Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 29, 2017. The filing covers Q2 2017, notwithstanding the “2016 Q2” period in the request metadata. Figures are unaudited.
Business context and results
Dillard’s operates department stores, clearance centers and an internet store, alongside a general-contracting construction segment. At quarter-end it operated 268 Dillard’s locations, 25 clearance centers and one internet store.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,427.2m | $1,452.4m | $2,845.3m | $2,955.7m |
| Gross profit | $420.2m | $459.1m | $968.2m | $1,023.7m |
| Net income (loss) | $(17.1)m | $12.1m | $49.2m | $89.5m |
| EPS, basic and diluted | $(0.58) | $0.35 | $1.62 | $2.55 |
| Cash from operations | Six months: $22.2m | Prior six months: $86.7m |
Margins, liquidity and debt
- Q2 consolidated gross margin was 29.4%, down from 31.6%; retail gross margin was 30.2%, down from 32.6%. Management attributed the retail decline primarily to higher markdowns.
- Q2 SG&A was 28.1% of net sales versus 27.2%; the increase reflected selling payroll and purchased services, with limited sales leverage. For the first half, gross margin was 34.0% versus 34.6%, while SG&A was 28.1% versus 26.8%.
- At July 29, cash was $135.1m and working capital was $637.2m. Merchandise inventory was $1,527.4m, up 2% year over year. Total assets were $3,749.3m.
- Total debt, excluding capital leases, was $813.4m, including $200m of subordinated debentures; no borrowings were outstanding under the prior revolving facility. The company reported approximately $974m of unused availability, net of letters of credit, under that facility.
- Six-month investing cash outflow was $60.2m, including $66.0m of capital expenditures. Financing cash outflow was $173.9m, including $166.6m for treasury-stock purchases and $4.5m in dividends. Cash declined $211.9m. Operating cash flow less capital expenditures was approximately negative $43.8m.
Material changes versus comparable periods
- Q2 comparable-store sales declined 1%, versus a 5% decline in Q2 2016; total retail-store sales also fell 1%. First-half comparable-store sales declined 2%, and total retail sales declined 3%.
- Q2 net sales fell $25.2m (about 1.7%); first-half sales fell $110.4m (about 3.7%). Retail sales transactions declined 3% in Q2 and 5% in the first half, while average dollars per transaction rose 2% in both periods.
- Q2 gross profit declined $38.9m and the company moved from $12.1m net income to a $17.1m net loss. First-half net income decreased $40.3m.
- First-half operating cash flow fell $64.6m year over year, which management attributed mainly to lower gross profit and working-capital changes. Capital expenditures rose from $42.0m to $66.0m, and share repurchases increased from $112.5m to $166.6m.
- Construction-segment sales declined 13% in Q2 and 26.9% in the first half. Awarded-contract backlog was $182.0m, down approximately 46% from a year earlier.
Outlook, risks and unusual items
- Management described Q2 markdowns as significant and results as disappointing. A 1% change in markdowns would have affected net income by approximately $3m for Q2 and $5m for the first half.
- Fiscal 2017 capital expenditures were expected to be approximately $125m; the company expected to fund capital spending, working capital and repurchases with cash, operating cash flow and possible use of its credit facility. The expected fiscal 2017 effective tax rate was approximately 35%. No full-year sales or earnings forecast was provided.
- In August 2017, after quarter-end, the company replaced its $1.0bn revolving facility with an $800m facility, expandable by $200m, maturing August 9, 2022. Interest and commitment-fee terms were unchanged; the maximum leverage covenant tightened from 4.0:1 to 3.5:1, with the minimum coverage ratio remaining 2.5:1.
- The company repurchased $160.6m of shares in the first half; $93.2m remained authorized at July 29. It expected approximately $2.5m of additional pension contributions during the remainder of fiscal 2017.
- Management cited retail competition, consumer spending and credit conditions, merchandise sourcing and costs, technology and data-security issues, financing availability and interest rates among forward-looking risks. It reported no legal proceedings expected to have a material adverse effect and no material change in previously disclosed risk factors.
- Upcoming standards were expected to affect reporting: Topic 606 revenue recognition, planned for adoption in fiscal 2018, was still being assessed, particularly for construction revenue; the company expected lease accounting adoption in fiscal 2019 to increase reported assets and liabilities.
Important facts for investors to verify
- Whether markdowns and retail gross-margin pressure ease, and how inventory levels and the stated sensitivity to markdowns evolve.
- Whether sales trends improve across product categories and whether declining transaction counts continue.
- How much liquidity remains after ongoing capital spending, share repurchases and seasonal working-capital needs, particularly under the amended facility’s tighter leverage covenant.
- Whether construction backlog converts to revenue as expected and whether the Wells Fargo Alliance’s lower income persists.
- The quantified financial-statement effects and implementation progress for the new revenue-recognition and lease-accounting standards.