Dillard’s, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for fiscal 2018, ended February 2, 2019—not a 2017 Q4 filing. Fiscal 2018 had 52 weeks; fiscal 2017 had 53 weeks, so annual comparisons are not fully like-for-like.
Business context
Dillard’s operated 291 stores, including 26 clearance centers, and an internet store across 29 states. Its other reportable segment, CDI Contractors, performs general contracting, including store construction and remodeling. The retail business is seasonal, with a significant share of annual sales and income typically generated in the second half.
Key financial results
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net sales | $6.356 billion | $6.261 billion |
| Net income | $170.3 million | $221.3 million |
| Diluted EPS | $6.23 | $7.51 |
| Operating cash flow | $367.3 million | $274.3 million |
| Consolidated gross margin | 32.5% | 32.9% |
| Retail gross margin | 33.6% | 33.6% |
| SG&A as a percentage of sales | 26.6% | 26.9% |
Comparable retail sales rose 2% on a 52-week comparison. Retail segment sales increased $12.7 million; construction segment sales rose 53.4% to $235.4 million. Construction’s gross margin was 3.7%, versus 4.4% in fiscal 2017, and its growth reduced consolidated margin relative to retail-only performance. Transactions declined 2%, while average transaction dollars increased 3%.
Cash and cash equivalents were $123.5 million; working capital was $837.0 million. Merchandise inventory was $1.528 billion, up 4%. Total debt, excluding capital leases, was $565.6 million: $365.6 million of long-term notes and $200 million of subordinated debentures. The company had no revolver borrowings at year-end and $778.2 million of unused availability after letters of credit. Fiscal-year capital expenditures were $137.1 million. Dividends declared were $0.40 per common share.
Changes, outlook and unusual items
- Sales increased modestly, but net income fell to $170.3 million from $221.3 million. Fiscal 2017 included an estimated $77.4 million tax benefit from the Tax Cuts and Jobs Act, making the earnings comparison materially affected by tax items. Fiscal 2018 also included $2.9 million of disclosed tax benefits.
- Operating cash flow increased $93.0 million, primarily due to an increase in trade accounts payable, accrued expenses and other liabilities. Cash declined $63.5 million during the year, reflecting investing and financing outflows.
- Fiscal 2018 share repurchases totaled $127.9 million for 1.8 million shares; $406.9 million remained under the March 2018 authorization. Management identified property investments, repurchases and dividends as cash-use priorities.
- For fiscal 2019, management estimated depreciation and amortization of $225 million, rentals of $28 million, net interest and debt expense of $46 million, and capital expenditures of $140 million. It expected an effective tax rate of approximately 21%–22%. The company expected to fund operations, capital spending, repurchases and dividends with cash on hand, operating cash flow and, if needed, its credit facility. Dividends remained subject to Board approval.
- Construction contract backlog was $335.1 million at year-end, up approximately 5%; remaining performance obligations under executed contracts were $143.9 million. Construction revenue and profit estimates use the cost-to-cost method and may be adjusted as estimates change.
- The $800 million revolving facility matures August 9, 2022 and carries a variable LIBOR-based rate. A 100-basis-point rate change, based on fiscal 2018 average borrowings, would change annual interest expense by about $0.9 million. The company reported compliance with facility covenants.
Risks and contingencies
Principal risks include intense competition, online and off-price retail pressure, changing fashion preferences, discretionary consumer spending, weather and seasonality, sourcing and tariff exposure, labor and benefit costs, vendor allowances, and reliance on information technology and third-party services. The company also highlighted cyber/privacy incidents, supplier or distribution disruptions, real-estate exposure, and fluctuations in income from the Wells Fargo private-label card alliance, which expires in fiscal 2024. It is self-insured for certain claims and bears property and merchandise losses from named storms at approximately 75 Gulf and Atlantic coast stores.
Management said pending ordinary-course legal matters were not expected to materially affect financial position, cash flows or results. No material legal proceeding was reported as of March 29, 2019. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Reconcile the 52-week fiscal 2018 results with the 53-week fiscal 2017 comparison, especially comparable sales and reported earnings.
- Assess the quality and sustainability of earnings, including the prior-year tax benefit, current-year tax items, lower consolidated gross margin and CDI’s low-margin growth.
- Review the drivers and repeatability of higher operating cash flow, particularly the working-capital contribution and inventory growth.
- Verify debt maturity and interest obligations, pension funding requirements, revolver covenant headroom and planned capital spending.
- Monitor store closures, construction backlog conversion, card-alliance income and the expected balance-sheet effect of adopting lease accounting in fiscal 2019.