Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended April 28, 2012, Dillard’s first quarter of fiscal 2012. The request metadata labels the period “2011 Q1,” but that does not match the filing. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and results
Dillard’s operates department stores and a general contracting construction business. At quarter-end, it operated 304 retail locations, including 17 clearance centers, and an internet store. Management described the quarter as a record first quarter for net income and earnings per share.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $1,549.3 million | $1,469.2 million |
| Service charges and other income | $33.9 million | $29.6 million |
| Gross profit | $595.2 million | $570.3 million |
| Income before taxes and joint-venture income | $147.1 million | $115.7 million |
| Net income | $95.0 million | $76.7 million |
| Diluted EPS | $1.89 | $1.31 |
| Operating cash flow | $98.5 million | $59.2 million |
Financial condition and material changes
- Sales: Net sales increased 5%. Retail and comparable-store sales each rose 5%; construction segment sales nearly doubled, to $27.3 million, due to more new projects. The number of retail transactions fell 2%, while average dollars per transaction increased.
- Margins and expenses: Gross profit was 38.4% of net sales versus 38.8% a year earlier; retail gross margin was 39.0% versus 39.1%. SG&A improved to 25.4% of sales from 26.5%, and rentals fell to $8.3 million from $11.4 million. Net income margin increased to 6.1% from 5.2%.
- Cash flow and investment: Operating cash flow was $98.5 million. Capital expenditures were $47.5 million, up from $17.0 million. Cash increased by $26.4 million during the quarter to $250.7 million.
- Liquidity and debt: Working capital was $805.3 million. Total debt was $891.1 million, excluding capital lease obligations; no borrowings were outstanding on the $1.0 billion revolving credit facility. Letters of credit of $85.1 million left approximately $915 million of unused availability. The facility expires April 11, 2017.
- Capital returns: Dillard’s repurchased 439,000 shares for $27.5 million at an average $62.71 per share, completing its May 2011 authorization. A new $250 million repurchase authorization was approved; it was unused at quarter-end. The quarterly dividend declared was $0.05 per share.
- Share-count effect: Weighted-average basic shares fell to 49.4 million from 57.5 million. The filing reports the share counts and repurchases; investors should consider their contribution to EPS growth alongside operating performance.
Outlook, commentary, and risks
- Management said it may continue to see retail and construction sales growth and expects retail gross margin and SG&A rate to improve slightly during fiscal 2012; each expectation was explicitly qualified as not guaranteed.
- Fiscal 2012 capital expenditures were expected to be approximately $175 million, versus $116 million in fiscal 2011. No store openings were planned. Management expected peak credit-facility borrowings not to exceed $200 million and anticipated financing capital needs with cash, operating cash flow, and facility availability.
- Management projected fiscal 2012 rental expense to decline by approximately $14 million from fiscal 2011, primarily due to equipment lease expirations, and expected the effective tax rate to be about 36%.
- The new 850,000-square-foot Maumelle, Arkansas internet fulfillment center began processing merchandise. The Nashville fulfillment center and Hutchinson, Kansas store were expected to close during fiscal 2012, with minimal closing costs anticipated.
- The GE credit-card marketing and servicing alliance expires in fiscal 2014. Alliance income increased to $25.2 million from $21.1 million; management expected moderate growth in fiscal 2012, but receipts depend on sales, customer balances and payment behavior, credit losses, fees, and GE funding costs.
- Results are seasonal, with a significant portion of sales and income typically occurring in the holiday-season fourth quarter; first-quarter results are not necessarily indicative of full-year performance. Cited risks include consumer spending and credit conditions, competition, macroeconomic and weather conditions, sourcing and labor costs, system or data-security issues, and financing availability and interest rates.
Unusual items, contingencies, and controls
- The prior-year quarter included a $4.2 million pretax mall joint-venture gain and a $1.2 million pretax property impairment charge. Neither item was recorded in the current quarter; current-quarter property sales generated a net gain of approximately $0.9 million.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors or contractual obligations.
- Management concluded disclosure controls and procedures were effective at quarter-end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales growth, gross-margin performance, and SG&A improvements persisted beyond this seasonally atypical first quarter.
- How much EPS growth reflects improved earnings versus the substantially lower weighted-average share count following repurchases.
- Whether planned capital spending, inventory needs, and further repurchases can be funded without borrowing above management’s stated peak-borrowing expectation.
- Whether the projected improvements in rent, margins, and SG&A—and the expected growth in GE alliance income—materialized.
- Construction backlog was $166.3 million at quarter-end; investors should verify conversion into recognized revenue and profitability.