Business Context and Reporting Period
Company: Dillard's, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and twelve months ended April 30, 2005.
Business Overview: Dillard's operates 329 retail department stores in 29 states, offering fashion apparel and home furnishings. The company recently sold its private label credit card business to GE Consumer Finance in November 2004, entering a long-term marketing and servicing alliance.
Key Financial Metrics
| Metric | Three Months Ended April 30, 2005 |
Three Months Ended May 1, 2004 |
Twelve Months Ended April 30, 2005 |
Twelve Months Ended May 1, 2004 |
|---|---|---|---|---|
| Net Sales | $1,802,999 | $1,854,395 | $7,477,176 | $7,639,418 |
| Net Income | $38,040 | $53,762 | $101,944 | $38,757 |
| Earnings Per Share (Diluted) | $0.46 | $0.64 | $1.22 | $0.46 |
| Gross Margin % | 35.1% | 36.0% | 33.1% | 32.6% |
| Operating Cash Flow | $73,202 | $337,429 | N/A | N/A |
| Cash and Equivalents | $455,548 | $67,063 | N/A | N/A |
| Total Debt (Current + Long-term) | $1,398,644 | $2,017,797 | N/A | N/A |
| Current Ratio | 1.91 | 2.26 | N/A | N/A |
Note: All figures in thousands except per share data and percentages.
Material Changes vs. Prior Period
- Sales Decline: Net sales decreased 3% in the quarter and 2% year-to-date compared to the prior year. Comparable store sales also declined 3% in the quarter. The decline was driven by weakness in women's and juniors' clothing (-7.3%) and home goods (-4.3%), partially offset by growth in cosmetics (+1.3%) and shoes/accessories (+4.4%).
- Profitability: Net income for the quarter dropped 29% to $38.0 million, primarily due to lower sales volume and a 90 basis point decrease in gross margin caused by higher markdown activity. However, year-to-date net income increased significantly to $101.9 million, driven by a one-time $83.9 million gain from the sale of the credit card business in the prior fiscal year.
- Expense Reduction: Advertising, selling, administrative, and general expenses decreased $12.5 million quarter-over-quarter, largely due to the elimination of bad debt and payroll costs associated with the sold credit card business. Interest and debt expense fell $11.8 million due to reduced debt levels.
- Liquidity: Cash and cash equivalents increased to $455.5 million from $67.1 million a year ago, reflecting the proceeds from the credit card sale and strong operating cash flows.
Guidance, Outlook, and Risks
2005 Guidance
Management provided the following estimates for fiscal 2005 (in millions):
- Depreciation and Amortization: $310 million (vs. $302 million actual in 2004).
- Rental Expense: $48 million (vs. $55 million actual in 2004).
- Interest and Debt Expense: $105 million (vs. $139 million actual in 2004).
- Capital Expenditures: $335 million (vs. $285 million actual in 2004).
Management Commentary
Management noted that while sales were down, the company is executing initiatives to maintain customer loyalty and attract new customers with upscale offerings. Capital expenditures are expected to fund five new store openings and remodeling projects. The company plans to finance these activities through cash on hand and operating cash flows.
Risks and Contingencies
- Legal Proceedings: A class action lawsuit regarding the Mercantile Stores Pension Plan is pending. Management believes the outcome will not have a material adverse effect on financial position but could impact net income in a specific period.
- Accounting Changes: The company must adopt SFAS No. 123-R (Share-Based Payment) in fiscal 2006, which will require expensing stock options. The impact has not yet been quantified.
- Market Risks: The company faces risks related to general retail conditions, consumer spending patterns, and competitive pressures from various retail channels.
Investor Verification Checklist
- Credit Card Sale Impact: Verify the sustainability of earnings without the one-time $83.9 million gain recorded in the prior year's twelve-month period.
- Comparable Store Sales: Monitor the 3% decline in comparable store sales and the specific weakness in the women's and juniors' categories.
- Gross Margin Pressure: Assess the impact of increased markdown activity (1.7% of sales) on future profitability.
- Debt Reduction: Confirm the trajectory of debt reduction following the assumption of $400 million in receivables by GE and the payoff of short-term conduits.
- Capital Expenditures: Track the execution of the $335 million capital plan, including the opening of five new stores in fiscal 2005.
- Share Repurchases: Note the completion of the previous $200 million repurchase plan and the authorization of a new $200 million plan subsequent to the reporting period.