Dillard’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended October 28, 2017, compared with periods ended October 29, 2016. This differs from the “2016 Q3” period in the request metadata. Amounts below are in U.S. dollars.
Business context and key financial metrics
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 268 Dillard’s locations, 25 clearance centers, and one internet store. Retail is seasonal, with a significant share of sales and income typically generated in the holiday quarter.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,354.9 million | $1,365.6 million | $4,200.2 million | $4,321.3 million |
| Net income | $14.5 million | $22.8 million | $63.8 million | $112.3 million |
| Diluted EPS | $0.50 | $0.67 | $2.14 | $3.24 |
| Gross margin | 34.3% | 35.6% | 34.1% | 35.0% |
| SG&A as % of net sales | 30.3% | 30.1% | 28.8% | 27.9% |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $55.5 million | $125.9 million |
Quarterly comparable-store sales declined 1%; nine-month comparable-store sales declined 2%. Retail gross margin was 35.3% for the quarter versus 36.6% and 35.0% year to date versus 36.0%. The filing does not present a separate operating-income figure.
At October 28, 2017, cash was $114.9 million, working capital was $643.9 million, and total debt excluding capital leases was $813.5 million. The company had no revolver borrowings and approximately $773 million of unused availability under its $800 million revolving facility; $26.6 million of letters of credit were outstanding. The filing states the company was covenant-compliant. Inventory was $1,957.3 million, up 3% year over year. Nine-month capital expenditures were $106.3 million; cash dividends paid were $6.5 million.
Material changes versus the prior comparable period
- Quarterly net sales declined 0.8%, while net income fell about 36%; nine-month net sales declined about 2.8% and net income fell about 43%.
- Lower gross profit and higher markdowns pressured margins. Management reported that retail gross margin decreased 137 basis points in the quarter and 105 basis points year to date. Nine-month SG&A increased 98 basis points as a share of net sales.
- Operating cash flow declined $70.4 million year over year, mainly due to lower gross profit and working-capital changes, especially inventory growth.
- Construction-segment sales fell 2.8% for the quarter and 19.8% year to date. Awarded contract backlog was $196.3 million, down about 30% from a year earlier; management expected it to be earned over the next 9–24 months.
- The company repurchased 3.5 million shares for $184.4 million in the first nine months, at an average $52.48 per share; $69.5 million remained authorized. Treasury-stock purchases contributed to the decline in stockholders’ equity.
Outlook, commentary, risks, and unusual items
- Management attributed the quarter’s 1% sales decline in part to Hurricanes Harvey and Irma, which affected Texas and Florida, the company’s two largest states by sales. Hurricane-related federal employee-retention tax credits benefited the period.
- Fiscal 2017 capital expenditures were expected to be approximately $125 million. The company expected a fiscal-year effective tax rate of about 34% and anticipated funding capital expenditures, working capital, and repurchases from cash, operating cash flow, and the credit facility.
- Quarterly results included a $4.8 million pretax gain on asset disposals, including a store-property sale and insurance recovery, and a $0.8 million loss from writing off deferred financing fees after amending and extending the revolver. The gain contributed about $0.11 per share after tax; the debt charge reduced EPS by about $0.02 after tax.
- The August 2017 credit agreement matures August 9, 2022; borrowings bear interest at LIBOR plus 1.375%. Covenants require a maximum total leverage ratio of 3.5:1 and a minimum coverage ratio of 2.5:1.
- Management cited retail competition, consumer and regional economic conditions, weather, credit availability, costs, supply-chain and technology risks, and financing conditions as factors that could affect results. It said there were no material changes to the risk factors in the prior annual report and no pending legal matters expected to have a material adverse effect.
- New revenue-recognition guidance was expected to affect construction revenue accounting, with retail adjustments not expected to be material; adoption was planned for fiscal Q1 2018 using the full retrospective method. The company expected the new lease standard to increase reported assets and liabilities and planned adoption in fiscal Q1 2019. It estimated another accounting update would reduce both other assets and deferred tax liabilities by about $174 million upon adoption in fiscal Q1 2018.
Important facts for investors to verify
- Whether holiday-quarter sales and margins recover from the reported declines, and how much the hurricane disruption affected results.
- Inventory levels, markdowns, and their effect on gross margin; management estimated a 1% change in markdowns would affect net income by about $2 million for the quarter and $7 million for the nine months.
- The sustainability of operating cash flow and the company’s ability to fund investment and repurchases while carrying $813.5 million of debt.
- Construction backlog conversion and the continued decline in construction activity.
- The extent and accounting impact of the unusual asset-sale and insurance gains, as well as implementation effects from new accounting standards.
- The filing’s stated outlook is limited; results are subject to seasonality and management cautions that interim performance may not indicate full-year results.