Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended July 30, 2016, and the six months then ended, compared with periods ended August 1, 2015. This differs from the request metadata’s “2015 Q2”; the filing itself is for fiscal 2016 Q2. Dillard’s operates department stores, clearance centers and an internet store, as well as a general contracting construction business.
Financial results
| Metric | Three months ended July 30, 2016 | Prior-year quarter | Six months ended July 30, 2016 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,452.4 million | $1,513.8 million | $2,955.7 million | $3,087.3 million |
| Gross profit | $459.1 million | $493.4 million | $1,023.7 million | $1,106.5 million |
| Gross margin | 31.6% | 32.6% | 34.6% | 35.8% |
| Net income | $12.1 million | $30.0 million | $89.5 million | $139.5 million |
| Diluted EPS | $0.35 | $0.75 | $2.55 | $3.43 |
- Quarterly net sales fell about 4%; comparable-store sales declined 5%. Net income fell about 60%. Six-month sales and net income declined about 4% and 36%, respectively.
- Quarterly SG&A was $395.1 million, or 27.2% of sales versus 26.7% a year earlier. It declined in dollars by $9.1 million, but rose as a share of sales. Six-month SG&A was $793.5 million, or 26.8% of sales versus 26.2%.
- Operating cash flow for the first six months was $86.7 million, compared with $62.0 million. Investing used $41.0 million and financing used $120.3 million; cash decreased $74.6 million to $128.3 million.
- At quarter end, working capital was $972.8 million. Debt excluding capital leases was $813.2 million: $613.2 million long-term debt and $200.0 million subordinated debentures. Capital lease obligations totaled $7.7 million. The company had no revolver borrowings, $26.4 million of letters of credit and approximately $973.6 million of unused availability under its $1.0 billion facility; it reported compliance with covenants.
- Merchandise inventories were $1.499 billion, up 1% overall and 2% at comparable stores year over year. Capital expenditures were $42.0 million for the half-year.
Material changes and management commentary
- Management cited challenging apparel-retail conditions and disappointing sales, with increased markdowns pressuring retail gross margin. Retail gross margin declined 92 basis points in the quarter and 119 basis points for the six-month period.
- Transactions fell 7% in the quarter and 6% over six months, while average dollars per transaction rose 2% in both periods. Home and furniture was the weakest reported category, down 12.1% in the quarter; all listed retail categories declined.
- Interest and debt expense rose 8.2% in the quarter and 5.7% for the half, primarily due to lower capitalized interest; management also cited higher short-term borrowings for the quarter and lower interest income for the half.
- The construction segment’s quarterly sales increased 6.4%; awarded-contract backlog was $339.6 million, up about 103% from January 30, 2016. Retail operations remained the primary source of revenue.
- The company repurchased $112.5 million of shares during the six months (1.6 million shares at an average $70.08); $387.5 million remained under the $500 million authorization. Cash dividends declared were $0.07 per share for the quarter.
Outlook, risks and notable items
- No sales or earnings guidance is stated. Management expected fiscal 2016 capital expenditures of approximately $120 million, versus $166 million in fiscal 2015, and an effective tax rate of approximately 35%. It expected to fund capital spending, working capital and repurchases with cash on hand, operating cash flow and, if needed, the credit facility.
- The business is seasonal, with a significant share of sales and income typically in the holiday quarter; interim results are not necessarily indicative of full-year performance. Management identified retail and macroeconomic conditions, competition, consumer spending and credit, weather, supply-chain, labor, cybersecurity and financing-rate risks, among others.
- The company closed a store in Aiken, South Carolina, and clearance centers in Sandy, Utah, and Arlington, Texas (the Arlington closure occurred August 3, after quarter-end). Management said it may incur future store-closing costs.
- After quarter-end, the company agreed to invest $20.0 million of cash in a Bonita Springs, Florida shopping-mall joint venture to help refinance debt due in December 2016.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. The company expected to contribute approximately $2.1 million more to its officer pension plan during the remainder of fiscal 2016.
Key facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied metadata says 2015 Q2, while the filing reports the quarter ended July 30, 2016.
- Track comparable-store sales, markdown levels, inventory growth and gross-margin trends, especially through the holiday season.
- Assess whether operating cash flow remains adequate as the company funds repurchases, capital expenditures and the planned $20 million joint-venture investment.
- Review debt, credit-facility covenant headroom and the terms and use of the remaining share-repurchase authorization.