Dillard’s, Inc. — Form 10-Q Summary
Business context and period: The filing covers the third quarter and first nine months of fiscal 2016, ended October 29, 2016, compared with the periods ended October 31, 2015. Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 271 stores, 23 clearance centers, and one internet store.
Key financial metrics
| Metric | Three months ended Oct. 29, 2016 | Nine months ended Oct. 29, 2016 |
|---|---|---|
| Net sales | $1,365.6 million, down $69.0 million year over year | $4,321.3 million, down $200.6 million |
| Net income | $22.8 million, versus $45.7 million | $112.3 million, versus $185.3 million |
| Diluted EPS | $0.67, versus $1.19 | $3.24, versus $4.65 |
| Gross profit / margin | $486.7 million / 35.6%, versus $521.7 million / 36.4% | $1,510.5 million / 35.0%, versus $1,628.3 million / 36.0% |
| Operating cash flow | $125.9 million for nine months, versus $83.3 million |
SG&A was $410.6 million in the quarter and $1,204.1 million year to date; as a percentage of net sales it rose to 30.1% and 27.9%, respectively. Interest and debt expense was $15.6 million for the quarter and $47.3 million year to date.
At October 29, cash was $80.5 million, working capital was $947.1 million, and total debt excluding capital leases was $830.2 million. The balance sheet reported $613.2 million of long-term debt, $200.0 million of subordinated debentures, and $17.0 million of short-term borrowings. The $1.0 billion revolving facility had approximately $956.6 million available after borrowings and letters of credit; the company reported compliance with its financial covenants. Nine-month capital expenditures were $73.4 million. Cash declined $122.4 million from the start of the fiscal year.
Changes and business drivers
- Comparable retail sales fell 4% in the quarter and 5% year to date. Retail transactions decreased 6% in both periods; average transaction value increased 1% in the quarter and 2% year to date.
- Retail gross margin declined 100 basis points in the quarter and 113 basis points year to date, primarily because of higher markdowns. Total SG&A dollars decreased, but expense ratios rose as sales fell.
- Retail inventory was down 2% overall and 1% in comparable stores year over year. Management estimated that a 1% change in markdowns would affect net income by about $2 million for the quarter and $7 million year to date.
- Construction-segment sales fell 18.7% in the quarter and 5.3% year to date. Awarded-contract backlog was $278.3 million, up 27% from a year earlier; management expected it to be earned over the next 9–24 months.
- Prior-year comparisons included gains on asset disposals of $9.4 million in the quarter and $9.5 million year to date; current-period results included a year-to-date gain of $0.9 million. This helped make the decline in reported earnings larger than the underlying sales and margin movements alone would suggest.
Outlook, risks, and notable items
- Management expected fiscal 2016 capital expenditures of approximately $100 million, compared with $166 million in fiscal 2015, and an effective tax rate of approximately 35%. It gave no specific sales or earnings guidance.
- The company repurchased $165.6 million of shares during the first nine months under a $500 million authorization; $334.4 million remained. These repurchases were funded from cash, operating cash flow, and potentially the credit facility.
- A replacement store opened in Greensboro in October. Several stores or clearance centers closed during the year. The Chesterfield, Missouri store was temporarily closed because of water damage; management expected insurance to cover property and merchandise losses and planned to reopen it in fiscal 2017.
- Management cited department-store and macroeconomic conditions, competition, consumer spending and credit, sourcing and cost pressures, cybersecurity/system risks, and financing and interest-rate changes as factors that could affect results. Results are seasonal, with a significant portion of sales and income generally occurring in the holiday quarter.
- Routine legal matters were not expected to have a material adverse effect. The company reported no material changes to its previously disclosed risk factors, and no material changes to internal control over financial reporting.
Investor facts to verify
- Whether sales trends and transaction counts stabilize, and whether markdowns continue to pressure retail margins.
- Inventory levels and the resulting clearance and markdown risk, particularly given the stated sensitivity of earnings to markdown changes.
- Cash use, debt levels, share repurchases, and continued compliance with the revolving-credit covenants.
- Whether the construction backlog converts to revenue on the expected timetable and at sustainable margins.
- Insurance recovery and the timing of the Chesterfield store reopening, along with the stated capital-expenditure and tax-rate expectations.