.4 million | $55.4 million | Down $7.0 million |
- Retail comparable-store sales were flat, versus 2% growth in the prior-year quarter; total retail sales rose 1%. Retail gross margin fell 141 basis points, primarily because of increased markdowns. Management described quarterly performance as disappointing.
- SG&A was 27.6% of net sales, compared with 27.8%. Net interest expense declined $2.8 million to $11.2 million, primarily due to lower average debt levels following a note maturity.
- Net income included a $7.4 million pretax gain ($5.8 million after tax, or $0.22 per share) from selling two store properties. Excluding that gain, reported net income benefited less from the quarter’s operating results.
- Average diluted shares fell to 26.3 million from 27.8 million, helping lift EPS despite lower net income. The company repurchased 246,158 shares for $17.4 million at an average $70.85 per share.
- Cash from operations declined mainly due to changes in accounts payable and merchandise inventories. Inventory was up 3% year over year; annualized retail inventory turnover was 2.1 times, unchanged.
Balance sheet, debt, and liquidity
- At May 4, 2019, cash and cash equivalents were $139.8 million, with a further $8.7 million of restricted cash. Working capital was $915.6 million.
- Total debt, excluding finance and operating lease liabilities, was $565.6 million: $365.6 million of long-term debt and $200.0 million of subordinated debentures. The company reported no revolver borrowings.
- The unsecured revolving credit facility provides $800 million of capacity, plus a $200 million expansion option, and matures August 2022. After $21.8 million of letters of credit, $778.2 million remained available. The company was in compliance with its financial covenants.
- Under operating cash flow, investing activities used $5.1 million and financing activities used $18.3 million; cash, cash equivalents, and restricted cash increased $25.0 million during the quarter.
- Property and equipment purchases were $18.7 million. The company received $13.4 million in property-sale proceeds; some proceeds were held in escrow as restricted cash pending acquisition of replacement property.
Material changes, outlook, and risks
- The company adopted the new lease accounting standard on February 3, 2019. At May 4, operating lease assets were $52.8 million and operating lease liabilities were $52.0 million. Management said adoption had no material impact on income, cash flows, or equity; comparative periods remain under the prior lease standard.
- Management expected fiscal 2019 capital expenditures of approximately $140 million, versus $137 million in fiscal 2018, funded through cash on hand, operating cash flow, and, if needed, the credit facility. The expected fiscal 2019 effective tax rate was approximately 21%–22%.
- The company expected to contribute approximately $4.0 million more to its pension plan during the rest of fiscal 2019. Construction backlog was $345.6 million at quarter end, up about 13% year over year, and was expected to be earned over the next nine to 24 months.
- After quarter end, Dillard’s closed its Boardman, Ohio and Muskogee, Oklahoma stores. It said it remained committed to closing underperforming stores where appropriate and could incur future closure costs.
- Key risks cited include retail and macroeconomic conditions, consumer spending and credit availability, competition including online and off-price retailers, markdowns, labor and merchandise costs, data-security or system failures, supply-chain disruption, and borrowing-rate or financing availability changes. The Wells Fargo private-label card alliance is a source of income and is subject to portfolio performance and Wells Fargo’s ability to extend credit; the alliance expires in fiscal 2024.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; as of June 7, 2019, no legal proceeding was reasonably expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and comparable-store trends improve, and whether markdown pressure continues to erode retail gross margin.
- The contribution of the $7.4 million property-sale gain to reported earnings and the sustainability of underlying operating profitability.
- Inventory levels, cash conversion, and the drivers of the year-over-year decline in operating cash flow.
- Progress toward the stated $140 million capital-spending plan, store closures, and any related charges.
- Debt maturities, covenant compliance, liquidity usage, and the continuing effects of lease liabilities recognized upon adoption of the lease standard.
- Performance and durability of construction backlog and Wells Fargo Alliance income, as well as any changes in management’s tax-rate, pension-contribution, or other fiscal 2019 expectations.