Dillard's, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended November 3, 2018 (quarterly results compared with the quarter ended October 28, 2017). The filing is for 2018 Q3, notwithstanding the request metadata's 2017 Q3 label. Dillard's operates department stores and a construction business; it reported 265 stores, 27 clearance centers, and one internet store.
Financial performance
- Third-quarter sales: Net sales were $1.419 billion, up $64.2 million (4.7%). Retail sales rose 2% and comparable-store sales rose 3%; construction sales increased 85.2% to $77.4 million.
- Third-quarter earnings and margins: Net income was $7.4 million ($0.27 per diluted share), versus $14.5 million ($0.50) a year earlier. Gross profit was $464.3 million, nearly flat in dollars, while gross margin fell to 32.7% from 34.3%. Retail gross margin declined 87 basis points, primarily because of increased markdowns. SG&A was 29.5% of sales versus 30.2%.
- Nine-month results: Net sales were $4.345 billion, up 3.4%; net income was $85.1 million ($3.08 per diluted share), versus $63.8 million ($2.14). Gross profit rose 2.5% to $1.470 billion; gross margin was 33.8% versus 34.1%.
- Other income and expenses: Service charges and other income declined to $35.8 million in the quarter and $101.6 million for nine months, down $6.1 million and $11.2 million, respectively. Wells Fargo Alliance income fell to $23.7 million for the quarter and $67.1 million year to date. Net interest expense decreased 19.2% for the quarter and 12.9% year to date, largely reflecting lower average debt.
- Cash flow and investment: Nine-month operating cash flow was $69.7 million, up from $55.5 million. Capital expenditures were $114.2 million; investing cash outflow was $107.6 million. Cash declined $108.9 million to $78.2 million. Inventory increased 4% year over year.
- Liquidity and debt: Working capital was $754.9 million. Total debt excluding capital leases was $756.6 million, including $191.1 million of short-term revolver borrowings and $365.5 million of long-term debt; subordinated debentures were $200.0 million. The $800 million revolving facility had $584.4 million of unused availability after borrowings and letters of credit. The company reported compliance with its credit covenants.
Material changes and unusual items
- Quarterly net income was lower despite sales growth, principally reflecting markdown pressure and the absence of the prior-year quarter's $4.8 million asset-disposal gain. The prior-year quarter also included a $0.8 million debt-extinguishment loss.
- Current-quarter net income included approximately $2.9 million ($0.11 per share) of tax benefits, including additional federal tax credits and an update to provisional Tax Cuts and Jobs Act amounts. The nine-month results also reflect a $66.6 million cumulative-effect reduction to retained earnings from adoption of tax accounting standards; this was an equity adjustment, not a current-period operating expense.
- The company paid the remaining $161.0 million principal on 7.13% notes that matured in August 2018 and drew $191.1 million under its revolving facility. Nine-month share repurchases were $91.9 million; $442.9 million remained under the March 2018 $500 million authorization.
- The company adopted revenue-recognition and retirement-benefit presentation standards retrospectively. It expects the lease standard, to be adopted in fiscal 2019, to increase reported assets and liabilities; the filing does not provide a clear quantified estimate.
Outlook, commentary, and risks
- Management described third-quarter performance as disappointing, citing markdowns. It expects fiscal 2018 capital expenditures of approximately $140 million and an effective tax rate of approximately 21%–22% for the remainder of the year, subject to operating results and tax developments.
- Construction backlog was $331.7 million, up approximately 69% year over year; management expects it to be earned over the next 9–24 months. The company plans to finance capital expenditures, working capital, and repurchases through cash, operating cash flow, and the credit facility.
- Retail results are seasonal, with a significant portion of sales and income typically in the holiday quarter; interim results may not indicate full-year performance. Management noted that a 1% change in markdowns would affect net income by approximately $3 million for the quarter and $9 million for the nine-month period.
- Key risks cited include retail competition and economic or weather conditions, consumer spending and credit availability, sourcing and labor costs, data security or system failures, financing availability and interest rates, and tax-law developments. Management said pending ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales growth can be sustained while markdowns and retail gross-margin pressure ease.
- Inventory quality and the sensitivity of earnings to further markdowns.
- Cash generation relative to capital spending, repurchases, and working-capital needs.
- Revolver usage, debt maturities, covenant headroom, and the cost of variable-rate borrowing.
- Progress on the construction backlog and the timing and profitability of contract execution.
- Final tax effects and the balance-sheet impact of lease-standard adoption.