Dillard’s, Inc. — Form 10-Q Summary
Period note: The supplied filing is for the quarter ended July 30, 2011, with six-month results compared with the period ended July 31, 2010. This does not match the request metadata’s “2010 Q2.”
Business context and reporting period
Dillard’s operates department stores and a general contracting construction business. It reported 305 stores, including 14 clearance centers, and one internet store at July 30, 2011, five fewer stores than a year earlier. Results are seasonal, with a significant portion of sales and income typically occurring in the holiday quarter.
Financial performance
- Second quarter: Net sales were $1.442 billion, up 3.8% from $1.389 billion; including service charges and other income, revenue was $1.475 billion. Net income rose to $17.6 million from $6.8 million. Diluted EPS was $0.32 versus $0.10.
- First six months: Net sales were $2.911 billion, up 2.4% from $2.843 billion; net income was $94.2 million versus $55.7 million. Diluted EPS was $1.66 versus $0.80.
- Margins and expenses: Consolidated gross margin was 33.2% versus 33.0% in the quarter and 36.1% versus 35.1% for six months. Retail gross margin was flat at 33.7% in the quarter and improved to 36.4% from 35.8% year to date. SG&A declined to 27.5% from 28.2% of sales in the quarter and to 27.0% from 27.6% year to date.
- Sales trends: Comparable-store sales increased 6% in the quarter and 4% for six months. Home and furniture sales declined; most other merchandise categories grew. Construction-segment sales fell 47% in the quarter and 46% year to date, and the segment recorded gross losses in both periods.
- Cash flow: Operating cash flow was $125.0 million for six months, down from $128.7 million. Capital expenditures were $48.7 million. Cash declined to $179.5 million from $343.3 million at January 29, 2011, chiefly amid substantial share repurchases.
- Debt and liquidity: Total debt, excluding capital leases, was $945.5 million; this includes $745.5 million of long-term debt and $200 million of subordinated debentures. Working capital was $778.8 million and the current ratio was 1.95. The $1.0 billion inventory-secured revolver had no borrowings; reported unused availability after $86 million of letters of credit was approximately $757 million. The facility expires December 12, 2012.
Material changes, outlook, and risks
- Net income improved substantially, supported by stronger comparable sales, improved gross margin year to date, and lower SG&A as a share of sales. Management said quarterly retail gross margin held steady despite increased markdowns, substantially offset by increased markups.
- Operating results included a $2.1 million pretax gain on sale of a mall-joint-venture interest. Six-month results also included a $4.2 million joint-venture gain associated with a $6.7 million excess-cash distribution and a $1.2 million property impairment charge. Prior-year comparisons included a $4.0 million property-sale gain and a $2.0 million tax benefit in the quarter.
- The company repurchased 6.4 million Class A shares for $268.7 million during the six months, at an average $41.95 per share. A new $250 million repurchase authorization remained unused at quarter-end.
- Management said sales growth might continue but gave no earnings guidance and cautioned that improvement was not assured. It expected fiscal 2011 capital expenditures of approximately $125 million, no new store openings, and peak revolver borrowings of approximately $200 million, net of invested cash. The estimated tax rate for the remainder of fiscal 2011 was approximately 36%.
- Management cited possible effects from economic weakness on customer traffic, spending, inventory and markdowns; competitive and pricing pressures; sourcing costs; credit availability and losses; and construction-market weakness. The company had closed three stores and announced a clearance-center closure. A derivative lawsuit dismissal remained subject to appeal; management did not expect other ordinary-course proceedings to materially harm financial position or results.
Important facts for investors to verify
- Confirm the intended reporting period: the filing itself covers the quarter ended July 30, 2011, not 2010 Q2.
- Assess the sustainability of comparable-store sales growth and margin gains, particularly against higher comparable-store inventory and markdown sensitivity.
- Review cash needs and liquidity alongside the scale of share repurchases, planned capital spending, debt maturities, and the company’s expected seasonal borrowing.
- Separate recurring earnings from the mall-joint-venture gain, joint-venture distribution, impairment charge, and tax benefits.
- Monitor construction contract profitability, store closures, tax-rate developments, and the pending appeal in the derivative litigation.