Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 2, 2020 (fiscal 2020 first quarter), compared with the three months ended May 4, 2019. The filing was signed June 5, 2020. The supplied metadata’s “2019 Q1” does not match the period stated in the filing.
Business context and results
Dillard’s operates department stores and a general contracting construction business. At May 2, 2020, it operated 285 stores, including 30 clearance centers, and one internet store. COVID-19-related government orders led the company to close all stores temporarily by April 9; store closures severely affected retail sales during the quarter.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $786.7 million | $1,465.4 million |
| Gross profit / margin | $98.2 million / 12.5% | $537.7 million / 36.7% |
| SG&A | $290.4 million; 36.9% of net sales | $405.2 million; 27.6% of net sales |
| Operating cash flow | $(111.1) million | $48.4 million |
| Net income (loss) | $(162.0) million | $78.6 million |
| Basic and diluted EPS | $(6.94) | $2.99 |
Financial position and liquidity
- Cash and cash equivalents were $70.0 million at May 2, down from $277.1 million at February 1, 2020. Working capital was $707.8 million.
- Total debt was $565.7 million, excluding finance and operating lease liabilities: $365.7 million of long-term debt and $200.0 million of subordinated debentures. No revolving-credit borrowings were outstanding at quarter-end.
- The amended revolving facility provides $800 million of capacity, with a $200 million expansion option, and matures August 9, 2022. After $21 million of letters of credit, unused availability was $779 million. The facility is secured by certain deposit accounts and subsidiary inventory; its borrowing rate is LIBOR plus 1.75%.
- Cash declined by $207.1 million during the quarter. Investing activities used $19.9 million; financing activities used $76.1 million, including $69.2 million of treasury-stock purchases and dividends.
- Merchandise inventory was $1.57 billion, down 14% year over year. Operating lease liabilities totaled $48.2 million and finance lease liabilities $1.6 million.
Material changes and notable items
- Retail sales fell 47% year over year; no comparable-store-sales figure was reported because store closures and the interaction of online and in-store sales made the comparison unsuitable. Every retail product category declined materially.
- Retail gross margin dropped to 12.8% from 37.8%, primarily because of markdowns. Purchases were reduced 33% through cancellations, delays, and suspended orders. Management said a 1% change in markdowns would affect quarterly net loss by about $2 million.
- SG&A fell 28.3% in dollars, principally due to lower payroll, but rose as a share of sales. Payroll expense was $168.5 million versus $257.5 million; about 90% of 38,000 associates were furloughed at the peak of closures.
- The company borrowed $779 million under its prior credit agreement in March as a liquidity measure, then repaid it when the amended facility was executed in April. The amendment also resulted in $2.9 million of issuance costs.
- Quarterly net loss included a $14.8 million tax benefit from CARES Act net-operating-loss carryback provisions. The prior-year quarter included a $7.4 million pretax gain from two store-property sales.
- Dillard’s repurchased 998,742 shares for $61.8 million at an average $61.91 per share; $206.9 million remained authorized. It also declared a $0.15-per-share dividend.
Outlook, risks, and contingencies
- Management withdrew fiscal 2020 guidance because of uncertainty about COVID-19, customer demand, and business operations. It expects to be in a net operating loss position for fiscal 2020 and did not provide an expected effective tax rate.
- Management expected to fund fiscal 2020 operations with cash on hand, operating cash flows, and the credit facility. It cautioned that liquidity and sales could be further affected if inventory and expenses are not appropriately managed.
- All stores had reopened by June 2, 2020, generally with reduced hours and safety measures. Through May 30, reopened-store sales were approximately 68% of prior-year sales on corresponding days.
- Key risks include further pandemic effects on store traffic, demand, supply chains, employees, and the retail industry; uncertainty about recovery to pre-pandemic sales; and availability and pricing of merchandise. The company also identified LIBOR’s expected phaseout and the need for a replacement reference rate.
- The company planned three store closures in the second quarter, with minimal expected closing costs. Construction-contract remaining performance obligations were $145.4 million, expected to be earned over nine to eighteen months.
- Routine legal proceedings were not expected to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether post-reopening sales, customer traffic, and margins improved or deteriorated from the reported 68% of prior-year sales through May 30.
- Whether the $779 million facility availability and $70 million quarter-end cash balance remained sufficient as operating cash use and working-capital needs evolved.
- How inventory levels, markdowns, and gross margins developed after the 14% year-over-year inventory reduction.
- Whether the company continued share repurchases or dividends amid pandemic-related liquidity pressure.
- Whether store closures, supply-chain disruption, or construction-backlog changes led to impairments, costs, or revised expectations in later filings.