Business Context and Reporting Period
Company: Dillard's, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 30, 2010 (52 weeks)
Business Overview: Dillard's operates 309 retail department stores and 12 clearance centers across 29 states, primarily in the Southwest, Southeast, and Midwest. The company sells fashion apparel, accessories, cosmetics, home furnishings, and consumer goods. Following the acquisition of CDI Contractors in August 2008, the company reports two segments: Retail Operations and Construction.
Key Financial Metrics
| Metric | Fiscal 2009 (2010) | Fiscal 2008 (2009) |
|---|---|---|
| Net Sales | $6,094.9 million | $6,830.5 million |
| Net Income (Loss) | $68.5 million | ($241.1 million) |
| Diluted EPS | $0.93 | ($3.25) |
| Gross Profit | $1,992.1 million | $2,002.8 million |
| Gross Margin % | 32.7% | 29.3% |
| Operating Cash Flow | $554.0 million | $350.0 million |
| Total Assets | $4,606.3 million | $4,745.8 million |
| Total Debt (Long-term + Current) | $749.3 million | $783.2 million |
| Cash and Equivalents | $341.7 million | $96.8 million |
| Working Capital | $980.5 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11% to $6.09 billion, driven by a 13% drop in retail operations sales and a 10% decline in comparable store sales due to the recessionary environment.
- Profitability Recovery: The company returned to profitability with $68.5 million in net income, a significant turnaround from the $241.1 million net loss in fiscal 2008. This improvement was aided by a 410 basis point increase in retail gross margin and a $288.6 million reduction in operating expenses.
- Impairment Charges: Asset impairment and store closing charges dropped dramatically from $197.9 million in 2008 to $3.1 million in 2009.
- Store Count: The company closed 6 stores during the fiscal year, ending with 309 locations.
- Liquidity: Cash and cash equivalents increased by $244.9 million to $341.7 million, supported by strong operating cash flows and the repayment of $200 million in short-term borrowings.
Guidance, Outlook, and Risks
Management Commentary and Guidance
Management expects fiscal 2010 capital expenditures to be approximately $100 million. The company anticipates minimal borrowings under its credit facility for 2010. While signs of modest economic improvement exist, management notes that further deterioration in the U.S. economy could adversely affect consumer confidence and spending.
Risks and Contingencies
- Legal Proceedings: Two derivative lawsuits were filed in 2009 alleging officer/director overcompensation. One was dismissed with prejudice (appealed); the other remains pending. Management intends to contest vigorously.
- Weather Exposure: Approximately 78 stores along the Gulf and Atlantic coasts are self-insured for property and merchandise losses related to "named storms."
- Vendor Allowances: Operating results depend on vendor allowances for advertising and payroll; reductions could increase costs or reduce sales.
- GE Alliance: Income from the proprietary credit card alliance with GE is subject to credit losses and funding costs, which may decline in a challenging economy.
Investor Verification Checklist
- Comparable Store Sales: Verify the 10% decline in comparable store sales and assess the sustainability of the gross margin improvement (33.7% for retail) in a low-growth environment.
- Inventory Levels: Confirm that the 5% decline in comparable store inventory aligns with sales trends to avoid future markdowns.
- Debt Maturities: Review the schedule of long-term debt maturities ($2M in 2010, $49M in 2011, $77M in 2012) and the company's ability to refinance or repay without straining liquidity.
- Legal Exposure: Monitor the status of the derivative lawsuits regarding executive compensation.
- Capital Allocation: Track the utilization of the remaining $182.6 million stock repurchase authorization and the $1.2 billion revolving credit facility.