Dillard’s, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended May 4, 2013; comparative quarter ended April 28, 2012. Interim financial statements are unaudited. The filing notes that retail results are seasonal and this quarter is not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,549.1 million | $1,549.3 million | Essentially flat |
| Service charges and other income | $40.2 million | $36.7 million | Up 9.7% |
| Gross profit | $611.4 million | $592.4 million | Up $18.9 million |
| Gross margin | 39.5% | 38.2% | Up 1.3 percentage points |
| SG&A | $390.2 million | $393.2 million | Down $3.0 million |
| Net income | $117.2 million | $95.0 million | Up 23.4% |
| Diluted earnings per share | $2.50 | $1.89 | Up $0.61 |
| Cash from operations | $136.9 million | $98.5 million | Up 39% |
Retail comparable sales rose 1%, marking the eleventh consecutive quarter of comparable-store growth, while transactions declined 2% and average transaction dollars increased 2%. Retail gross margin improved 110 basis points, primarily on lower markdowns. Retail sales grew 1%; construction-segment sales fell 30% to $19.1 million, attributed to project timing.
Liquidity, debt and capital allocation
- At May 4, 2013, cash was $156.0 million, working capital was $785.6 million, and total debt excluding capital leases was $814.8 million. The balance sheet reports $614.8 million of long-term debt and $200.0 million of subordinated debentures; capital lease obligations totaled $8.7 million.
- The company generated $136.9 million in operating cash flow. Inventory growth used $249.5 million of cash, partially offset by increased payables and accrued liabilities. Cash increased $31.9 million during the quarter.
- Investing activities provided $10.2 million, including asset-sale proceeds; capital expenditures were $7.3 million. Financing activities used $115.2 million, chiefly reflecting $114.7 million of share repurchases.
- The $1.0 billion inventory-secured revolving facility had no borrowings outstanding; $47.3 million of letters of credit left approximately $953 million of availability. The facility expires April 2017.
- The company repurchased 1.4 million Class A shares at an average $79.12 per share. $227.3 million remained under the new $250 million 2013 authorization. The declared dividend was $0.05 per share; no dividends were paid during this quarter.
Material changes and unusual items
- Net income included an $11.7 million pretax gain on the sale of the Acumen Brands investment and a $0.6 million gain on two former store properties. The filing reports the Acumen gain as $7.6 million after tax, or $0.16 per share.
- A $6.5 million pretax impairment and store-closing charge included write-downs of an operating property and cost-method investments; the after-tax impact was reported as $4.2 million, or $0.09 per share.
- A pension-plan curtailment generated a $1.5 million pretax credit, reported as $1.0 million after tax, or $0.02 per share. Pension expense was $2.1 million versus $4.1 million a year earlier.
- Long-term debt carrying value was approximately $615 million versus estimated fair value of $686 million; subordinated debentures had a $200 million carrying value and approximately $207 million fair value.
Outlook, commentary and risks
- Management expected some retail and construction sales growth in fiscal 2013, slight retail gross-profit improvement, and slight SG&A improvement as a percentage of sales; it cautioned that none was assured. The company expected fiscal 2013 effective income tax to be approximately 35%.
- Fiscal 2013 capital expenditures were projected at approximately $150 million, versus $137 million in fiscal 2012. Management expected peak borrowings to be similar to fiscal 2012 and planned to fund capital spending, working capital and repurchases with cash, operating cash flow and potentially the credit facility.
- Management expected moderate improvement in income from the GE credit-card marketing and servicing alliance, which expires in fiscal 2014. The amount depends on account sales, balances, payment rates, credit losses and GE funding costs.
- The company closed one Utah store and announced a planned North Carolina store closure for the third quarter, with minimal expected closing costs. It had 301 Dillard’s locations, including 18 clearance centers, and an internet store.
- Risks highlighted include retail and macroeconomic conditions, consumer spending and credit availability, competition, weather, sourcing and labor costs, data-security or system disruptions, financing availability and borrowing-rate changes. Management said pending ordinary-course legal matters were not expected to have a material adverse effect; it reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- How much of the earnings increase reflects ongoing retail performance versus the investment-sale gain, pension credit and impairment charge.
- Whether improved retail gross margin and comparable sales persist, especially given higher comparable-store inventory and weaker home and furniture sales.
- How working-capital movements, particularly inventory growth, affect cash generation in subsequent quarters.
- The outlook for GE alliance income ahead of its fiscal 2014 expiration and the terms or replacement arrangements thereafter.
- Execution and funding of planned capital expenditures and continued share repurchases, alongside debt and liquidity needs.
- Management’s forward-looking statements are estimates, not guarantees; the filing provides no numerical full-year revenue or earnings guidance.