Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended August 1, 2015, compared with periods ended August 2, 2014. The request metadata says 2014 Q2, but the filing itself is for fiscal 2015 Q2.
Business context and results
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 272 Dillard’s locations, 25 clearance centers and one internet store. Management called second-quarter performance “disappointing.”
| Metric | Three months ended Aug. 1, 2015 | Three months ended Aug. 2, 2014 | Six months ended Aug. 1, 2015 | Six months ended Aug. 2, 2014 |
|---|---|---|---|---|
| Net sales | $1,513.8 million | $1,474.5 million | $3,087.3 million | $3,025.8 million |
| Net income | $30.0 million | $34.4 million | $139.5 million | $146.1 million |
| Basic and diluted EPS | $0.75 | $0.80 | $3.43 | $3.36 |
| Gross profit margin | 32.6% | 33.8% | 35.8% | 36.7% |
| Operating cash flow | Not presented separately by quarter | $62.0 million | $133.8 million |
Financial position, cash flow and capital allocation
- At August 1, cash and cash equivalents were $175.1 million, working capital was $934.0 million, and total debt excluding capital leases was $814.8 million, comprising $614.8 million of long-term debt and $200.0 million of subordinated debentures. Capital lease obligations totaled $15.4 million.
- The company reported $1.0 billion available under its new senior unsecured revolving facility, due May 2020; there were no borrowings and $28.0 million of letters of credit outstanding. Dillard’s reported compliance with its financial covenants.
- Six-month operating cash flow fell $71.9 million year over year, mainly due to working-capital changes, including higher inventory and lower income taxes payable. Investing used $79.5 million, including $87.0 million of capital expenditures. Financing used $211.1 million, largely reflecting $207.9 million of share repurchases.
- Cash declined $228.6 million from fiscal year-end to $175.1 million. The company repurchased 1.84 million shares at an average $112.83; $292.1 million remained authorized. Dividends declared were $0.06 per share for the quarter.
Material changes and management commentary
- Quarterly comparable-store sales increased 1%, while retail sales transactions decreased 2% and average dollars per transaction rose 2%. Retail sales were nearly flat; shoes performed strongly, while home and furniture declined significantly.
- Quarterly retail gross margin declined 54 basis points, primarily due to increased markdowns. Company-wide gross margin declined 119 basis points. Inventory was up 3% year over year in both total and comparable stores.
- Quarterly SG&A dollars rose $3.8 million; retail SG&A increased mainly from payroll and insurance, partly offset by lower advertising. The reported consolidated SG&A ratio fell to 26.7% from 27.2% as sales mix and construction activity affected the comparison.
- Construction-segment sales rose to $46.1 million from $13.4 million in the quarter, but its awarded-contract backlog of $288.5 million was down about 5% from January 31, 2015 and 15% from a year earlier.
- Alliance income from the private-label credit-card arrangements declined $4.2 million in the quarter and $5.0 million for the six-month period, with increased credit losses cited as a cause. Wells Fargo’s 10-year alliance began after the Synchrony agreement expired in November 2014.
Outlook, risks and contingencies
- No full-year sales or earnings guidance is provided. Management expected fiscal 2015 capital expenditures of approximately $160 million and an effective income-tax rate near 35%; it also expected approximately $3.1 million of additional pension contributions during the rest of fiscal 2015.
- Management said results are seasonal, with a significant share of sales and income typically in the holiday-season fourth quarter; interim results may not indicate full-year performance. Planned 2015 store openings included locations in Slidell, Louisiana, and Cincinnati, Ohio.
- Key stated risks include retail and macroeconomic conditions, competition including online and off-price retailers, consumer spending and credit availability, weather, sourcing and labor costs, data-security or system incidents, financing availability and borrowing rates, and supply-chain disruption.
- Routine legal matters were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements. Management stated disclosure controls were effective.
Important facts for investors to verify
- Confirm the actual filing period: the filing is for Q2 fiscal 2015, not Q2 2014.
- Track retail comparable sales, markdowns, inventory growth and margin recovery, particularly given the quarter’s lower net income.
- Assess whether operating cash generation can support capital spending and substantial repurchases while cash balances decline.
- Monitor credit-card alliance income and credit losses, and construction backlog and segment profitability.
- Review the company’s debt terms, revolver covenants, and the fair value disclosures: long-term debt fair value was approximately $702 million versus $615 million carrying value; subordinated debentures were approximately $210 million versus $200 million carrying value.