Dillard’s, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended May 5, 2018. The filing compares results with the three months ended April 29, 2017. Although the request metadata says 2017 Q1, the filing itself covers 2018 Q1. Results are unaudited, and management cautions that seasonality limits their usefulness as a full-year indicator.
Financial and operating performance
- Sales: Net sales were $1.456 billion, up 2.7% from $1.418 billion. Retail sales and comparable-store sales each increased 2%; construction revenue rose 44% to $46.9 million.
- Profit and margins: Gross profit increased 0.9% to $553.3 million, while gross margin declined 66 basis points to 38.0%. Retail gross margin fell 31 basis points, primarily due to increased markdowns. Net income rose 21.5% to $80.5 million; diluted EPS increased to $2.89 from $2.12. The effective tax rate declined to approximately 22.0% from 35.3%, contributing to the net income increase.
- Expenses: SG&A increased 2.3% to $405.9 million but edged down as a share of net sales, to 27.9% from 28.0%. Depreciation and amortization declined $4.0 million; net interest expense declined $1.7 million, principally due to lower average debt.
- Cash flow: Operating cash flow was $55.4 million, down from $83.4 million. Capital expenditures were $39.2 million; investing activities used $36.5 million and financing activities used $39.9 million. Cash, cash equivalents and restricted cash decreased $21.0 million to $166.0 million.
- Liquidity and debt: Cash and cash equivalents were $164.1 million and working capital was $767.1 million. Debt, including $200 million of subordinated debentures but excluding capital leases, totaled $726.4 million. No revolving-credit borrowings were outstanding; $775.2 million of the $800 million facility was available after letters of credit. The company reported compliance with its credit covenants.
- Balance sheet and inventory: Merchandise inventory was $1.781 billion, up 4% year over year. Total assets were $3.781 billion and stockholders’ equity was $1.682 billion.
Changes versus the prior comparable quarter
- Retail sales momentum improved: comparable-store sales increased 2%, versus a 4% decline in the prior-year quarter. Transactions fell 2%, while average dollars per transaction rose 3%.
- Retail gross margin weakened amid markdowns. Management estimated that a 1% change in markdowns would affect quarterly net income by approximately $2 million.
- Operating cash flow fell $28.1 million, primarily reflecting less favorable working-capital movements, including higher receivables and inventory, partly offset by higher payables and accrued expenses.
- Share repurchases were $34.8 million for 0.5 million shares, compared with $91.1 million for 1.7 million shares in the prior-year quarter. The company completed its prior $500 million authorization and had the full $500 million authorization available under a new March 2018 plan.
Outlook, commentary and notable items
- Management expected fiscal 2018 capital expenditures of approximately $140 million, versus $130 million in fiscal 2017, with increased spending primarily related to store remodels. It expected to fund capital needs and repurchases with cash, operating cash flow and, if needed, the credit facility.
- Management expected a fiscal 2018 federal and state effective tax rate of approximately 22%–23%. The company was still evaluating certain Tax Cuts and Jobs Act effects and expected to finalize its accounting within the permitted measurement period.
- Construction backlog was $306.9 million at May 5, 2018, down approximately 4% from February 3, 2018 and up approximately 49% year over year. Management expected it to be earned over the next nine to 24 months.
- The company operated 267 Dillard’s locations, 25 clearance centers and one internet store. It remained committed to closing underperforming stores where appropriate.
- Adoption of tax-accounting standards resulted in a net $66.6 million cumulative-effect reduction to retained earnings; this was an accounting adoption adjustment, not a quarterly operating expense. The company also adopted revenue-recognition standards retrospectively; their effect on prior-year income was not material.
- Key risks cited include retail and macroeconomic conditions, competition, consumer spending and credit availability, sourcing and labor costs, data security, financing availability and interest-rate fluctuations. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether sales growth can continue while markdown pressure and lower retail gross margin persist.
- Inventory growth, working-capital needs and the trend in operating cash flow relative to earnings.
- Progress on the $306.9 million construction backlog and the timing and profitability of its conversion to revenue.
- Actual capital spending, share repurchases and cash/debt levels through the rest of fiscal 2018.
- Final tax effects of the Tax Cuts and Jobs Act and whether the expected 22%–23% full-year tax rate is achieved.
- Seasonality: first-quarter results are not necessarily indicative of full-year performance, with a significant portion of sales and income typically generated in the holiday quarter.