Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 27, 2012, compared with periods ended October 29, 2011. The filing is for 2012 Q3, notwithstanding the request metadata’s 2011 Q3 label. The company operates department stores and a general contracting construction business. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Quarter 2012 | Quarter 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,449.6 | $1,382.6 | $4,486.9 | $4,293.6 |
| Gross profit | $530.0 | $501.5 | $1,622.5 | $1,548.9 |
| Net income | $48.5 | $228.2 | $174.5 | $322.4 |
| Diluted EPS | $1.01 | $4.31 | $3.55 | $5.80 |
| Operating cash flow | Not presented by quarter | $219.9 | $135.6 |
- Quarterly net sales rose about 5%; comparable store sales increased 5%. Retail operations sales rose 4% and construction sales rose 53%. For nine months, total sales increased about 4.5% and comparable retail sales increased 4%.
- Gross margin was 36.6% of sales for the quarter versus 36.3% a year earlier, and 36.2% for nine months versus 36.1%. Retail gross margin improved, primarily due to lower markdowns in the quarter and increased markups year to date.
- SG&A was 27.9% of sales for the quarter versus 29.3%, and 26.7% for nine months versus 27.7%. Rental expense fell 32% in the quarter and 30% year to date; management attributed the decrease mainly to reduced equipment leases.
- Quarterly net income was sharply below the prior year largely because the prior-year quarter included a $201.6 million tax benefit from reversal of a valuation allowance. Current-quarter results included a $1.7 million tax benefit from an amended return and a $1.1 million pretax gain on store-property sales.
- Nine-month operating cash flow improved $84.3 million, or 62.2%, year over year. Investing activities used $99.9 million, including $111.9 million of capital expenditures; financing activities used $219.4 million, including $162.1 million for treasury-stock purchases and $78.2 million of debt and lease principal payments. Cash declined $99.5 million to $124.8 million.
- At October 27, 2012, working capital was $807.1 million. Total debt was $842.0 million excluding capital leases; cash was $124.8 million. The $1.0 billion inventory-secured revolver had $27.0 million drawn, $61.9 million of letters of credit, and about $911 million of unused availability. Long-term debt’s estimated fair value was about $657 million versus a $615 million carrying value.
Material changes and capital allocation
- Compared with the prior-year nine-month period, repurchases fell to 2.5 million shares for $162.1 million from 9.3 million shares for $392.4 million. The current-year repurchases averaged $64.21 per share; $115.4 million remained under the 2012 authorization.
- Capital expenditures increased to $111.9 million from $80.3 million. Management expected fiscal 2012 capital expenditures of approximately $145 million and no new store openings.
- The store count was 302, including 18 clearance centers, plus one internet store, down two stores from the comparable prior-year period. The company closed two mall stores and replaced its Nashville internet fulfillment center with a new 850,000-square-foot facility in Arkansas.
Outlook, risks, and unusual items
- Management expected modest retail sales growth and slight improvement in retail gross margin and SG&A as a percentage of sales for fiscal 2012, while cautioning that improvement was not assured. It expected rental expense to be about $14 million below fiscal 2011 and the fiscal-year effective tax rate to approximate 36%.
- Management expected peak fiscal 2012 revolver borrowings not to exceed $125 million. It anticipated funding capital expenditures and working capital from cash, operating cash flow, and the credit facility. The GE credit-card marketing and servicing alliance generated $78.7 million in nine-month income; it expires in fiscal 2014, and future receipts are uncertain and depend on card activity, customer balances and payment behavior, credit losses, and GE funding costs.
- On November 26, 2012, after quarter-end, the board declared a one-time $5.00-per-share cash dividend, payable December 21 to shareholders of record December 7. The company expected to fund it from normal operating cash flows.
- Key disclosed risks include retail and macroeconomic conditions, customer spending and credit availability, competition, weather, sourcing and labor costs, data-security or system failures, financing availability, and borrowing-rate fluctuations. Management reported no litigation expected to have a material adverse effect and no material change to previously disclosed risk factors. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm the quarter’s underlying earnings excluding the prior-year $201.6 million tax benefit and other property-sale gains; reported year-over-year net income is not directly comparable.
- Track holiday-quarter sales, markdowns, and inventory: the business is seasonal, and management noted that a 1% change in markdowns could affect net income by about $2 million for the quarter or $6 million year to date.
- Assess liquidity and cash deployment after the $5.00 special dividend, planned capital expenditures, repurchases, and debt repayments.
- Monitor construction-contract execution and backlog, reported at $184.7 million, and the sustainability of GE alliance income.