Dillard’s, Inc. — Form 10-K Summary
Reporting period: The filing is for fiscal 2014, ended January 31, 2015, and covers 52 weeks. The request metadata says “2013 Q4,” but that does not match the filing period. Fiscal 2013 ended February 1, 2014 and also covered 52 weeks.
Business context
Dillard’s operated 297 department stores, including 20 clearance centers, across 29 states, plus an Internet store and CDI, a general contracting business. Retail operations generated about 98% of fiscal 2014 net sales; construction generated about 2%. Results are seasonal, with a significant share of sales and income typically in the final quarter.
Financial results and key metrics
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net sales | $6.621 billion | $6.532 billion |
| Service charges and other income | $159.1 million | $160.1 million |
| Gross profit | $2.348 billion; 35.5% of net sales | $2.308 billion; 35.3% |
| Retail gross margin | 36.1% | 35.7% |
| SG&A | $1.664 billion; 25.1% of net sales | $1.632 billion; 25.0% |
| Income before taxes | $510.8 million | $496.2 million |
| Net income | $331.9 million | $323.7 million |
| Diluted EPS | $7.79 | $7.10 |
| Cash from operations | $611.6 million | $501.8 million |
Net sales rose 1.4%; comparable retail sales increased 1%. Net income increased 2.5%, while diluted EPS rose 9.7%, aided by a lower diluted share count following share repurchases. Fiscal 2014 fourth-quarter net sales were $2.135 billion and net income was $130.5 million, versus $2.034 billion and $119.1 million, respectively, in the prior-year fourth quarter.
Cash and cash equivalents were $403.8 million at year-end, and working capital was $1.003 billion. Merchandise inventory was $1.374 billion, up from $1.345 billion; comparable-store inventory increased 2%. Capital expenditures were $151.9 million. Operating cash flow less capital expenditures was approximately $459.7 million, calculated from the reported figures.
Long-term debt was $614.8 million and subordinated debentures were $200.0 million; total debt excluding capital leases was $814.8 million. No revolving-credit borrowings were outstanding at year-end, with approximately $904 million of unused availability after letters of credit. The $1.0 billion facility expires July 2018. Long-term debt maturities include $87.2 million in fiscal 2017 and $161.0 million in fiscal 2018; no scheduled maturities were due in fiscal 2015 or 2016.
Material changes and unusual items
- Retail gross margin improved 35 basis points, primarily from higher initial markups. Consolidated gross margin increased 20 basis points. SG&A rose 14 basis points of sales, mainly because of higher selling payroll and related taxes, partly offset by lower advertising expense.
- Retail sales transactions declined 2%, while average dollars per transaction increased 3%. Home and furniture sales fell 9.9%; juniors’ and children’s apparel increased 3.9%.
- Construction-segment sales increased 41.5% to $130.7 million; awarded contract backlog was $304.0 million, up about 55%. Construction gross margin declined as fee percentages on new contracts were lower.
- Operating cash flow increased $109.8 million. Management attributed the improvement primarily to working-capital changes, particularly higher accounts payable and accrued expenses.
- The company repurchased 2.8 million shares for $290.4 million during fiscal 2014. It authorized a further $500 million repurchase plan in November 2014; the full authorization remained available at year-end. Dividends were $0.24 per share for the year.
- A $5.9 million pretax gain from a retail-store sale was included in fiscal 2014 results. Fiscal 2013 included an $11.7 million pretax investment-sale gain, a $5.4 million impairment charge, and a $1.5 million pretax pension adjustment gain.
- The private-label card alliance moved from Synchrony to Wells Fargo in November 2014 under a new 10-year agreement. Dillard’s reported about $112 million of alliance income in fiscal 2014, down from $113 million; the decline was attributed primarily to higher credit losses and discontinuation of a credit product, partly offset by higher finance-charge income.
Outlook, risks, and contingencies
Fiscal 2015 estimates include depreciation and amortization of about $250 million, rentals of $25 million, net interest and debt expense of $61 million, and capital expenditures of $160 million. Management expected an effective tax rate of approximately 35%, a pension-plan contribution of about $4.5 million, and pension expense of approximately $14.4 million. The filing provides no clear fiscal 2015 sales or earnings guidance. Planned capital spending primarily supports store construction and remodeling.
Management expected to fund capital expenditures, working capital, and repurchases with cash on hand, operating cash flow, and possible use of the revolving facility. Risks include intense retail and online competition, consumer-spending and mall-traffic weakness, fashion and markdown exposure, weather and supply-chain disruptions, labor and benefit costs, cybersecurity, and changes in private-label card economics. The company is self-insured for certain claims and bears property and merchandise losses from named storms at approximately 75 Gulf and Atlantic coast stores. The pension liability was $196.9 million; management noted sensitivity to discount-rate changes. Management reported no pending legal matter expected to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the period distinction: this is a fiscal 2014 annual report, not a 2013 fourth-quarter filing; compare fourth-quarter figures on a like-for-like basis.
- Assess whether the sales and margin improvement can persist given weaker transaction counts, higher SG&A, and growth in inventory.
- Examine the quality of the cash-flow increase, which was substantially supported by working-capital movements, and the planned level of buybacks and capital spending.
- Track Wells Fargo Alliance income, credit losses, and the terms and performance of the new 10-year arrangement.
- Review debt maturities, revolving-facility availability, pension assumptions and liability, and exposure to self-insured and named-storm losses.