Dillard’s, Inc. — Form 10-Q Summary
Period: The supplied filing is for the quarter ended October 31, 2015, with comparisons to the quarter ended November 1, 2014, and nine-month comparisons. This differs from the request metadata’s “2014 Q3.” The company operates department stores and a construction business; results are unaudited and retail is seasonal, with a significant portion of sales and income typically in the fourth quarter.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Three months ended Nov. 1, 2014 | Nine months ended Oct. 31, 2015 | Nine months ended Nov. 1, 2014 |
|---|---|---|---|---|
| Net sales | $1,434.7 million | $1,459.8 million | $4,521.9 million | $4,485.6 million |
| Net income | $45.7 million | $55.2 million | $185.3 million | $201.4 million |
| Diluted EPS | $1.19 | $1.30 | $4.65 | $4.67 |
| Operating cash flow | Not reported separately for the quarter | $83.3 million | $209.9 million |
- Third-quarter retail comparable sales fell 4%; retail sales declined 3%. Total net sales fell 1.7%, as construction sales rose 41.2% and partly offset weaker retail sales.
- Third-quarter gross profit was $521.7 million, or 36.4% of net sales versus 36.7% a year earlier. Retail gross margin improved 11 basis points to 37.6%; retail SG&A rose to 29.8% of retail sales from 28.9%.
- Nine-month net sales rose modestly because construction sales increased 144.9%; retail sales and comparable retail sales each declined 1%. Total gross margin fell to 36.0% from 36.7%.
- Cash from operations fell $126.6 million year over year, primarily reflecting a $108.3 million adverse change in working-capital items, including inventory increases and lower income taxes payable. Inventory increased 6% in both total and comparable stores; turnover decreased to 2.1 from 2.3.
Liquidity, debt, and capital allocation
- At October 31, 2015, cash was $100.1 million and working capital was $820.1 million. Total debt excluding capital leases was $940.8 million: $126.0 million short-term borrowings, $614.8 million long-term debt, and $200.0 million subordinated debentures.
- The company had a new $1.0 billion unsecured revolving credit facility maturing May 2020; $126.0 million was drawn and $28.1 million of letters of credit were outstanding. The borrowing rate was 1.56% weighted average. The company reported compliance with all facility covenants.
- Nine-month capital expenditures were $141.9 million; fiscal 2015 capital expenditures were expected to be approximately $150 million. The company repurchased $382.5 million of stock in the first nine months, with $117.5 million of authorization remaining at quarter-end.
- Cash declined $303.6 million during the nine months. Financing cash outflows included $382.5 million of share repurchases; operating cash flow was below capital expenditures.
Outlook, commentary, and notable items
- Management called third-quarter performance disappointing because sales were weaker than expected. It gave no specific sales or earnings guidance in the supplied filing. It expected a fiscal 2015 effective income-tax rate of approximately 35% and capital expenditures of approximately $150 million.
- Management expected to fund capital spending, working capital, and repurchases with cash on hand, operating cash flow, and use of the credit facility. Fiscal-year results remain subject to seasonality.
- Third-quarter results included a $9.4 million pretax gain ($6.0 million after tax, or $0.16 per share) mainly from selling three stores; the prior-year quarter included a $5.9 million pretax gain ($3.8 million after tax, or $0.09 per share) from a store sale.
- Income from the private-label card alliances declined, primarily due to increased credit losses; the nine-month decrease also reflected the portfolio transition from Synchrony to Wells Fargo. The Wells Fargo agreement runs through fiscal 2024.
- Construction contract backlog was $219.2 million, down about 28% from January 31, 2015 and 31% from November 1, 2014. Management noted potential store-closure costs for underperforming locations. Routine legal matters were not expected to have a material adverse effect.
- Disclosed risks include retail and macroeconomic conditions, weather and consumer spending, competition, consumer credit availability, merchandise sourcing, operating costs, data security, financing availability, and interest-rate fluctuations. Management said disclosure controls were effective and reported no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: the filing covers Q3 2015, not Q3 2014, and assess the deterioration in comparable sales, earnings, and operating cash flow.
- Track inventory growth, turnover, markdown exposure, and the effect of seasonal working-capital needs on cash and revolver usage.
- Assess whether construction growth and backlog can offset continued retail weakness, and whether credit-alliance income stabilizes after the portfolio transition.
- Review the pace of buybacks against cash generation, debt levels, capital needs, and remaining repurchase authorization.
- Monitor store performance and closures, the stated tax and capital-spending outlook, and the company’s ability to maintain credit-facility covenant compliance.