Dillard’s, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended August 4, 2018. The filing is for fiscal 2018, notwithstanding the request metadata’s “2017 Q2” label. Dillard’s operates department stores and a general contracting construction business.
Financial performance
| Metric | Three months ended Aug. 4, 2018 | Three months ended July 29, 2017 | Six months ended Aug. 4, 2018 | Six months ended July 29, 2017 |
|---|---|---|---|---|
| Net sales | $1,468.0 million | $1,427.3 million | $2,926.3 million | $2,845.7 million |
| Gross profit / margin on net sales | $450.8 million / 30.7% | $420.2 million / 29.4% | $1,005.4 million / 34.4% | $968.6 million / 34.0% |
| Net income (loss) | $(2.9) million | $(17.1) million | $77.7 million | $49.2 million |
| Diluted earnings (loss) per share | $(0.10) | $(0.58) | $2.80 | $1.62 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $(15.4) million | $22.2 million |
- Quarterly comparable-store sales rose 1%; total retail-store sales rose 2%. Retail gross margin improved 163 basis points to 31.9%, mainly from lower markdowns, while retail SG&A as a share of retail sales increased 9 basis points to 28.9%.
- Six-month comparable-store sales increased 2%. Retail gross margin improved 67 basis points to 35.5%; retail SG&A as a share of retail sales increased 10 basis points to 28.7%.
- Service charges and other income declined to $32.7 million for the quarter and $65.8 million for the half-year, from $36.5 million and $70.9 million, respectively. Wells Fargo Alliance income fell, principally due to lower customer account balances; shipping income also decreased as more online orders qualified for free shipping.
Liquidity, debt, and cash flow
- At August 4, 2018, cash was $116.5 million and working capital was $770.0 million. Total debt, excluding capital leases, was $799.3 million.
- The company had $233.8 million outstanding under its unsecured revolving facility and $24.8 million in letters of credit, leaving $541.4 million of available capacity. The $800 million facility has a $200 million expansion option and matures August 9, 2022. Dillard’s reported compliance with its financial covenants.
- Six-month operating cash flow was negative $15.4 million, compared with positive $22.2 million a year earlier; management attributed the decline primarily to a $58.3 million adverse change in working-capital items. Investing cash outflow was $81.9 million, including $86.0 million of capital expenditures. Financing provided $26.8 million, including $233.8 million of short-term borrowings, offset in part by debt payments and share repurchases.
- The company paid the remaining $161.0 million principal on 7.13% unsecured notes that matured August 1, 2018. It repurchased 518,000 shares for $37.9 million during the half-year and had $496.9 million remaining under a new $500 million repurchase authorization.
Material changes and notable items
- Quarterly net loss narrowed to $2.9 million from $17.1 million, while six-month net income increased to $77.7 million from $49.2 million. Higher sales and retail gross margins supported improvement; lower service income partially offset it.
- Construction-segment sales increased 38.8% for the quarter and 41.1% for the half-year. Awarded-contract backlog was $244.3 million at August 4, down about 24% from February 3, 2018 and up about 34% from July 29, 2017; the company expected it to be earned over nine to 24 months.
- Cash and merchandise inventory were $116.5 million and $1,603.3 million, respectively, at August 4. Inventory was 5% higher than a year earlier; annualized retail inventory turnover was 2.3 versus 2.4.
- Accounting-standard adoption reduced retained earnings by about $66.6 million cumulatively, principally reflecting the intra-entity transfer tax-accounting change; the filing also reports a separate $2.5 million reclassification related to stranded tax effects. Revenue-standard adoption did not materially affect prior-period income.
Outlook, commentary, and risks
- Management said second-quarter performance continued positive sales momentum. Fiscal 2018 capital expenditures were expected to be approximately $140 million, versus $130 million in fiscal 2017; the company expected to fund capital spending, working capital, and repurchases with cash, operating cash flow, and credit-facility borrowings.
- The expected fiscal 2018 federal and state effective tax rate was approximately 21%–22%. The company continued evaluating aspects of the Tax Cuts and Jobs Act; final tax effects could differ from provisional amounts.
- Management cited ordinary retail and macroeconomic uncertainties, competition and online retail, customer spending and credit availability, weather, labor and sourcing costs, cybersecurity and system risks, financing availability, and interest-rate fluctuations. Results are seasonal, with a significant share of sales and income typically in the holiday quarter.
- Various legal claims were pending in the ordinary course; management did not expect their resolution to materially harm financial position, cash flows, or results. The filing reported no material changes to the prior 10-K risk factors and no material adverse legal proceedings identified as of September 7, 2018.
- The company intended to adopt the new lease standard in fiscal 2019 and expected most current operating leases to increase reported assets and liabilities.
Most important facts for investors to verify
- Whether improved comparable sales and retail gross margins persist, and whether inventory growth leads to higher markdowns.
- Whether operating cash flow recovers after the working-capital outflow and how much the company uses its revolver.
- How the $244.3 million construction backlog converts to revenue and profit, given lower construction gross margins.
- The eventual tax effects of the Tax Cuts and Jobs Act and the balance-sheet impact of lease-standard adoption.
- The pace and funding of share repurchases relative to liquidity, debt maturities, and planned capital expenditures.