Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 2, 2015 (fiscal 2015 first quarter). The filing period differs from the “2014 Q1” label in the request.
Business context and performance
Dillard’s operated 297 stores, including 23 clearance centers, and one internet store. The company reports retail department stores and a general contracting construction business as its two segments. Management said first-quarter performance was weaker than anticipated; comparable retail sales fell 1%.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,573.5 million | $1,551.3 million |
| Service charges and other income | $39.9 million | $37.2 million |
| Gross profit | $613.1 million | $612.1 million |
| Income before taxes | $167.3 million | $172.4 million |
| Net income | $109.6 million | $111.7 million |
| Diluted EPS | $2.66 | $2.56 |
| Cash flow from operations | $91.3 million | $161.9 million |
Total gross margin was 39.0% of net sales, down from 39.5%; retail gross margin improved to 40.2% from 39.7%. SG&A was 25.6% of sales versus 25.4%, while net margin was 7.0% versus 7.2%. EPS rose despite lower net income, alongside a decrease in weighted-average shares to 41.2 million from 43.7 million.
At May 2, 2015, cash was $457.6 million, working capital was $1,111.6 million, and total debt excluding capital leases was $814.8 million. The balance sheet reported $614.8 million of long-term debt and $200.0 million of subordinated debentures. Operating cash flow declined $70.6 million year over year, primarily from working-capital changes, including higher inventories and lower income taxes payable. Capital expenditures were $42.2 million versus $22.8 million. Cash increased $53.9 million during the quarter.
Material changes and management commentary
- Retail operations sales decreased 1%; transactions fell 7%, while average dollars per transaction increased 6%. Home and furniture sales declined 17.9%; men’s apparel and accessories declined 4.2%.
- Construction sales rose to $55.1 million from $12.1 million, contributing to consolidated sales growth despite lower retail sales. Its gross margin was 3.8%, substantially below retail’s 40.2%, contributing to the decline in consolidated gross margin.
- Retail SG&A increased $10.0 million, primarily from higher payroll and payroll taxes and purchased services. Management cited its initiative to increase selling-associate pay and weaker sales as factors pressuring expense leverage.
- Private-label alliance income fell to $26.7 million from $27.5 million, primarily reflecting increased credit losses and the discontinued Synchrony credit product, partly offset by higher finance-charge income.
- Retail inventory was up 5% year over year; inventory turnover declined to 2.5 from 2.6.
Liquidity, outlook, risks, and contingencies
No borrowings were outstanding under the $1.0 billion secured revolving facility at quarter-end; $28.2 million of letters of credit left approximately $972 million of availability. In May 2015, the company replaced it with a $1.0 billion senior unsecured revolver maturing May 13, 2020. The new facility includes a maximum total leverage ratio of 4.0:1 and a minimum coverage ratio of 2.5:1.
Management expected fiscal 2015 capital expenditures of approximately $160 million, peak borrowings not to exceed $100 million, and an effective tax rate of approximately 35%. It expected to fund capital expenditures and working capital from cash, operating cash flow, and the credit facility. The filing provides no specific sales or earnings guidance. The business is seasonal, with a significant share of sales and income typically in the holiday quarter; quarterly results are not necessarily indicative of the full year.
Management reported ordinary-course legal proceedings that were not expected to have a material adverse effect. The company expected approximately $3.8 million of additional pension-plan contributions during the remainder of fiscal 2015. Forward-looking risks include retail and macroeconomic conditions, consumer spending and credit availability, competition, weather, labor costs, supply-chain disruptions, data-security issues, and access to financing. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether retail sales and comparable-store trends improve after the 1% quarterly decline, and whether inventory growth leads to increased markdowns; management estimated a 1% change in markdowns would affect quarterly net income by about $2 million.
- Whether the increased retail gross margin can be sustained while payroll and other SG&A costs rise, and how the lower-margin construction mix affects consolidated margins.
- Whether operating cash flow recovers from the working-capital-driven decline and whether planned capital expenditures remain near $160 million.
- Compliance with the new revolver’s leverage and coverage covenants, and the status and terms of the credit facility following its replacement.
- The effect of credit losses and other portfolio economics on income from the Wells Fargo private-label card alliance.