Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 2, 2014. The filing is for fiscal 2014; the supplied metadata’s “2013 Q2” does not match the filing period. Figures are unaudited. Dollar amounts are in millions unless stated otherwise.
Business context and key results
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 296 stores, including 18 clearance centers, and one internet store—four fewer stores than a year earlier. Retail operations generated nearly all net sales.
| Metric | Three months ended Aug. 2, 2014 | Three months ended Aug. 3, 2013 | Six months ended Aug. 2, 2014 | Six months ended Aug. 3, 2013 |
|---|---|---|---|---|
| Net sales | $1,474.5 | $1,479.9 | $3,025.8 | $3,029.0 |
| Net income | $34.4 | $36.5 | $146.1 | $153.7 |
| Diluted EPS | $0.80 | $0.79 | $3.36 | $3.30 |
| Gross margin on net sales | 33.8% | 34.0% | 36.7% | 36.8% |
| SG&A as % of net sales | 27.2% | 26.9% | 26.2% | 26.0% |
Financial position and cash flow
- Six-month operating cash flow was $133.8, versus $131.7 a year earlier. Investing used $64.1, primarily reflecting $68.8 of capital expenditures; financing used $71.5, including $65.9 of treasury-stock purchases and $5.2 of dividends. Cash declined $1.8 to $235.3.
- At August 2, working capital was $988.6. Current assets were $1,733.9 and current liabilities $745.4; inventory was $1,429.2, up from $1,345.3 at fiscal year-end but down 2% year over year.
- Total debt excluding capital leases was $814.8: $614.8 of long-term debt and $200.0 of subordinated debentures. No revolving-facility borrowings were outstanding. The $1.0 billion facility had approximately $930 million of unused availability after letters of credit; it expires July 2018.
- Capital expenditures were $68.8 for the first half; management expected approximately $150 million for fiscal 2014, versus $95 million in fiscal 2013. Management expected peak fiscal-2014 borrowings not to exceed $250 million.
Material changes and operating drivers
- Comparable-store sales increased 1% in both the quarter and first half, extending the company’s stated streak to 16 consecutive quarters. Quarterly retail sales transactions fell 3%, while average dollars per transaction rose 3%; for the first half, transactions fell 2% and average transaction size rose 3%.
- Quarterly retail gross margin declined 33 basis points, mainly because of increased markdowns, partly offset by increased markups. Quarterly SG&A rose 25 basis points of sales, primarily from payroll and payroll taxes, partly offset by lower insurance and advertising costs.
- Quarterly net income declined to $34.4 from $36.5, while EPS edged up to $0.80 from $0.79, supported by a lower weighted-average share count following repurchases. First-half net income fell, but EPS rose to $3.36 from $3.30.
- Construction-segment sales fell 37% in both the quarter and first half because of timing delays on projects. Awarded-contract backlog was $340.6 at August 2, up about 73% from February 1 and 430% from a year earlier.
- First-half comparisons also reflect prior-year items: a $12.4 gain on asset disposals, including the Acumen Brands investment sale, and $6.5 of impairment and store-closing charges. There were no such impairment/store-closing charges in the 2014 first half.
Outlook, commentary, and risks
- Management expected the fiscal-2014 effective income tax rate to be approximately 35%. The filing provides no specific sales or earnings guidance.
- The GE credit-card marketing and servicing alliance was due to expire in fiscal 2014’s fourth quarter. A 10-year Wells Fargo agreement was planned to follow; 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.
- Two new stores in Sarasota and Las Vegas were expected to open in the third quarter. Management remained willing to close underperforming stores and said future closure costs could arise.
- Management cited retail, macroeconomic, weather, consumer-credit, competitive, labor-cost, supply-chain, cybersecurity, financing, and interest-rate risks. The business is seasonal, with a significant portion of sales and income typically in the fourth quarter.
- Routine legal claims were not expected by management to materially adversely affect the company. The filing reported no material changes to previously disclosed risk factors, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales growth can continue while transaction counts decline and markdowns pressure retail margins.
- Whether the construction backlog converts to revenue and profit, given project-timing delays and lower segment margins.
- The actual economics, startup costs, and transition performance of the Wells Fargo card program after the GE alliance ends.
- Whether planned capital spending and share repurchases remain consistent with cash generation, debt levels, and management’s borrowing expectations.
- How holiday-season performance affects full-year results; interim results are not necessarily indicative of the fiscal year.