Dillard’s, Inc. — Form 10-Q Summary
Period: Quarter ended July 29, 2023, with six-month results compared with the periods ended July 30, 2022. The filing covers fiscal 2023; this differs from the request metadata’s “2022 Q2.” Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and results
Dillard’s operates department stores and an internet store, plus a general contracting construction business. At quarter-end it operated 274 stores, including 27 clearance centers. Management described the quarter as an overall good performance, while noting that cautious consumer activity continued.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,567.4m | $1,588.6m | $3,151.3m | $3,200.3m |
| Net income | $131.5m | $163.4m | $333.0m | $414.5m |
| Basic and diluted EPS | $7.98 | $9.30 | $19.89 | $23.07 |
| Gross margin as % of net sales | 38.8% | 40.8% | 41.3% | 43.7% |
| Operating cash flow | Not provided for quarter alone | $397.9m | $279.1m |
Financial position and capital allocation
- At July 29, cash and cash equivalents were $774.3m and short-term investments were $150.2m. Working capital was $1,353.4m.
- Total debt was $521.4m: $321.4m long-term debt and $200.0m subordinated debentures. No revolver borrowings were outstanding; $780.7m of the $800m facility was available after letters of credit.
- Six-month capital expenditures were $63.8m. Financing cash outflows included $217.3m of share repurchases and $6.8m of dividends paid. Repurchases covered approximately 0.7m shares; $458.1m remained authorized under the May 2023 plan.
- Cash, cash equivalents and restricted cash increased $114.0m in the first half, compared with a $223.9m decrease a year earlier. Operating cash flow benefited primarily from working-capital changes, notably income taxes payable; the tax payment deadline was extended to July 31, 2023 after severe storms in Arkansas.
Material changes versus prior year
- Quarterly net sales declined 1.3%; retail sales and comparable-store sales each fell about 3%. Six-month net sales declined 1.5%, with comparable retail sales down about 4%.
- Quarterly net income fell about 19.5% and EPS about 14.2%. Six-month net income fell about 19.7% and EPS about 13.8%.
- Retail gross margin declined 110 basis points to 40.4% in Q2 and 150 basis points to 43.0% for the first half. Management cited lower markups for the quarter and lower markups plus increased markdowns for the half-year.
- SG&A rose 2.8% in Q2 and 2.1% for the first half; as a share of sales it increased to 26.3% and 26.0%, respectively. Management attributed the increase primarily to higher payroll and related expenses.
- Construction sales grew 91% in Q2 and 106% in the first half, partly offsetting weaker retail sales. Construction represented 4% of net sales in both periods.
- Net interest and debt expense fell substantially, mainly because interest income increased; six-month interest income was $20.0m versus $2.0m a year earlier. Other expense increased, primarily from higher pension-plan interest cost and amortization of actuarial losses.
Outlook, risks and unusual items
- No full-year sales or earnings guidance is provided. The company expects a fiscal 2023 effective tax rate of approximately 23%, subject to results differing from management’s expectations. Management expects to fund operations with cash on hand, operating cash flow and, if needed, its credit facility.
- Management highlighted inflation and rising interest costs, and uncertainty about customers’ willingness and ability to accept price increases. The filing also identifies consumer spending, mall traffic, competition, labor availability and costs, financing rates, supply-chain disruption, cybersecurity and broader economic conditions as risks.
- The business is seasonal, with a significant portion of sales and income typically occurring in the fiscal fourth quarter; interim results are not necessarily indicative of full-year results.
- The company closed three locations during the first half and announced the expected September 2023 closure of its owned MacArthur Center location in Norfolk, Virginia. No material closure costs were incurred or expected for those closures; future underperforming-store closures may entail costs.
- The revolving credit agreement was amended effective July 1, 2023 to replace LIBOR with SOFR-based terms and matures April 28, 2026. The company accrued $2.2m of excise tax related to share repurchases.
- Routine legal matters were not expected to materially affect financial position, cash flows or results. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether retail sales trends and transaction volumes stabilize: Q2 transactions declined 6%, while average dollars per transaction rose 3%.
- Whether retail gross margins recover, given lower markups, markdown sensitivity and management’s stated inflation concerns.
- Whether higher payroll costs and other SG&A pressures continue to outpace sales.
- How much of stronger operating cash flow reflects timing of tax payments and other working-capital movements.
- Future share repurchases, liquidity needs and debt obligations, including the $200m subordinated debentures and the remaining May 2023 repurchase authorization.
- Performance and margin contribution of the growing construction segment, including conversion of its $210.5m remaining contract obligations, expected to be earned over the next nine to eighteen months.