Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 3, 2014. Although the request metadata says 2013 Q1, the filing is for fiscal 2014 Q1; comparisons are with the three months ended May 4, 2013. Dillard’s operates department stores and a general contracting construction business. It had 296 stores, including 18 clearance centers, and one internet store at quarter-end.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1.551 billion | $1.549 billion | Up $2.2 million |
| Service charges and other income | $37.2 million | $40.2 million | Down $3.0 million |
| Net income | $111.7 million | $117.2 million | Down 4.7% |
| Diluted earnings per share | $2.56 | $2.50 | Up 2.4% |
| Operating cash flow | $161.9 million | $136.9 million | Up $25.0 million |
- Comparable-store sales rose 2%, the fifteenth consecutive quarterly increase; retail sales increased 1%. Transaction count fell 2%, while average dollars per transaction rose 2%.
- Gross profit was $612.1 million. Consolidated gross margin was 39.5%, unchanged year over year; retail gross margin declined 14 basis points to 39.7%, primarily from increased markdowns partly offset by higher markups.
- SG&A increased 0.9% to $393.7 million and rose 19 basis points as a share of sales to 25.4%. Depreciation and amortization declined 4.8% to $62.0 million; net interest expense declined 2.9% to $15.8 million.
- Cash from operations less capital expenditures was approximately $139.1 million, versus $129.6 million in the prior-year quarter. Capital expenditures were $22.8 million, compared with $7.3 million.
- At May 3, cash and cash equivalents were $312.1 million, working capital was $951.7 million, and total debt excluding capital leases was $814.8 million. Long-term debt was $614.8 million and subordinated debentures were $200.0 million. No revolver borrowings were outstanding; approximately $965 million of the $1.0 billion facility remained available after letters of credit.
- Merchandise inventory was $1.564 billion, up 1% from a year earlier; comparable-store inventory was up 2%. Total assets were $4.294 billion and stockholders’ equity was $2.036 billion.
Material changes and unusual items
- Net income declined despite slightly higher sales. The prior-year quarter included an $11.7 million pretax investment-sale gain, a $1.5 million pretax pension curtailment gain, and $6.5 million of impairment and store-closing charges. No comparable impairment charge was recorded in Q1 2014; asset-disposal gains were $0.4 million versus $12.3 million in the prior year.
- EPS increased while net income decreased, alongside lower weighted-average shares (43.651 million versus 46.936 million), reflecting share repurchases. The company repurchased 0.7 million shares for $65.9 million during the quarter and had $224.5 million of authorization remaining under its November 2013 plan.
- Construction-segment sales fell 36.7% to $12.1 million because of project timing. Its awarded-contract backlog was $271.0 million, up approximately 38% from February 1, 2014 and 387% from May 4, 2013.
- Operating cash flow improved primarily because of working-capital changes. Inventory growth was partly offset by increased payables and accrued liabilities.
Outlook, liquidity, and risks
- Management expected fiscal 2014 capital expenditures of approximately $150 million, compared with $95 million in fiscal 2013. Two new stores in Sarasota, Florida, and Las Vegas, Nevada, were under construction and expected to open in Q3.
- Management expected peak fiscal 2014 borrowings not to exceed $250 million and anticipated funding capital expenditures, working capital, and repurchases with cash on hand, operating cash flow, and the credit facility. The expected fiscal 2014 effective tax rate was approximately 35%.
- The GE credit-card marketing and servicing alliance was due to expire in Q4 fiscal 2014. A 10-year Wells Fargo agreement was expected to take its place; management expected income, excluding startup costs, to be comparable to historical alliance earnings, with potential growth thereafter. Future cash flows were described as difficult to predict.
- The business is seasonal, with a significant portion of sales and income typically generated in the holiday quarter; Q1 results are not necessarily indicative of full-year results. Risks cited include retail and macroeconomic conditions, weather, competition, consumer spending and credit, costs and supply availability, cybersecurity or system failures, and financing and interest-rate conditions.
- Routine legal claims were pending, but management did not expect them to materially adversely affect the company. No legal proceeding was identified as reasonably expected to have a material adverse effect. The company expected approximately $2.2 million in additional pension contributions during the remainder of fiscal 2014.
Important facts for investors to verify
- Confirm the reporting period: this filing covers Q1 fiscal 2014, not Q1 2013.
- Assess whether comparable-store sales growth and markdown levels support retail margins and inventory productivity.
- Monitor whether the Wells Fargo card program replaces GE alliance income as expected, including startup costs and program performance.
- Track capital spending, new-store openings, cash generation, and the company’s planned borrowing and repurchase levels.
- Separate prior-year gains and impairment charges from recurring performance when comparing earnings.