Dillard's, Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended May 2, 2009. Dillard's, Inc. operates retail department stores and, following the acquisition of CDI Contractors in August 2008, a general contracting construction segment. The company operated 315 stores as of the period end, a decrease of 4.8% from the prior year due to closures. The business is highly seasonal, with a significant portion of sales typically realized in the fourth fiscal quarter.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $1,473.9 million | $1,675.6 million |
| Net Income | $7.7 million | $2.7 million |
| Earnings Per Share (Diluted) | $0.10 | $0.04 |
| Gross Profit Margin | 33.5% | 33.3% |
| Operating Cash Flow | $42.4 million | $36.5 million |
| Cash and Equivalents | $102.7 million | $84.0 million |
| Total Debt Outstanding | $1,152.8 million | $1,300.7 million |
| Working Capital | $824.1 million | $776.1 million |
Material Changes vs. Prior Period
- Sales Decline: Total net sales decreased by 12% ($201.7 million). Retail operations sales dropped 16% ($260.9 million), driven by a 13% decline in comparable store sales and a 19% decrease in transaction volume. All merchandise categories experienced declines, with Home and Furniture falling 26.2%.
- Profitability Improvement: Despite lower sales, net income increased 184% year-over-year. This was driven by a 150 basis point improvement in retail gross profit margins (to 34.8%) due to inventory management and reduced markdowns, and a $66.6 million reduction in SG&A expenses.
- Debt Reduction: Total debt decreased significantly. The company repurchased $5.0 million of 9.125% notes, realizing a $1.5 million pretax gain. Short-term borrowings were reduced by $125 million compared to the prior year.
- Segment Addition: The Construction segment contributed $59.2 million in sales and $2.6 million in gross profit, a new line item compared to the prior year when CDI was an equity method investment.
Outlook, Risks, and Management Commentary
- Economic Environment: Management cites a sustained economic decline and reduced consumer confidence as primary headwinds. GE Consumer Finance has reduced spending limits on Dillard's proprietary credit cards, which is expected to negatively impact credit sales and related income.
- Cost Management: The company expects expense savings initiatives and store closures to produce an operating expense decline exceeding $200 million for fiscal 2009. Capital expenditures are projected at $120 million for the year, a significant reduction from $190 million in 2008.
- Store Strategy: No new stores opened in the quarter. The company announced the closure of the Tullahoma, TN location and identified four other locations for closure in 2009.
- Liquidity: The company maintains a $1.2 billion revolving credit facility with approximately $757 million in unutilized availability. Peak funding requirements for fiscal 2009 are estimated at $300 million.
- Legal Proceedings: A derivative lawsuit was filed on May 27, 2009, alleging officer overcompensation. Management intends to contest the allegations vigorously.
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the 17% reduction in comparable store inventory and its impact on future sales availability.
- Credit Card Income: Monitor the impact of GE's tightened credit policies on the "Service charges and other income" line item, which declined 15.4%.
- Store Closures: Track the execution of planned store closures and associated one-time charges in future quarters.
- Debt Covenants: Confirm continued compliance with the $100 million availability threshold required to avoid financial covenants on the revolving credit facility.
- Legal Exposure: Assess the potential financial impact of the derivative lawsuit filed against officers and directors.