Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 28, 2012, compared with periods ended July 30, 2011. The request metadata says “2011 Q2,” but the filing is for 2012 Q2. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business and results
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 303 stores, including 18 clearance centers, and one internet store. Management described the quarter as its fourth consecutive quarter of record operating results; comparable-store sales rose for an eighth consecutive quarter.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,487.9, up 3.2% | $3,037.2, up 4.3% |
| Service charges and other income | $37.3 | $74.0 |
| Net income | $31.0 vs. $17.6; up 76.6% | $126.0 vs. $94.2; up 33.7% |
| Diluted EPS | $0.63 vs. $0.32 | $2.53 vs. $1.66 |
| Gross profit | $500.1; 33.6% of net sales vs. 33.2% | $1,092.5; 36.0% vs. 36.0% |
| SG&A | $398.8; 26.8% of net sales vs. 27.5% | $792.0; 26.1% vs. 27.0% |
| Net interest and debt expense | $17.7 vs. $18.4 | $35.1 vs. $36.7 |
Retail comparable-store sales increased 3% in the quarter and 4% for the first six months. Retail operating gross margin improved 70 basis points in the quarter and 20 basis points for the six months. Sales transactions fell 3% in both comparisons, while average transaction value rose 6%. Construction sales nearly doubled in both periods, reflecting increased project activity; backlog of awarded contracts was $92.7 million.
Cash flow, liquidity and capital allocation
- Six-month operating cash flow was $152.8 million, versus $125.0 million. Investing used $78.9 million, including $86.7 million of capital expenditures; financing used $135.7 million.
- Cash declined $61.7 million from fiscal year-end to $162.5 million. Working capital was $727.0 million.
- Total debt was $914.6 million, excluding capital leases. The company also reported $10.4 million of capital lease obligations. Cash plus debt should be considered alongside the seasonal working-capital needs of the retail business.
- The $1.0 billion inventory-secured revolving facility expires April 11, 2017. At quarter-end, borrowings were $24.0 million, letters of credit were $83.9 million and reported unused availability was approximately $795 million. No financial covenants apply while availability exceeds $100 million.
- Share repurchases totaled $162.1 million for six months (2.5 million shares, including unsettled purchases); $115.4 million remained under the 2012 authorization. Cash dividends declared were $0.10 per share for six months.
Changes, outlook and risks
Profit growth reflected higher sales, improved retail merchandise margins, lower SG&A as a percentage of sales and lower interest expense. Results also benefited from the absence of the prior-year $1.2 million property impairment charge. Prior-year comparisons included a $2.1 million pretax gain on sale of a mall joint-venture interest in the second quarter and a $4.2 million joint-venture gain in the prior-year six-month period. Current-period asset-sale gains were $0.9 million for six months.
Management expected some retail and construction sales growth, slight retail gross-margin and SG&A-rate improvement, and approximately $14 million lower rental expense for fiscal 2012; it cautioned that improvement was not assured. Fiscal 2012 capital expenditures were projected at approximately $140 million, with no planned store openings. Peak credit-facility borrowings were expected not to exceed $200 million. The expected fiscal-year tax rate was approximately 36%. These are management estimates, not guarantees, and the filing emphasizes retail seasonality, with a significant share of sales and income typically in the holiday quarter.
The new 850,000-square-foot Maumelle internet fulfillment center began processing merchandise; the Nashville facility closed in July 2012. A Kansas store closed during the quarter, and a Virginia store closure was planned for the third quarter. Management said it may incur future costs from closing underperforming stores. The GE-branded credit-card alliance, a significant source of service income, expires in fiscal 2014; income depends on customer activity, credit losses, fees and GE funding costs. Other cited risks include economic and weather conditions, competition, consumer credit and spending, supply-chain disruption, borrowing rates, and systems or data-security issues. Management reported no material expected adverse effect from pending ordinary-course litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the period: this filing covers the quarter ended July 28, 2012, despite the “2011 Q2” request metadata.
- Track whether comparable-store growth and retail margin improvements persist, particularly given lower transaction counts and seasonal earnings concentration.
- Assess the sustainability of credit-alliance income and the terms and renewal implications of its fiscal 2014 expiration.
- Monitor cash usage, inventory needs, repurchases, capital spending and borrowing against the facility’s availability and peak-borrowing outlook.
- Evaluate execution and returns from the new fulfillment center and the planned or completed store closures.