Business Context and Reporting Period
This Form 10-Q covers Dillard's, Inc. for the quarterly period ended August 1, 2009. The Company operates two reportable segments: retail department stores and a general contracting construction company (CDI Contractors). The reporting period reflects the impact of a sustained economic decline and a slowdown in consumer spending.
Key Financial Metrics
| Metric | Three Months Ended Aug 1, 2009 | Six Months Ended Aug 1, 2009 |
|---|---|---|
| Net Sales | $1,427.8 million | $2,901.6 million |
| Net Loss | $(26.7) million | $(19.0) million |
| Loss Per Share (Basic & Diluted) | $(0.36) | $(0.26) |
| Gross Profit Margin (Retail) | 31.0% | 32.9% |
| Cash and Cash Equivalents | $116.9 million | $116.9 million |
| Operating Cash Flow (6 months) | N/A | $183.1 million |
| Total Debt Outstanding | $1,044.4 million | $1,044.4 million |
| Working Capital | $841.3 million | $841.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11.2% for the quarter and 11.6% for the six-month period compared to the same periods in 2008. Retail operations sales dropped 15% in the quarter, driven by a 13% decline in comparable store sales and reduced mall traffic.
- Profitability Improvement: Despite the sales decline, the net loss narrowed significantly compared to the prior year. The quarterly loss was $26.7 million versus $38.3 million in 2008. The 2008 prior period included a one-time $17.6 million gain on the disposal of a corporate aircraft, which is not present in the current period.
- Margin Expansion: Gross profit margin for retail operations improved by 130 basis points in the quarter and 140 basis points for the six months, attributed to aggressive inventory management, lower inventory levels (down 18% in comparable stores), and reduced markdowns.
- Expense Reduction: Advertising, selling, administrative, and general expenses (SG&A) decreased by $82.6 million (17.2%) for the quarter and $149.2 million (15.5%) for the six months, primarily due to payroll savings and store closures.
- Debt Reduction: Short-term borrowings decreased by $133.0 million during the six-month period. Total debt outstanding was $1,044.4 million as of August 1, 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects the economic downturn to continue affecting consumer confidence and spending. Capital expenditures for fiscal 2009 are projected at approximately $90 million, a significant reduction from the $190 million spent in fiscal 2008. No new store openings are planned for fiscal 2009.
- Liquidity: The Company maintains a $1.2 billion revolving credit facility with approximately $692 million in unutilized availability as of August 1, 2009. Management expects peak short-term borrowings of approximately $300 million during fiscal 2009.
- Risks and Contingencies:
- Legal Proceedings: Two derivative lawsuits were filed in May and June 2009 alleging overcompensation of officers and directors. Management intends to contest these vigorously.
- Credit Card Alliance: GE Consumer Finance has reduced spending limits and tightened authorization strategies, which is expected to negatively impact credit sales and related income.
- Store Closures: The Company closed one store in the quarter and has identified five additional locations for closure in 2009, which may incur future closing costs.
Investor Verification Checklist
- Verify the sustainability of the gross margin improvement given the continued decline in comparable store sales.
- Monitor the impact of GE's tightened credit policies on future service charge income and cash flows.
- Assess the potential financial impact of the pending derivative lawsuits regarding executive compensation.
- Confirm the execution of the planned store closures and associated exit costs.
- Review the utilization of the $1.2 billion credit facility against the projected $300 million peak borrowing requirement.