Dillard’s, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 29, 2011. The filing compares results with the periods ended October 30, 2010. The company operates department stores and a general contracting construction business. Results are seasonal; the holiday quarter is typically significant.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $1,382.6 million, up 2.9% | $4,293.6 million, up 2.6% |
| Comparable store sales | Up 5% | Up 4% |
| Gross profit | $502.6 million; 36.4% of net sales versus 36.2% | $1,552.3 million; 36.2% versus 35.5% |
| Income before taxes and joint ventures | $39.5 million versus $21.5 million | $179.5 million versus $106.1 million |
| Net income | $228.2 million versus $14.4 million | $322.4 million versus $70.0 million |
| Diluted EPS | $4.31 versus $0.22 | $5.80 versus $1.02 |
| Operating cash flow | Not separately reported for quarter | $135.6 million versus $158.9 million |
Quarterly net income included a $201.6 million tax benefit ($3.81 per share), principally from reversal of a valuation allowance on a capital loss carryforward following a tax election related to property transferred to the company’s REIT subsidiary. The reported profit increase therefore substantially reflects a tax item, not just operating performance.
Quarterly retail gross margin held at 36.8%; SG&A improved 30 basis points as a share of sales. Nine-month retail gross margin improved 40 basis points, and SG&A improved 60 basis points. Construction sales fell 31% in the quarter and 41% year to date, amid weak demand and pricing pressure; the segment also recorded a $1.2 million loss on an electrical contract year to date.
Financial position and capital allocation
- At October 29, cash and cash equivalents were $106.4 million, with another $24.9 million in restricted cash. Working capital was $672.1 million and the current ratio was 1.52, down from 2.05 at fiscal year-end.
- Total debt was $1.034 billion, excluding capital leases; this includes $142.0 million of revolving-facility borrowings, $692.0 million of long-term debt including its current portion, and $200.0 million of subordinated debentures. Debt to capitalization was 36.1%, versus 31.2% at January 29, 2011.
- The $1.0 billion inventory-secured revolving facility had approximately $802 million of unused availability after borrowings and letters of credit. It expires December 12, 2012; no financial covenants apply while availability exceeds $100 million.
- Nine-month operating cash flow declined by $23.3 million, primarily due to working-capital changes, including inventory growth. Capital expenditures were $80.3 million. The company repurchased 9.3 million Class A shares for $392.4 million and paid $7.5 million in dividends.
Outlook, notable items, and risks
- Management said it may continue to see some retail sales growth, but gave no assurance. It cited improved sales trends and planned inventory 4% higher in comparable stores year over year.
- Fiscal 2011 capital expenditures were expected to be approximately $125 million, with no new store openings planned. Peak facility borrowings, net of invested cash, were expected to be approximately $200 million. Management estimated a roughly 36% effective tax rate for the remainder of fiscal 2011.
- The company expected approximately $5 million of annual cash tax benefits from increased depreciation deductions in years one through twenty, and approximately $2 million annually in years twenty-one through forty, beginning in fiscal 2011. Timing of potential land-related tax benefits was uncertain.
- A November 30, 2011 settlement with i2 Technologies provided for a $57.0 million payment in the quarter ending January 28, 2012. After taxes and settlement costs, management expected approximately $28.5 million of net income from the settlement in that quarter.
- Management cited macroeconomic and retail-industry conditions, consumer spending and credit, competition, sourcing costs and availability, labor and operating expenses, systems or data-security failures, and financing availability and rates as risks. It said known sourcing-cost pressures were expected to have minimal gross-margin impact in fiscal 2011. Existing derivative lawsuits were concluded; other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Separate the $201.6 million tax benefit and the subsequent i2 settlement from recurring operating earnings and cash generation.
- Track comparable sales, markdowns, inventory growth, and the conversion of earnings into operating cash flow.
- Monitor liquidity, seasonal revolver usage, the December 2012 facility expiration, and the effects of continued share repurchases on cash and leverage.
- Confirm the timing and realization of REIT-related cash tax benefits, including uncertain benefits tied to land.
- Assess construction-segment demand and margins, and whether management’s fiscal 2011 capital-spending and borrowing expectations were achieved.