Dillard’s, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for fiscal 2017, ended February 3, 2018, a 53-week year. Fiscal 2016 ended January 28, 2017, with 52 weeks. This does not match the request metadata of “2016 Q4”; the filing’s fourth quarter is included in its annual results.
Business context
Dillard’s operated 292 stores, including 24 clearance centers, and an online store in 29 states. Retail operations generated $6.108 billion of fiscal 2017 net sales; its construction subsidiary, CDI, generated $153.4 million. The business is seasonal, with a substantial share of sales and income typically earned in the holiday quarter.
Key financial results
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $6.261 billion | $6.257 billion |
| Gross profit / gross margin | $2.062 billion / 32.9% | $2.091 billion / 33.4% |
| Retail gross margin | 33.6% | 34.3% |
| SG&A / share of net sales | $1.692 billion / 27.0% | $1.656 billion / 26.5% |
| Income before tax and joint venture results | $212.7 million | $257.7 million |
| Net income | $221.3 million | $169.2 million |
| Diluted EPS | $7.51 | $4.93 |
| Cash from operations | $274.3 million | $517.0 million |
| Cash and cash equivalents at year-end | $187.0 million | $347.0 million |
Comparable retail sales were flat on a comparable 52-week basis. Reported net sales were slightly higher, with the additional week contributing to the comparison. Retail gross margin fell 65 basis points, primarily due to increased markdowns. Net income included an estimated $77.4 million tax benefit from the Tax Cuts and Jobs Act (about $2.62 per share); fiscal 2016 included a $6.5 million pretax investment impairment charge.
Liquidity, debt and capital allocation
- Working capital was $690.2 million. Merchandise inventory rose 4% year over year to $1.464 billion.
- Total debt was approximately $726.4 million, excluding capital leases: $526.4 million of unsecured notes and $200 million of 7.5% subordinated debentures. Fiscal 2018 scheduled debt maturities were $161.0 million.
- The $800 million revolving facility, extended in August 2017 to mature in 2022, had no borrowings outstanding at year-end; $774 million was available after letters of credit. The company reported covenant compliance.
- Operating cash flow declined $242.7 million, mainly reflecting working-capital changes, including lower payables and higher inventory, and lower deferred taxes. Capital expenditures were $130.5 million; financing activities used $324.0 million, including $219.0 million of share repurchases.
- The company declared $0.34 per share in fiscal 2017 dividends and had $34.8 million remaining under its then-current repurchase authorization at year-end. A new $500 million repurchase authorization was announced March 1, 2018.
Outlook, risks and other notable items
- Fiscal 2018 estimates: depreciation and amortization of $230 million, rentals of $27 million, net interest and debt expense of $50 million, and capital expenditures of $140 million. Management expected a 22%–23% effective tax rate.
- Management expected to fund operations, capital spending, working capital, dividends and repurchases from cash on hand, operating cash flow and, if needed, the revolving facility; it provided no specific sales or earnings forecast.
- CDI sales declined 17.3% to $153.4 million; awarded-contract backlog increased about 36% to $319.7 million.
- Principal risks include intense retail and online competition, promotional pressure and markdowns, shifting fashion preferences, economic and regional energy-market exposure, weather and seasonality, sourcing and supplier disruption, cybersecurity and technology outages, real-estate exposure, labor and benefit costs, and fluctuations in private-label card alliance income. Wells Fargo owns the card accounts and bears their credit risk; Dillard’s alliance income was approximately $101 million in fiscal 2017.
- The Tax Act benefit was provisional and subject to finalization. The company also disclosed that adopting new intra-entity tax-transfer accounting in fiscal 2018 was expected to reduce retained earnings by approximately $69.1 million. The nonqualified pension liability was $194.7 million; management expected a $5.1 million fiscal 2018 contribution.
- No material legal proceedings were reported as of March 30, 2018. Management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of the earnings increase reflects the one-time $77.4 million tax benefit, versus underlying operating performance?
- Can Dillard’s sustain comparable sales and recover retail gross margin amid markdown pressure and rising inventory?
- Can operating cash flow improve after its sharp decline, while meeting $161 million of fiscal 2018 debt maturities and planned capital returns?
- What are the final effects of tax-accounting adjustments, and how will the $69.1 million expected retained-earnings adjustment affect reported equity?
- Does CDI’s increased backlog convert to revenue and profit at expected margins, and how sensitive are results to the company’s pension and real-estate obligations?