Dillard’s, Inc. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended November 1, 2014, and the nine months then ended. This differs from the “2013 Q3” period in the request metadata. Dollar amounts below are in millions unless stated otherwise; interim results are unaudited.
Business context and financial performance
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 298 stores, including 18 clearance centers, and one internet store.
| Metric | Three months ended Nov. 1, 2014 | Comparable 2013 period | Nine months ended Nov. 1, 2014 | Comparable 2013 period |
|---|---|---|---|---|
| Net sales | $1,459.8 | $1,468.6 | $4,485.6 | $4,497.6 |
| Gross profit | $535.3 | $531.2 | $1,645.6 | $1,645.6 |
| Income before taxes | $85.3 | $78.4 | $310.8 | $314.4 |
| Net income | $55.2 | $50.9 | $201.4 | $204.6 |
| Diluted EPS | $1.30 | $1.13 | $4.67 | $4.43 |
| Gross profit as % of net sales | 36.7% | 36.2% | 36.7% | 36.6% |
| SG&A as % of net sales | 28.2% | 27.5% | 26.9% | 26.5% |
Quarterly comparable retail sales declined 1%; nine-month comparable retail sales increased 1%. In the quarter, retail sales were down 1%, while construction revenue rose 20%, partly offsetting the retail decline. Home and furniture sales were notably weak: down 12.1% for the quarter and 8.8% for the nine-month period.
Cash flow, balance sheet, and liquidity
- Operating cash flow: $209.9 for the first nine months, up from $173.0 a year earlier. Management attributed the improvement primarily to working-capital movements.
- Investing cash flow: $(119.3), including $124.1 of capital expenditures versus $65.3 in the prior-year period. Capital spending was mainly for new stores and remodeling.
- Financing cash flow: $(235.8), including $290.4 of share repurchases, $7.8 of dividends paid, and $63.0 of additional short-term borrowings. Cash declined $145.2 to $91.9.
- Liquidity: Working capital was $826.6. The $1.0 billion inventory-secured revolver had $63.0 drawn and $33.0 in letters of credit, leaving approximately $904 of availability. The facility expires July 1, 2018.
- Debt: Total debt was $877.8, excluding capital leases: $614.8 long-term debt, $200.0 subordinated debentures, and $63.0 short-term borrowings. Capital lease obligations totaled approximately $7.0.
- Inventory: $1,832.3 at quarter-end, essentially flat versus the prior-year date. Inventory seasonality affects comparisons with the February year-end balance.
Changes versus the prior comparable period
- Quarterly net income rose 8.6% and EPS rose 15%, although net sales declined 0.6%. Management cited improved retail gross margin and share repurchases; the quarter also included a $5.9 gain on a store sale, equivalent to $0.09 per share after tax.
- Retail gross margin improved 69 basis points in the quarter, primarily from increased markups and fewer markdowns. SG&A increased 70 basis points of sales, mainly due to higher payroll and payroll taxes.
- For the nine months, net income decreased about 1.6%, while EPS increased as weighted-average shares fell from 46.1 million to 43.1 million. Gross margin improved 10 basis points; SG&A increased 37 basis points of sales.
- Cash flow from operations improved, but capital expenditures were substantially higher. The prior-year nine-month period included a $6.5 asset impairment/store-closing charge and larger asset-sale gains.
Outlook, commentary, and risks
- Management expected fiscal 2014 capital expenditures of approximately $155, compared with $95 in fiscal 2013, and expected peak borrowings not to exceed $140. It expected a fiscal 2014 effective tax rate of approximately 35%.
- The Synchrony credit-card alliance expired in November 2014. A new 10-year Wells Fargo agreement began that month; management expected income, excluding startup costs, to be comparable to historical alliance earnings, with potential growth as the program expands. Future cash flows were described as difficult to predict.
- The construction backlog was $318.3 at November 1, up approximately 62% from February 1, 2014 and 101% from November 2, 2013. Nine-month construction sales had fallen 12% because of project timing delays in the first half.
- The company completed prior repurchase authorizations and announced a new authorization of up to $500 in November 2014. The timing and amount of future repurchases are not specified.
- Management cited retail and macroeconomic conditions, consumer spending and credit availability, competition, weather, costs, supply-chain disruption, financing availability and interest-rate changes among risks. Normal-course legal matters were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent holiday-period sales and margins offset the reported quarterly comparable-sales decline and higher SG&A rate.
- Whether the Wells Fargo card program achieves management’s expectation of earnings comparable to the former Synchrony alliance, including the effect of startup costs and credit losses.
- Actual fiscal 2014 capital expenditures and peak borrowings compared with management’s estimates.
- How the new $500 repurchase authorization is used, and its effect on cash, borrowing, and per-share results.
- Whether construction backlog converts to revenue on schedule and whether retail inventory and markdown levels remain controlled.