Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended July 31, 2010, and the six months ended that date, compared with the periods ended August 1, 2009. The request metadata labels the period “2009 Q2,” but the filing itself is for fiscal 2010 Q2. Amounts below are in millions unless noted.
Business context and performance
Dillard’s operated retail department stores and a general contracting construction business. At quarter-end it operated 310 stores, including 14 clearance centers, and one internet store. Management characterized the economy as fragile and retail sales as lackluster. Results are seasonal, with a significant portion of sales and income typically generated in the fourth quarter.
Key financial metrics
| Metric | Three months ended July 31, 2010 | Six months ended July 31, 2010 |
|---|---|---|
| Net sales | $1,388.9; down 2.7% year over year | $2,842.5; down 2.0% |
| Gross profit | $458.5; 33.0% of net sales | $997.8; 35.1% of net sales |
| Income (loss) before tax and joint-venture losses | $7.6 | $84.6 |
| Net income (loss) | $6.8 | $55.7 |
| Diluted earnings (loss) per share | $0.10 | $0.80 |
| Operating cash flow | $128.7 for the six months |
Retail sales were $1,358.7 million for the quarter, down 1%; comparable-store sales were flat. For six months, retail sales increased less than 1% and comparable-store sales rose 1%. Construction sales declined 51% for the quarter and 55% for the six-month period. Quarter SG&A declined $4.7 million year over year; six-month SG&A declined $25.3 million. Retail gross margin improved 270 basis points for the quarter and 290 basis points for six months, which management attributed primarily to lower markdowns and inventory management.
At July 31, cash and cash equivalents were $214.7 million, working capital was $905.8 million, and the current ratio was 2.22. Total debt, excluding capital leases, was $948.5 million: $1.8 million current, $746.7 million long-term, and $200.0 million subordinated debentures. No revolving-credit borrowings were outstanding; approximately $725 million of facility availability remained after letters of credit. Six-month capital expenditures were $57.6 million. Cash fell $127.0 million from January 30, primarily as financing outflows included $182.6 million of share repurchases.
Changes versus prior comparable periods
- Quarterly net income improved from a $26.7 million loss in 2009 to $6.8 million income; six-month net income improved from an $19.0 million loss to $55.7 million income.
- Quarterly total gross margin increased from 29.9% to 33.0%; six-month gross margin rose from 31.7% to 35.1%.
- Six-month operating cash flow decreased from $183.1 million to $128.7 million. Management attributed the decline largely to a $125.1 million unfavorable change in working-capital items, particularly tax accruals and collection of a tax receivable, partly offset by improved earnings adjusted for noncash items.
- Merchandise inventories were $1,328.2 million, down 6% from a year earlier; inventory turnover was 2.7 versus 2.5.
- Cash was higher than a year earlier ($214.7 million versus $116.9 million), while total debt excluding capital leases was broadly lower. The company repurchased 7.2 million shares for $182.6 million during the six months, completing its prior $200 million authorization.
Outlook, risks, and unusual items
- Management said modest retail sales growth might continue in coming months, but gave no assurance. It expected weak construction demand to persist through fiscal 2010 and into the first half of fiscal 2011.
- Management warned that further economic deterioration could weaken consumer confidence and spending, reduce traffic and comparable sales, increase inventory and markdowns, and lower profitability. Other stated risks included competition, consumer credit availability and losses, cost pressures, weather, supply-chain disruption, financing availability, and interest-rate changes.
- Management expected a roughly 36% effective tax rate for the remainder of fiscal 2010. The rate is subject to actual results. Quarter earnings included an approximately $2.0 million tax benefit from a state administrative settlement and a $4.0 million pretax gain on sale of a former store location. Six-month results also included a $2.2 million impairment charge on property held for sale. Construction results included a $2.2 million loss on certain electrical contracts in the first quarter.
- Fiscal 2010 capital expenditures were expected to be approximately $105 million; no further store openings were planned for the year. The company expected peak revolver borrowings to be minimal and planned to fund capital spending and working capital from cash, operations, and the credit facility.
- The $1.2 billion revolving facility was reduced to $1.0 billion effective September 1, 2010, to reduce unused fees. In August 2010, the board authorized a new open-ended share-repurchase plan of up to $250 million.
- Two shareholder derivative lawsuits alleged improper compensation or benefits. One was dismissed with prejudice, but the plaintiff appealed; the other remained pending. Management said other ordinary-course legal matters were not expected to have a material adverse effect, though outcomes cannot be predicted with certainty.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether retail comparable sales and gross-margin improvement can continue amid weak consumer demand and seasonal fourth-quarter dependence.
- Whether markdown discipline and inventory levels remain sustainable, and how changes in markdowns affect earnings; management estimated a 1% markdown change would affect net income by about $2 million for the quarter and $4 million for six months.
- Construction segment recovery prospects, including exposure to low demand, pricing pressure, project delays, and contract losses.
- Cash generation and liquidity after substantial repurchases, capital spending, and planned remaining pension contributions; the filing expected approximately $3.6 million of pension-plan contributions for the rest of fiscal 2010.
- Credit-card alliance income and tax assumptions: management expected fiscal 2010 alliance receipts to be lower than the prior year, and estimated a possible $3–$5 million decrease in uncertain tax benefits over the next 12 months.
- Progress and potential outcomes of the pending shareholder litigation and appeal, and the company’s execution of the newly authorized repurchase plan.