Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended August 3, 2013, and the six months then ended, compared with periods ended July 28, 2012. This is a 2013 second-quarter filing; the request metadata’s “2012 Q2” does not match the filing. Dillard’s operates department stores and a general contracting construction business.
Financial performance and condition
- Second-quarter revenue: Net sales were $1.480 billion, down 0.5% year over year. Service charges and other income were $36.9 million; comparable retail-store sales increased 1%. Retail sales were essentially flat, while construction sales fell 33.9%, primarily due to project timing.
- Six-month revenue: Net sales were $3.029 billion, down 0.3%. Retail sales rose 0.4%, while construction sales declined 32.1%.
- Profit: Second-quarter net income was $36.5 million, versus $31.0 million; diluted EPS was $0.79 versus $0.63. Six-month net income was $153.7 million versus $126.0 million; diluted EPS was $3.30 versus $2.53. The company reported record second-quarter EPS.
- Margins and expenses: Second-quarter gross profit was $503.0 million, or 34.0% of net sales versus 33.6%; retail gross margin improved 10 basis points. SG&A was $398.2 million, down $0.6 million, but increased to 26.9% of sales from 26.8%. For the first half, gross margin was 36.8% versus 36.0%, and SG&A was 26.0% versus 26.1% of sales.
- Cash flow: Six-month operating cash flow was $131.7 million, down from $152.8 million. Inventory increases were a significant working-capital use. Capital expenditures were $40.9 million, compared with $86.7 million. Cash declined $10.3 million from the fiscal-year start to $113.7 million.
- Debt and liquidity: Total debt, excluding capital leases, was $814.8 million: $614.8 million of long-term debt and $200 million of subordinated debentures. Working capital was $851.8 million. The $1.0 billion inventory-secured revolving facility had no borrowings; after $47.2 million of letters of credit, approximately $935 million remained available. The facility expires July 1, 2018.
- Capital returns: Dillard’s repurchased 1.4 million shares for $114.7 million during the first half and paid $2.3 million in dividends. The company had $227.3 million remaining under its 2013 repurchase authorization.
Material changes and notable items
- Lower sales were largely attributable to construction-project timing; retail comparable sales remained positive for the twelfth consecutive quarter. Transactions fell 4% in the quarter, while average transaction value rose 4%.
- Six-month results included a $12.4 million gain on asset disposals, mainly the $11.7 million gain from selling the Acumen Brands investment. They also included $6.5 million of impairment and store-closing charges, including a $5.4 million impairment of cost-method investments.
- Interest expense declined as average debt levels were lower. Lower equipment leases also reduced rental expense.
- Inventory increased 7% overall and 8% in comparable stores year over year at quarter-end; inventory turnover was 2.6 versus 2.7.
Outlook, risks, and contingencies
- Management expected possible retail sales growth and slight improvement in retail gross profit and SG&A as a percentage of sales in fiscal 2013, while cautioning that these expectations were not guaranteed. Construction sales were expected to be similar to fiscal 2012; the awarded-contract backlog was $64.3 million.
- Fiscal 2013 capital expenditures were projected at approximately $125 million. Management expected peak borrowings similar to fiscal 2012 and expected to fund capital needs and working capital from cash, operating cash flow, and the credit facility.
- Management expected a fiscal 2013 effective tax rate of approximately 35% and moderate growth in income from the GE credit-card alliance. That alliance expires in late fiscal 2014, and its proceeds depend on customer balances, payment behavior, credit losses, rates, and other factors.
- The company closed two stores during the first half and expected another closure in the third quarter. Two new stores were planned to open in fiscal 2014. Seasonal holiday sales mean interim results may not predict full-year performance.
- Risks cited include retail and macroeconomic conditions, weather, competition, consumer spending and credit availability, sourcing and labor costs, cybersecurity or system failures, financing availability and interest rates, and supply-chain disruptions. 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
- Confirm the reporting-period discrepancy: the filing is for the quarter ended August 3, 2013, not 2012 Q2.
- Assess whether higher inventory and lower operating cash flow reflect planned seasonal stocking or a developing sales and markdown risk.
- Separate recurring earnings from the Acumen Brands and property-sale gains and the impairment charges.
- Monitor the scale and funding of share repurchases relative to cash generation, debt, and planned capital expenditures.
- Review the durability of GE alliance income and the company’s transition options before the alliance expires in late fiscal 2014.