Dillard’s, Inc. — Form 10-K Summary
Period clarification: Although the request metadata says “2009 Q4,” the filing is the 10-K for fiscal 2010, the 52 weeks ended January 29, 2011. It also includes unaudited fourth-quarter comparisons.
Business context and reporting period
Dillard’s operated 308 department stores, including 14 clearance centers, in 29 states, plus an internet store. Retail operations accounted for nearly all sales; the construction segment performs general contracting work, including store construction and remodeling. The company’s business is seasonal, with a significant share of sales and income typically generated in the second half of the fiscal year.
Financial performance and liquidity
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net sales | $6.121 billion | $6.095 billion |
| Net income | $179.6 million | $68.5 million |
| Diluted EPS | $2.67 | $0.93 |
| Gross profit | $2.145 billion; 35.0% of sales | $1.992 billion; 32.7% of sales |
| Operating cash flow | $512.9 million | $554.0 million |
| Capital expenditures | $98.2 million | $75.1 million |
| Cash and cash equivalents | $343.3 million | $341.7 million |
| Working capital / current ratio | $870.7 million / 2.05 | Not stated here |
| Total debt, including subordinated debentures | $946.4 million | $949.3 million |
Retail sales rose 2% and comparable-store sales increased 3%. Retail gross margin improved 190 basis points to 35.6%; total gross margin improved 230 basis points. SG&A declined to 26.6% of sales from 27.0%. Net margin was approximately 2.9%, compared with 1.1%.
Fiscal 2010 operating cash flow decreased 7.4% year over year, principally due to working-capital and tax-related changes, partly offset by higher adjusted net income. The company ended the year with no revolver borrowings and approximately $727 million of unused borrowing availability after letters of credit. Its $1.0 billion inventory-secured facility expires in December 2012.
Material changes versus prior periods
- Net income rose to $179.6 million from $68.5 million, while consolidated sales were nearly flat. Retail sales improved, but construction-segment sales fell 51% to $100.9 million amid weak demand.
- Retail gross margin recovery reflected inventory discipline and reduced markdown activity; comparable-store inventory declined 2%. Retail comparable-store sales had fallen 10% in fiscal 2009.
- Construction gross margin weakened to 2.0% from 4.5%, including a $2.5 million loss on certain electrical contracts.
- Operating cash flow fell despite higher earnings. The company repurchased approximately 14.6 million Class A shares for $413.9 million; shares outstanding declined to about 60.0 million from 73.8 million.
- Fiscal 2010 fourth-quarter sales were $1.934 billion and net income was $109.6 million, or $1.75 diluted EPS, versus $1.834 billion, $79.5 million and $1.08, respectively, in fiscal 2009’s fourth quarter.
Outlook, commentary, risks and unusual items
Management cited recovering consumer confidence, disciplined inventory management and controlled spending as contributors to the improved results. It saw potential for modest retail sales growth but cautioned that further economic deterioration could reduce traffic and comparable sales, increase markdowns and lower profitability.
- Fiscal 2011 estimates: depreciation and amortization $260 million; rentals $46 million; net interest and debt expense $71 million; capital expenditures approximately $150 million. No fiscal 2011 store openings were planned. The company expected GE alliance income to improve moderately.
- Management expected rising fabric costs, including cotton, and overseas wages to have minimal gross-margin effect in fiscal 2011, based on sourcing, design and pricing measures. It noted health-care legislation could increase costs from fiscal 2014 onward; the impact was still under assessment.
- Key risks include intense retail competition, economic and consumer-spending shifts, fashion and sourcing execution, markdown and inventory exposure, real-estate ownership and lease obligations, named-storm property losses at about 75 coastal stores, vendor allowances, data security, and dependence on the GE credit-card alliance, which expires in fiscal 2014.
- Fiscal 2010 included a reported net $10.4 million pretax gain from specified items, including hurricane-loss proceeds and store-property sales, partly offset by impairment charges; it also included a $9.7 million income-tax benefit. These items affect comparability of reported earnings.
- Two derivative suits alleging improper director and officer compensation had been dismissed; one plaintiff appealed. Management said other ordinary-course proceedings were not expected to materially affect the company. The filing reported no legal proceedings expected to have a material adverse effect.
- In January 2011, the company formed a wholly owned subsidiary intended to seek REIT status and a captive insurer, and transferred certain real-estate interests to the REIT subsidiary. Management said the REIT structure may improve access to debt or preferred stock.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: this is fiscal 2010, not a 2009 Q4 10-K; use the filing’s quarterly results for the Q4 comparison.
- Assess whether retail sales and margin gains persisted, and whether inventory and markdown discipline remained effective.
- Review cash conversion, the substantial share repurchases, remaining liquidity, debt maturities and the December 2012 credit-facility expiry.
- Monitor the construction segment’s reduced revenue and contract-loss exposure, and the fiscal 2011 capital-spending plan.
- Evaluate reliance on GE alliance income and the terms and replacement prospects for the agreement expiring in fiscal 2014.
- Review nonrecurring gains and tax benefits, pension assumptions and obligations, lease and purchase commitments, and developments in the appealed derivative action.