Dillard’s, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for fiscal 2011, ended January 28, 2012 (52 weeks), not 2010 Q4 as indicated in the request metadata. The filing’s fourth quarter is the three months ended January 28, 2012.
Business context and reporting period
Dillard’s operated 304 department stores, including 16 clearance centers, across 29 states, plus an online store and CDI, a construction contractor. Retail accounted for nearly all revenue. Sales are seasonal, with a significant share of sales and income typically generated in the second half of the fiscal year.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $6.264 billion | $6.121 billion |
| Net income | $463.9 million | $179.6 million |
| Diluted EPS | $8.52 | $2.67 |
| Retail comparable-store sales growth | 4% | 3% |
| Retail gross margin | 35.9% | 35.6% |
| SG&A as a share of sales | 26.0% | 26.6% |
| Cash from operating activities | $501.1 million | $512.9 million |
- Net sales rose 2.3%; retail segment sales increased 3%, while construction segment sales fell 31% to $69.7 million. Total gross margin was 35.5%, up from 35.0%.
- Fiscal 2011 net income included a $201.6 million tax benefit from reversal of a valuation allowance related to the REIT property transfer and capital loss carryforward, plus a $44.5 million pretax gain from a $57 million JDA Software lawsuit settlement. The reported earnings increase therefore includes significant unusual benefits.
- Operating cash flow decreased 2.3% to $501.1 million. Capital expenditures were $115.7 million. Cash and cash equivalents declined to $224.3 million from $343.3 million, with total cash used of $119.0 million.
- Working capital was $721.4 million; the current ratio was 1.83, down from 2.05. Long-term debt, including current maturities, was $691.6 million; the company also had $200 million of subordinated debentures. Total debt was reported as $891.6 million.
- The $1 billion inventory-secured revolving facility had no balance outstanding at year-end, with about $753 million of unused availability after letters of credit. It was due to expire December 2012; the company said it was working to amend and extend it.
- Stock repurchases totaled $491.2 million for 11.4 million shares during FY2011; outstanding shares fell nearly 18% year over year. Dividends declared were $0.19 per share.
Material changes and quarterly results
- Retail comparable-store sales increased in all four quarters. Shoes and cosmetics were notable areas of strength; home and furniture sales declined.
- FY2011 Q4 sales were $1.970 billion, versus $1.934 billion in the prior-year quarter; net income was $141.5 million versus $109.6 million, and diluted EPS was $2.77 versus $1.75. The current-year quarter included the JDA settlement gain.
- Construction revenue continued to contract, reflecting a weak project backlog. New contracts awarded during FY2011 totaled approximately $165 million, but management did not guarantee a recovery.
- The company closed four stores during FY2011 and announced one additional closure for FY2012. It had no planned store openings for FY2012.
Outlook, risks, and unusual items
- FY2012 estimates included depreciation and amortization of $256 million, rentals of $34 million, net interest and debt expense of $71 million, and capital expenditures of $175 million. No sales or EPS guidance was provided in the supplied text.
- Management expected modest retail sales and gross-margin improvement, a slight improvement in SG&A as a percentage of sales, and moderately higher income from the GE credit-card alliance. These expectations were qualified as uncertain.
- Planned FY2012 spending primarily covered store remodeling, equipment and completion of a new internet fulfillment center. Management expected rental expense to decline by about $14 million, mainly due to equipment lease expirations.
- Key risks include intense retail competition; economic, consumer-spending and weather volatility; markdown and inventory exposure; vendor allowance and sourcing pressures; real-estate and named-storm exposure; data-security incidents; and changes in income from the GE card alliance, which expires in fiscal 2014. Management also cited higher health-care-related operating costs expected from FY2014 onward.
- The defined-benefit pension liability rose to $174.1 million from $132.3 million, partly reflecting a lower discount rate. Management expected an approximately $7.9 million pension contribution in FY2012.
- Management reported no legal proceedings expected to have a material adverse effect. The financial-statement and internal-control audit opinions were unqualified; management and the auditor reported effective internal control over financial reporting. The company changed its independent auditor for FY2011.
Important facts for investors to verify
- Underlying earnings excluding the $201.6 million tax benefit and JDA settlement gain, and the sustainability of reported EPS.
- Whether retail sales and margins continue improving, and whether construction backlog and profitability recover.
- Operating cash generation, working-capital requirements, and funding for buybacks, dividends and planned capital expenditures.
- Completion and terms of the revolving-credit-facility extension, alongside scheduled debt maturities and available borrowing capacity.
- Progress and operating impact of the new fulfillment center, store closures, pension funding needs, and the FY2014 credit-card alliance and health-care cost exposures.