Dillard’s, Inc. — Form 10-Q Summary
Reporting-period clarification: Although the request metadata says 2012 Q3, this filing reports the quarter ended November 2, 2013, and the nine months then ended. The interim financial statements are unaudited.
Business context and reporting period
Dillard’s operates department stores and a general contracting construction business. At November 2, 2013, it operated 299 stores, including 17 clearance centers, and one internet store—three fewer stores than a year earlier. Results are seasonal, with a significant share of sales and income typically generated in the fiscal fourth quarter.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,468.6 million | $1,449.6 million | $4,497.6 million | $4,486.9 million |
| Net income | $50.9 million | $48.5 million | $204.6 million | $174.5 million |
| Diluted EPS | $1.13 | $1.01 | $4.43 | $3.55 |
| Gross profit margin | 36.2% | 36.6% | 36.6% | 36.2% |
| SG&A as % of net sales | 27.5% | 27.9% | 26.5% | 26.7% |
- Quarterly comparable-store sales rose 1%; retail sales increased 1%. Nine-month comparable-store sales also rose 1%. Retail gross margin fell 30 basis points in Q3, primarily due to increased markdowns, but improved 30 basis points for the nine-month period.
- Operating cash flow was $173.0 million for the nine months, down from $219.9 million. The company attributed the decline mainly to working-capital changes, particularly higher inventory, partly offset by higher adjusted net income. Capital expenditures were $65.3 million, versus $111.9 million.
- Cash and cash equivalents were $111.0 million; working capital was $739.1 million. Merchandise inventory was $1,829.2 million, up 6% from a year earlier.
- Total debt excluding capital leases was approximately $984.8 million, including $170.0 million of short-term borrowings, $614.8 million of long-term debt and $200.0 million of subordinated debentures. The $1.0 billion inventory-secured revolving facility had approximately $783 million of unused availability after borrowings and letters of credit. The facility expires July 1, 2018.
Material changes versus the prior comparable period
- Quarterly sales increased about 1.3% and net income increased about 4.9%; diluted EPS rose from $1.01 to $1.13. Management cited higher comparable sales, SG&A leverage and $186.9 million of Q3 share repurchases as contributors to per-share earnings growth.
- For the nine months, sales were nearly flat, while net income increased about 17.2%. Results included a $11.7 million gain from selling the Acumen Brands investment and $0.6 million of gains on former store sales, partly offset by $6.5 million of impairment and store-closing charges.
- Share repurchases totaled $301.6 million for the nine months, compared with $162.1 million in the prior-year period. The company repurchased 3.9 million shares during the current nine-month period. A further $250 million repurchase authorization was approved in November 2013.
- Interest and debt expense declined to $15.8 million for the quarter and $48.3 million for the nine months, primarily reflecting lower average debt levels.
Outlook, commentary, risks and unusual items
- Management expected possible retail sales growth and slight improvement in retail gross profit and SG&A as a percentage of sales during fiscal 2013, while cautioning that these outcomes were not assured. It expected fiscal 2013 construction sales to be similar to fiscal 2012.
- Management projected approximately $100 million of fiscal 2013 capital expenditures, expected no short-term borrowings at fiscal year-end, and anticipated peak fiscal 2013 borrowings not to exceed $250 million. The company expected to fund capital spending, working capital and repurchases with cash, operating cash flow and credit-facility borrowings.
- The company expected its fiscal 2013 effective income tax rate to be about 35%. It expected approximately $0.7 million of pension contributions for the remainder of fiscal 2013.
- The GE credit-card marketing and servicing alliance generated $84.3 million of income in the first nine months, versus $78.7 million a year earlier. Management expected a moderate fiscal-year increase, but noted that future receipts depend on account activity, credit losses and GE funding costs. The alliance expires in late fiscal 2014; the company was considering future ownership and management options for the card business.
- Two stores were expected to close in Q4 with minimal closing costs; management remained willing to close underperforming stores and noted that future closing costs may arise. Two new stores were expected to open in fiscal 2014.
- Key risks identified include retail and macroeconomic conditions, consumer spending and credit availability, competition, weather, sourcing and labor costs, data-security or system failures, financing availability and borrowing-rate fluctuations. The IRS was examining fiscal 2011; management did not expect a material impact. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the reporting period: the filing covers Q3 2013, not Q3 2012.
- Track inventory growth, markdown levels and retail gross margin, particularly through the holiday quarter.
- Assess cash generation and liquidity alongside substantial repurchases, debt levels and management’s year-end borrowing expectations.
- Monitor the GE alliance’s contribution and the company’s plans before its late-fiscal-2014 expiration.
- Separate recurring operating performance from the Acumen Brands and property-sale gains and the impairment charge.