Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended April 30, 2011, compared with the three months ended May 1, 2010. This differs from the “2010 Q1” period in the request metadata.
Business context and results
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 308 stores, including 14 clearance centers, and an internet store. Management cited improved comparable-store sales, better merchandise margins and lower operating expenses.
| Metric | Q1 2011 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $1,469.2 million | $1,453.6 million | Up 1%; retail comparable sales up 2% |
| Gross profit / margin | $570.3 million / 38.8% | $539.3 million / 37.1% | Margin up 1.7 percentage points |
| Income before taxes and joint-venture income | $115.7 million | $77.1 million | Higher year over year |
| Net income | $76.7 million | $48.8 million | Up about 57% |
| Diluted EPS | $1.31 | $0.68 | Up about 93%; share repurchases reduced shares outstanding |
| Operating cash flow | $59.2 million | $80.3 million | Down $21.1 million, mainly from working-capital changes and inventory |
Financial position and liquidity
- April 30 cash was $147.3 million, down from $343.3 million at January 29, 2011, largely reflecting share repurchases.
- Working capital was $727.2 million; the current ratio was 1.74, compared with 2.05 at January 29, 2011.
- Total debt, including subordinated debentures and excluding capital leases, was approximately $946.0 million. Long-term debt including its current portion was $746.0 million; subordinated debentures were $200 million.
- The $1.0 billion inventory-secured revolving facility had no borrowings outstanding. Approximately $859 million remained available after letters of credit; the facility expires December 12, 2012.
- Merchandise inventory was $1,504.0 million, up from $1,453.6 million a year earlier. Comparable-store inventory increased 4%.
Material changes and notable items
- Retail sales rose 2%, while construction-segment sales fell 45% to $13.7 million, which management attributed primarily to weak demand for private-sector construction projects.
- Retail gross margin improved 130 basis points, which management attributed to inventory discipline and reduced markdown activity. Total gross margin improved 170 basis points.
- SG&A declined $4.4 million, or about 1%, primarily due to lower advertising expense. Net interest expense declined $0.6 million.
- Q1 results included a $4.2 million pretax gain ($2.7 million after tax, or $0.05 per diluted share) from a mall joint-venture distribution and a $1.2 million pretax property impairment charge. The prior-year quarter included a $2.2 million impairment charge.
- The company repurchased 6.4 million shares for $268.7 million during the quarter, completing its then-current authorizations. In May 2011, the board authorized a further $250 million repurchase plan.
Outlook, risks and contingencies
- Management expected possible continued retail sales growth, but cautioned that it was not assured and that economic deterioration could reduce traffic and sales, raise inventories and markdowns, and pressure profitability.
- Fiscal 2011 capital expenditures were expected to be approximately $150 million, versus $98.2 million in fiscal 2010; no new store openings were planned. The new internet fulfillment center was expected to be fully functional by early fiscal 2012.
- Management expected minimal fiscal 2011 gross-margin impact from known fabric-price and overseas-wage pressures, citing supplier efficiencies, alternative sourcing, product redesign and pricing actions. The company also noted that results are seasonal and the quarter is not indicative of full-year performance.
- Three store closures were noted: Highland Mall closed in May 2011; Decatur Mall and Westminster Mall were expected to close in Q2. Further closures could result in additional costs.
- Management estimated an effective tax rate of approximately 36% for the remainder of fiscal 2011, subject to operating results and finalization of the tax structure of a real estate investment trust formed in January 2011.
- A shareholder derivative case remained on appeal in the Arkansas Supreme Court; a related federal case had been dismissed with final judgment stayed pending that appeal. Management said ordinary-course legal matters were not expected to materially affect the company.
Important facts for investors to verify
- How much of the earnings and EPS improvement reflects sustained retail performance versus the joint-venture gain and the substantial reduction in shares from buybacks.
- Whether inventory growth and markdown levels remain consistent with sales trends and management’s margin expectations.
- Liquidity and cash use after the $268.7 million repurchase, including planned capital spending, the new repurchase authorization and seasonal working-capital needs.
- Execution and costs associated with announced store closures and the internet fulfillment center.
- Developments in the pending derivative litigation and the uncertain-tax-benefit range; the filing estimated a possible $0.5–$1.5 million decrease in uncertain tax benefits over the next 12 months.