Dillard’s, Inc. — Fiscal 2016 Form 10-K
Period note: The request metadata says “2015 Q4,” but the supplied filing is Dillard’s annual report for the 52-week fiscal year ended January 28, 2017 (fiscal 2016), with fiscal 2015 comparisons. It is not a standalone quarterly filing.
Business context and reporting period
Dillard’s operated 293 stores, including 25 clearance centers, and an Internet store in 29 states. Retail department stores are the principal business; CDI Contractors is the other reportable segment. Holiday-season sales make the business seasonal, and the fourth quarter typically contributes about one-third of annual sales.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net sales | $6.257 billion | $6.596 billion |
| Gross profit / gross margin | $2.091 billion / 33.4% | $2.245 billion / 34.0% |
| SG&A / percentage of sales | $1.656 billion / 26.5% | $1.670 billion / 25.3% |
| Net income / diluted EPS | $169.2 million / $4.93 | $269.4 million / $6.91 |
| Cash provided by operations | $517.0 million | $450.2 million |
| Capital expenditures | $104.8 million | $165.8 million |
| Cash and cash equivalents at year-end | $347.0 million | $202.9 million |
| Working capital at year-end | $861.4 million | Not stated in the selected comparison |
Long-term debt, including its current portion, was $613.3 million; $200 million of 7.5% subordinated debentures were also outstanding. Management reported total debt of $813.3 million, excluding capital leases. No revolver borrowings were outstanding at year-end; the $1.0 billion facility had approximately $974 million available after letters of credit. Scheduled debt maturities include $87.2 million in fiscal 2017 and $161.0 million in fiscal 2018. The company was in compliance with credit-facility covenants.
Fiscal 2016 cash from operations rose 14.8%, with management attributing the increase primarily to working-capital changes, including higher trade payables and accrued expenses. The company repurchased 3.8 million shares for $246.2 million and paid $9.8 million in cash dividends.
Material changes versus the prior year
- Retail and comparable-store sales both declined 5%, versus 2% declines in fiscal 2015. Retail transactions fell 7%, while average dollars per transaction increased 2%.
- Sales fell across all reported retail merchandise categories; home and furniture declined 7.3%. Retail gross margin contracted 73 basis points, primarily from increased markdowns.
- SG&A dollars decreased $14.3 million, but SG&A as a share of sales rose 114 basis points as sales weakened. Advertising, supplies and utilities savings were partly offset by higher payroll and employee-related insurance expense.
- Net income declined $100.2 million. The year-over-year comparison also included a $6.5 million fiscal 2016 impairment charge and a $12.6 million fiscal 2015 gain, primarily on sales of four stores.
- Construction-segment revenue fell 10.3% to $185.6 million, while awarded-contract backlog rose approximately 41% to $235.8 million.
- Average diluted shares decreased from 39.0 million to 34.3 million, alongside the substantial share repurchases.
Outlook, risks and unusual items
For fiscal 2017, management estimated depreciation and amortization of $240 million, rentals of $25 million, net interest and debt expense of $63 million, and capital expenditures of $125 million. It expected an effective tax rate of approximately 35% and a pension contribution of approximately $4.9 million. The filing provides no clear sales, earnings or comparable-store-sales forecast. Management expected to fund operations, investment, dividends and repurchases through cash on hand, operating cash flow and, if needed, the credit facility.
Key disclosed risks include persistent retail competition and promotional pressure; weak consumer spending or mall traffic, particularly in energy-producing regions; fashion and inventory forecasting; weather and seasonality; supplier, foreign-sourcing and potential tariff/trade risks; cyber or technology disruption; real-estate exposure, including named-storm losses at about 75 coastal stores; and fluctuations in vendor allowances and private-label card alliance income. Alliance income was approximately $104 million in fiscal 2016, down from $105 million in fiscal 2015; Wells Fargo owns the card accounts and bears their credit risk under an agreement expiring in fiscal 2024.
The company recorded a $6.5 million pretax impairment of a cost-method investment. It also reported that a licensed upscale women’s apparel vendor had filed for bankruptcy, with the impact on future business unclear. Management said pending ordinary-course legal matters were not expected to materially affect financial position, cash flows or results. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2016 ended January 28, 2017, not “2015 Q4.”
- Review subsequent sales, markdowns and inventory levels, given the 5% sales decline, lower retail gross margin and 2% inventory increase.
- Assess near-term debt maturities and refinancing or repayment plans, particularly the $87.2 million fiscal 2017 and $161.0 million fiscal 2018 maturities.
- Track operating cash conversion: fiscal 2016 cash-flow improvement was substantially associated with working-capital changes, including payables and accrued expenses.
- Monitor the licensed vendor bankruptcy, construction backlog conversion, Wells Fargo Alliance income and the pace of share repurchases and dividends.