Dillard’s, Inc. — Form 10-K Summary
Business context and reporting period
This filing reports fiscal 2012, ended February 2, 2013, not a standalone “2011 Q4” filing. Fiscal 2012 included 53 weeks; fiscal 2011 ended January 28, 2012 and included 52 weeks. The fourth-quarter figures are included below for context and are not directly week-adjusted.
Dillard’s operated 302 department stores in 29 states and an online store, alongside its CDI construction business. Retail represented about 98% of fiscal 2012 net sales. The business is seasonal, with a significant share of sales and income generated in the holiday quarter.
Financial performance and position
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $6.593 billion | $6.264 billion |
| Gross profit / margin | $2.346 billion / 35.6% | $2.216 billion / 35.4% |
| SG&A / percent of sales | $1.672 billion / 25.4% | $1.631 billion / 26.0% |
| Income before tax | $479.8 million | $396.7 million |
| Net income | $336.0 million | $463.9 million |
| Diluted EPS | $6.87 | $8.52 |
| Operating cash flow | $522.7 million | $501.1 million |
| Cash and cash equivalents at year-end | $124.1 million | $224.3 million |
- On comparable 52-week periods, total sales increased 3% and comparable-store sales increased 4%. Reported retail-segment sales rose 5%, with the extra fiscal week affecting the full-year comparison.
- Retail gross margin improved 30 basis points to 36.1%; consolidated gross margin improved 20 basis points. Management attributed retail improvement primarily to fewer markdowns and higher markups.
- Fourth-quarter net sales were $2.106 billion versus $1.970 billion; net income was $161.4 million versus $141.5 million, and diluted EPS was $3.36 versus $2.77.
- Year-end working capital was $724.9 million. Long-term debt was $614.8 million and subordinated debentures were $200 million; capital lease obligations were $9.2 million on a present-value basis. No long-term debt maturities were scheduled through fiscal 2016. The $1.0 billion revolver had no borrowings outstanding and approximately $819 million of unused availability after letters of credit.
- Capital expenditures were $136.6 million. The company paid $252.3 million in dividends, including a $5.00-per-share special dividend, and repurchased $185.5 million of Class A shares under its repurchase plans.
Material changes versus the prior comparable period
- Net income and EPS fell despite higher sales and pretax income. Fiscal 2011 included a $201.6 million tax benefit from the REIT-related capital-loss valuation allowance reversal and a $44.5 million pretax litigation-settlement gain. Fiscal 2012 instead included an $18.1 million tax benefit related to a one-time ESOP dividend deduction and $11.4 million pretax gains on store-property sales, partly offset by $1.6 million of impairment and store-closing charges.
- Operating cash flow increased $21.6 million, which management attributed mainly to working-capital changes, including slower seasonal inventory buildup and higher trade payables and accrued expenses.
- Service charges and other income rose to $158.4 million, including $107.1 million from the GE credit-card alliance, compared with $95.8 million from GE in fiscal 2011.
- Construction-segment sales increased 49% to $103.8 million, and segment gross profit improved to $5.3 million. Awarded construction-contract backlog was $159.3 million at year-end.
- The store count declined from 304 to 302. Comparable-store inventory decreased 1% year over year, compared with a 3% increase in the prior-year comparison.
Outlook, commentary, risks and contingencies
- Management expected some retail and construction sales growth in fiscal 2013, but cautioned there was no assurance. It expected slight improvement in retail gross margin and SG&A as a percentage of sales, and moderate growth in GE-alliance income.
- Fiscal 2013 estimates included $261 million depreciation and amortization, $27 million rentals, $65 million net interest and debt expense, and $175 million capital expenditures. Management expected rental expense to fall by about $8 million, primarily as equipment leases expired. No store openings were planned; a Utah store closure was expected in the first quarter.
- The GE marketing and servicing alliance was due to expire in fiscal 2014. GE owns and manages the card accounts; Dillard’s receives alliance income but does not bear the accounts’ credit losses. Renewal or replacement terms were uncertain.
- Key risks include intense retail and online competition; consumer spending, traffic, fashion and markdown risk; merchandise, labor and supply-chain costs; seasonal and weather volatility; disruption to distribution or IT systems and data security; and the availability of financing and cash flow. The company also cited self-insured coastal property exposure to named storms.
- The officer pension plan was unfunded, with a reported benefit obligation of approximately $175.5 million. The filing estimated fiscal 2013 pension expense of about $15.7 million and a contribution/payment of about $4.8 million; lower discount rates could increase the obligation.
- Management said routine legal proceedings were not expected to have a material adverse effect. The company reported no off-balance-sheet arrangements reasonably likely to materially affect its financial condition.
Important facts for investors to verify
- Separate recurring operating performance from fiscal 2011’s substantial one-time tax benefit and settlement gain, and fiscal 2012’s tax benefit and property-sale gains.
- Assess the effect of fiscal 2012’s 53rd week when comparing annual sales, expenses and quarterly results; check the comparable 52-week sales trend.
- Track renewal or replacement arrangements for the GE alliance before its fiscal 2014 expiration and the associated income contribution.
- Review cash and liquidity after the special dividend and buybacks, planned fiscal 2013 capital spending, and the timing of future debt maturities.
- Monitor the unfunded pension obligation, inventory markdown and shrink estimates, store closures, and any changes in litigation or tax examinations.