Business Context and Reporting Period
Company: Dillard's, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended February 1, 2003 (52 weeks)
Business Overview: Dillard's operates retail department stores primarily in the Southwest, Southeast, and Midwest. The company faces competition from national and local retailers, including specialty, off-price, discount, and internet retailers. Earnings are heavily dependent on the fourth quarter due to holiday buying patterns, which average approximately one-third of annual sales.
Key Financial Metrics
| Metric | Fiscal 2002 | Fiscal 2001 | Change |
|---|---|---|---|
| Net Sales | $7,910,996 | $8,154,911 | -3.0% |
| Net Income (Loss) | $(398,405) | $71,798 | N/A |
| Income Before Extraordinary Items & Accounting Change | $136,300 | $65,786 | +107.2% |
| Diluted EPS (Net Income) | $(4.67) | $0.85 | N/A |
| Diluted EPS (Core Operations) | $1.60 | $0.78 | +105.1% |
| Gross Margin % | 33.6% | 32.5% | +1.1 pts |
| Operating Cash Flow | $356,942 | $616,981 | -42.1% |
| Long-Term Debt | $2,193,006 | $2,124,577 | +3.2% |
| Total Assets | $6,675,932 | $7,074,559 | -5.6% |
| Stockholders' Equity | $2,264,196 | $2,668,397 | -15.1% |
Note: All figures in thousands of dollars unless otherwise noted.
Material Changes vs. Prior Period
- Accounting Change (SFAS No. 142): The adoption of SFAS No. 142 regarding goodwill resulted in a non-cash cumulative effect charge of $530.3 million ($6.22 per diluted share). This charge reduced goodwill from $569.5 million to $39.2 million and is the primary driver of the reported net loss.
- Asset Impairment: The company recorded a pre-tax charge of $52.2 million for asset impairment and store closing costs, including a $55.8 million write-down of under-performing properties.
- Revenue Decline: Net sales decreased 3% due to a weak retail environment, particularly in the latter half of the fiscal year. Comparable store sales declined across all categories, with the largest drops in men's clothing (-6%) and home goods (-4%).
- Debt Restructuring: The company retired $340 million in long-term debt and repurchased $111.9 million of unsecured notes. Additionally, $400 million of receivable financing was brought onto the balance sheet following an amendment to the conduit financing agreement in May 2002.
- Joint Venture Sale: The company sold its interest in the FlatIron Crossing joint venture, recognizing a gain of $64.3 million.
Guidance, Outlook, and Risks
- Capital Expenditures: Expected to be approximately $250 million for fiscal 2003. The company plans to open five new stores totaling 773,000 square feet.
- Liquidity: Management expects cash flows from operations to fund working capital, capital expenditures, and debt service. The company has a $400 million revolving credit facility (unused) and expects to utilize up to $600 million in receivable financing facilities for peak working capital needs.
- Debt Maturities: Significant debt maturities are scheduled over the next five years ($139M, $207M, $297M, $298M, and $201M respectively). $331.6 million of subordinated debentures are subject to mandatory remarketing in January 2004.
- Risks: Key risks include general retail industry conditions, macro-economic factors, competitive pressures, trends in personal bankruptcies affecting credit card receivables, and potential disruptions from international trade or conflict.
Investor Verification Checklist
- Goodwill Impairment: Verify the sustainability of the $530 million goodwill write-down and the remaining $39 million goodwill balance under the new "impairment only" accounting standard.
- Core Earnings Quality: Analyze the $136 million income before extraordinary items and accounting changes to assess underlying operational performance, excluding the non-cash goodwill charge.
- Cash Flow Divergence: Investigate the 42% decline in operating cash flow despite improved core earnings, driven by a $102 million decrease in accounts payable and an increase in inventory.
- Debt Refinancing: Monitor the company's ability to refinance the $331.6 million of subordinated debentures due for remarketing in January 2004 and the $400 million receivable financing maturing in fiscal 2003.
- Store Portfolio: Review the performance of the remaining store portfolio following the closure of 12 locations and the write-down of under-performing properties.