Dillard’s, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the three months ended April 29, 2017 (fiscal 2017 first quarter), not 2016 Q1. Comparative figures are for the three months ended April 30, 2016. Amounts are in U.S. dollars.
Business context and reporting period
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 268 Dillard’s locations, 25 clearance centers and one internet store. Results are seasonal, with a significant portion of sales and income typically generated in the holiday-season fourth quarter.
Financial performance
- Sales: Net sales were $1.418 billion, down $85.1 million (5.7%) year over year. Comparable and total retail sales each declined 4%, versus 5% declines in the prior-year quarter. Retail sales were $1.386 billion; construction sales were $32.6 million, down 39.5%.
- Profit and margins: Gross profit was $548.0 million, down 2.9%; gross margin improved to 38.6% from 37.6%. Retail gross margin rose to 39.4% from 38.8%. SG&A was $398.5 million, essentially flat in dollars, but increased to 28.1% of net sales from 26.5%. Net income fell to $66.3 million from $77.4 million; diluted EPS was $2.12 versus $2.17. Net margin was 4.7% versus 5.2%.
- Cash flow: Operating cash flow was $77.4 million, compared with $20.2 million. Inventory growth used $307.5 million of cash, partly offset by increases in payables, accrued expenses and taxes. Capital expenditures were $34.5 million. Cash declined $45.5 million to $301.5 million after investing and financing outflows.
- Liquidity and debt: Working capital was $857.0 million. Total debt excluding capital leases was $813.4 million; cash was $301.5 million. The $1.0 billion unsecured revolver had no borrowings, $25.7 million of letters of credit and about $974 million of unused availability. The company reported compliance with its credit-facility covenants.
- Other measures: Merchandise inventory was $1.714 billion, up 4% year over year; annualized retail inventory turnover was 2.1 versus 2.4. Retail sales per square foot were $29 versus $30.
Material changes and notable items
- Retail sales weakness was concentrated in February, particularly the first two weeks; management reported a significant difference in sales from mid-February through quarter-end. Transaction count fell 7%, while average transaction dollars rose 2%.
- Sales declines were pronounced in cosmetics, home and furniture, and ladies’ accessories and lingerie; ladies’ apparel was essentially flat.
- Retail gross margin improved, primarily due to increased markups, but SG&A deleveraged as a share of sales. Management attributed the retail SG&A rate increase to lower sales leverage.
- Construction backlog was $206.5 million, down about 12% from January 28, 2017 and 33% from April 30, 2016; the company expected it to be earned over the following 9–24 months.
- The company repurchased 1.7 million Class A shares for $91.1 million at an average $53.79 per share; $162.7 million remained authorized. Weighted-average shares outstanding fell to 31.3 million from 35.7 million.
- Capital spending increased to $34.5 million from $17.7 million, primarily for store construction and remodeling. The company opened a replacement store in Nashville and acquired properties in Utah and Texas, with openings expected in fall 2017.
Outlook, risks and contingencies
- Management expected fiscal 2017 capital expenditures of approximately $125 million and an effective federal and state tax rate of about 35%. It expected to fund capital spending, working capital and repurchases through cash, operating cash flow and, if needed, the revolver. No sales or earnings guidance was provided.
- The company expected about $3.3 million of additional pension-plan contributions during the remainder of fiscal 2017. A 1% change in markdowns would have affected quarterly net income by approximately $2 million.
- Management cited challenging department-store conditions and risks including macroeconomic and regional conditions, competition (including online and off-price retail), consumer spending and credit availability, weather, supply-chain disruption, operating costs, cybersecurity/system failures and borrowing-rate changes.
- Routine legal proceedings were not expected by management to have a material adverse effect. The company reported no material change in risk factors from its latest Form 10-K.
- Adoption of the revenue-recognition standard was planned for fiscal 2018; management was assessing construction-segment effects and expected retail adjustments not to be material. The company expected the new lease standard, planned for fiscal 2019 adoption, to increase reported assets and liabilities.
Important facts for investors to verify
- Whether subsequent retail sales and comparable-store trends improved or worsened after the quarter, given the 4% comparable-sales decline.
- Whether higher inventory and lower turnover led to markdowns or further margin pressure.
- Whether construction backlog converted to revenue as expected, given its year-over-year decline.
- Whether operating cash flow remains supported by sustainable operations rather than working-capital timing, and how cash is allocated among capex, buybacks and debt.
- Progress on planned store openings, fiscal-year capital spending and the estimated effects of new accounting standards.