Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2020, compared with the periods ended November 2, 2019. Although the request metadata says 2019 Q3, the filing itself covers 2020 Q3.
Business context and operating results
Dillard’s operates department stores and a general contracting construction business. All stores had reopened by June 2, 2020, but were operating at reduced hours; the company also operated an internet store. COVID-19-related closures, restrictions, and demand uncertainty significantly affected results.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,024.9 million | $1,388.3 million | $2,730.6 million | $4,280.6 million |
| Gross profit | $366.2 million | $461.5 million | $743.6 million | $1,394.1 million |
| Gross margin | 35.7% | 33.2% | 27.2% | 32.6% |
| SG&A | $318.2 million | $418.1 million | $875.7 million | $1,232.4 million |
| Income (loss) before taxes | $0.2 million | $2.9 million | $(261.2) million | $51.5 million |
| Net income (loss) | $31.9 million | $5.5 million | $(138.7) million | $43.4 million |
| Diluted EPS | $1.43 | $0.22 | $(6.05) | $1.69 |
Q3 retail sales fell approximately 25%, with comparable store sales down approximately 24%. Retail gross margin improved to 36.6% from 34.5%, primarily because of lower markdowns. Nine-month retail margin declined to 28.0% from 33.7%, reflecting pandemic-related markdowns. Inventory was 22% below the prior-year quarter, following a 31% reduction in Q3 purchases. SG&A dollars fell, mainly due to lower payroll, but SG&A rose as a share of sales to 31.0% from 30.1%.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was a use of $62.9 million, versus $23.0 million provided in the prior-year period. Investing cash use was $50.4 million; financing cash use was $102.7 million.
- Cash and cash equivalents were $61.1 million at October 31, 2020, down from $277.1 million at February 1, 2020. Working capital was $767.0 million.
- Total debt was $580.8 million, excluding lease liabilities: $365.8 million long-term debt, $200.0 million subordinated debentures, and $15.0 million short-term borrowings. Long-term debt’s next scheduled payment was $45 million in January 2023, according to management.
- The amended revolving facility has $800 million capacity, with a $200 million expansion option, and matures August 9, 2022. At quarter-end, $763.9 million was available after $15.0 million of borrowings and $21.1 million of letters of credit. The facility is secured by specified deposits and inventory; it has no financial covenants while availability exceeds $100 million and no default exists.
- Capital expenditures were $52.1 million for the nine months, compared with $70.9 million a year earlier. The company repurchased $95.6 million of shares in the period and declared $10.3 million in dividends.
Material changes, outlook, and risks
- COVID-19 caused temporary store closures, reduced operating hours, occupancy limits, and substantial sales and liquidity pressure. Management said results could deteriorate further if it cannot manage inventory and expenses appropriately.
- The company borrowed $779 million under its prior revolver in March 2020 and repaid it when the amended credit agreement was executed. It expected to fund fiscal 2020 operations from cash, operating cash flow, and credit-facility borrowings.
- Management withdrew its 2020 financial guidance because of pandemic uncertainty. It expected a fiscal-year net operating loss and did not provide an expected full-year effective tax rate. Results are seasonal, with a significant share of sales and income typically generated in the holiday quarter.
- Q3 net income included a $32.4 million tax benefit tied primarily to CARES Act NOL carryback provisions. It also included a $2.2 million pretax loss on a store-property sale. The nine-month comparison is also affected by a $12.0 million property-sale gain recorded in the prior-year period.
- Other risks include potential renewed store restrictions, weaker consumer demand, supply-chain disruption, and uncertainty in income from the Wells Fargo private-label card alliance. Alliance income was $52.0 million for the nine months, down from $66.2 million.
- The company permanently closed three stores during the nine months and announced another upcoming closure. Management reported no long-lived-asset impairment charge through October 31, 2020. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales, comparable-store trends, and margins recover, and how seasonal holiday trading affects full-year results.
- Cash burn, working-capital needs, inventory and markdown levels, and actual availability under the revolving facility.
- The amount and timing of tax benefits from NOL carrybacks, including their cash-tax effects.
- Credit-card alliance income and construction-contract performance; the filing reported $97.2 million of remaining construction-contract performance obligations.
- Potential further store closures, COVID-19 restrictions, supply-chain effects, and any future asset impairments or financing needs.