Dillard’s, Inc. — Form 10-K Summary
Period: Fiscal 2015, ended January 30, 2016 (52 weeks), with fiscal 2014 comparisons. The request metadata says “2014 Q4,” but the supplied filing is the fiscal 2015 annual report; fourth-quarter figures are also summarized below.
Business context
Dillard’s operated 297 department stores, including 24 clearance centers, and an online store across 29 states. It also operated CDI, a general contracting construction business. Retail generated 97% of fiscal 2015 net sales; construction generated 3%. Results are seasonal, with roughly one-third of annual sales typically occurring in the fourth quarter.
Key financial results
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net sales | $6.596 billion | $6.621 billion |
| Gross profit / margin | $2.245 billion / 34.0% | $2.348 billion / 35.5% |
| Net income / margin | $269.4 million / 4.1% | $331.9 million / 5.0% |
| Diluted EPS | $6.91 | $7.79 |
| Cash from operations | $450.2 million | $611.6 million |
| Capital expenditures | $165.8 million | $151.9 million |
| Cash and cash equivalents at year-end | $202.9 million | $403.8 million |
| Merchandise inventory at year-end | $1.375 billion | $1.374 billion |
Fiscal 2015 retail comparable sales fell 2%; retail sales per square foot were $130 versus $131. Sales transactions declined 5%, while average dollars per transaction rose 3%. Construction revenue increased 58% to $206.9 million, but its awarded-contract backlog fell about 45% to $167.3 million.
Year-end working capital was $917.7 million. Long-term debt was $614.8 million and subordinated debentures were $200 million, for $814.8 million of total debt excluding capital leases. The company had no revolver borrowings and approximately $974 million of availability under its $1.0 billion unsecured revolving credit facility. The facility’s financial covenants were met. Debt maturities include $87.2 million in fiscal 2017 and $161.0 million in fiscal 2018; the $200 million subordinated debentures mature in 2038.
Fiscal fourth-quarter net sales were $2.074 billion versus $2.135 billion a year earlier; net income was $84.1 million versus $130.5 million, and diluted EPS was $2.31 versus $3.17.
Material changes and unusual items
- Net sales declined 0.4% year over year, while net income declined about 19% and diluted EPS fell from $7.79 to $6.91.
- Consolidated gross margin fell 144 basis points. Retail gross margin declined 107 basis points, primarily because of increased markdowns. SG&A rose 19 basis points as a percentage of sales, mainly from higher selling payroll, partly offset by lower advertising expense.
- Cash from operations decreased 26.4%, primarily reflecting less favorable working-capital changes and lower gross profit. Cash declined by $200.9 million during the year.
- The company repurchased 5.3 million Class A shares for $500 million during fiscal 2015, completing its authorization. On February 25, 2016, the board authorized a new $500 million repurchase program.
- The company recorded a $12.6 million pretax gain, primarily from selling four store locations ($8.1 million after tax, or $0.21 per share). The fourth-quarter portion was a $3.1 million pretax gain, primarily from one store sale.
- Income from the private-label card alliances declined to approximately $105 million from $112 million, primarily due to increased credit losses partly associated with the portfolio transition to Wells Fargo.
Outlook, commentary and risks
Management described fiscal 2015 as difficult: sales were below plan amid unusually intense competition, and the company focused on controlling inventory. Fiscal 2016 estimates included depreciation and amortization of $250 million, rentals of $27 million, net interest and debt expense of $61 million, and capital expenditures of approximately $150 million. Management expected an effective tax rate of about 35%, a pension contribution of approximately $4 million, and pension expense of approximately $12.8 million. No specific sales or earnings forecast was provided.
Management expected to fund capital spending, working capital, dividends and possible repurchases from cash, operating cash flow and, if needed, the credit facility. Key risks include competitive and online pricing pressure, weak consumer spending and economic conditions in energy-producing regions, fashion and markdown risk, weather and seasonality, supplier and import disruptions, store-location and real-estate exposure, cybersecurity and technology outages, employee-benefit costs, and reduced income from the card alliance. The company is self-insured for named-storm property and merchandise losses at approximately 75 Gulf and Atlantic coastal stores.
Ordinary-course lawsuits and claims were pending, but management did not expect their resolution to materially affect financial position, cash flows or results; the filing reported no material legal proceedings. KPMG issued unqualified opinions on the financial statements and internal controls, and management concluded controls were effective. The company reported no off-balance-sheet arrangements reasonably likely to materially affect its financial condition.
Important facts for investors to verify
- Whether retail sales and margins stabilize after the 2% comparable-sales decline and markdown-driven margin contraction.
- Whether operating cash flow recovers from $450.2 million and supports capital spending, dividends and any further repurchases.
- Whether the new $500 million repurchase authorization is used, and how buybacks affect liquidity and share count.
- Whether Wells Fargo alliance income and the $167.3 million construction backlog remain stable or weaken further.
- Debt maturities, covenant compliance, the unfunded $184.8 million officer pension obligation, and sensitivity to operating or interest-rate changes.
- The source filing’s reporting period: it covers fiscal 2015 ended January 30, 2016, not a standalone 2014 fourth quarter.