Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2016 (first quarter of fiscal 2016; not 2015 Q1 as indicated in the request). Financial statements are unaudited. Comparisons are with the three months ended May 2, 2015.
Business context
Dillard’s operates department stores, clearance centers, an internet store, and a construction business. At quarter-end it reported 272 Dillard’s locations, 24 clearance centers, and one internet store. Management noted that results are seasonal and the first quarter is not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Net sales | $1,503.2 million | $1,573.5 million |
| Gross profit | $564.7 million; 37.6% of sales | $613.1 million; 39.0% of sales |
| Operating expenses: SG&A | $398.3 million; 26.5% of sales | $403.6 million; 25.6% of sales |
| Income before taxes | $119.6 million | $167.3 million |
| Net income | $77.4 million | $109.6 million |
| Diluted EPS | $2.17 | $2.66 |
| Cash from operating activities | $20.2 million | $91.3 million |
| Capital expenditures | $17.7 million | $42.2 million |
At April 30, 2016, cash was $150.3 million and working capital was $982.8 million. Merchandise inventory was $1,647.8 million. Total debt excluding capital leases was $813.1 million, comprising $613.1 million of long-term debt and $200.0 million of subordinated debentures. No borrowings were outstanding on the $1.0 billion revolving credit facility; $973.6 million remained available after $26.4 million of letters of credit. The company reported compliance with its credit-facility covenants.
Material changes and management commentary
- Comparable and total retail store sales declined 5%, versus a 1% decline in the prior-year quarter. Total net sales fell $70.3 million, or about 4.5%.
- Management described performance as weaker than anticipated: disappointing sales pressured gross margin and net income. Retail gross margin declined 145 basis points, primarily due to increased markdowns; total gross margin fell 140 basis points.
- Transactions declined 6%, while average dollars per transaction increased 2%. Sales weakness was most pronounced in ladies’ accessories and lingerie, juniors’ and children’s apparel, and home and furniture; shoe sales were essentially flat.
- SG&A dollars decreased $5.2 million, but SG&A rose 85 basis points as a percentage of sales because revenue declined. Net income decreased $32.1 million, and diluted EPS fell from $2.66 to $2.17.
- Operating cash flow declined $71.1 million, primarily reflecting a $38.4 million adverse change in working-capital items, including accounts payable and accrued expenses, as well as lower gross profit. Inventory was flat year over year on a comparable-store basis.
- Financing cash outflow included $58.4 million spent repurchasing 0.7 million Class A shares at an average $80.98 per share. The board had authorized a $500 million open-ended program; $441.6 million remained authorized at quarter-end.
Outlook, risks, and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $150 million, compared with $166 million in fiscal 2015, and an effective federal and state tax rate of approximately 35%.
- The company expected to fund capital expenditures, working capital, and repurchases from cash on hand, operating cash flow, and, if needed, its revolving facility. No specific sales or earnings guidance was provided.
- The construction segment’s awarded-contract backlog was $308.0 million, up approximately 84% from January 30, 2016 and 3% from May 2, 2015, despite lower quarterly segment sales.
- The Aiken, South Carolina store closed May 7, 2016. Management said it remained prepared to close underperforming stores and could incur related future costs.
- Management estimated that a 1% change in markdowns would affect quarterly net income by approximately $2 million. The Wells Fargo private-label card alliance contributed $23.9 million in the quarter, down from $26.7 million in the prior-year period; the alliance expires in fiscal 2024.
- Routine lawsuits and claims were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors or market-risk information were reported. Forward-looking results remain exposed to retail and macroeconomic conditions, competition, consumer spending and credit, weather, costs, financing rates, and supply-chain or system disruptions.
Most important facts for investors to verify
- Whether sales trends and markdown-driven retail margin pressure continued after the quarter.
- Whether inventory levels, operating cash flow, and working-capital movements improved in subsequent periods.
- The pace and average price of share repurchases, and their effect on cash, debt, and per-share results.
- Actual capital spending and the development of the $308 million construction backlog.
- Any changes in store closures, private-label card alliance income, or the approximately 35% tax-rate expectation.