Dillard’s, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended October 30, 2010 and the nine months then ended, compared with the periods ended October 31, 2009. The request metadata says “2009 Q3,” but the filing itself is for 2010 Q3.
Business context and results
Dillard’s operates department stores and a general contracting construction business. At quarter-end it operated 310 stores, including 14 clearance centers, and one internet store—three fewer stores than a year earlier. Management noted that results are seasonal, with a significant portion of sales and income typically generated in the fiscal fourth quarter.
| Metric | Three months ended Oct. 30, 2010 | Prior-year quarter | Nine months ended Oct. 30, 2010 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,344.1 million | $1,359.3 million | $4,186.6 million | $4,261.0 million |
| Gross profit | $486.6 million | $466.3 million | $1,484.5 million | $1,387.4 million |
| Gross margin | 36.2% | 34.3% | 35.5% | 32.6% |
| Net income (loss) | $14.4 million | $8.0 million | $70.0 million | $(11.0) million |
| Diluted earnings (loss) per share | $0.22 | $0.11 | $1.02 | $(0.15) |
Financial position and cash flows
- Operating cash flow: $158.9 million for the first nine months, down from $261.4 million. Management attributed the decline mainly to working-capital changes, including income-tax accruals, tax-receivable collections, and inventory.
- Cash and liquidity: Cash was $167.1 million at October 30, 2010. Working capital was $862.8 million and the current ratio was 1.76, versus 2.28 at January 30, 2010.
- Debt: Total debt excluding capital leases was $946.8 million, comprising $746.8 million of long-term debt including its current portion and $200.0 million of subordinated debentures. No borrowings were outstanding under the revolving facility.
- Credit facility: The company reduced its inventory-secured revolving facility from $1.2 billion to $1.0 billion effective September 1, 2010. After $89.0 million of letters of credit, approximately $911 million remained available. The facility expires December 12, 2012.
- Capital allocation: Nine-month capital expenditures were $73.8 million. The company repurchased 10.1 million shares for approximately $253.9 million, including unsettled repurchases, and paid $8.5 million in dividends.
Material changes versus the prior comparable periods
- Retail sales increased less than 1% in both the quarter and nine-month period; comparable-store sales increased 1% in each period. Total company sales declined because construction revenue fell 46% in the quarter and 52% year to date.
- Retail gross margin improved 150 basis points in the quarter and 240 basis points year to date, primarily from inventory management and reduced markdowns. Total company gross margin improved 190 and 290 basis points, respectively.
- Quarterly SG&A decreased $3.6 million; nine-month SG&A decreased $28.9 million. Management cited cost controls, store closures, lower advertising, and lower payroll-related costs.
- Inventory was down 2% year over year in both total and comparable stores, while reported merchandise inventory at October 30 was $1.709 billion.
- Construction operations remained pressured by weak demand and competitive pricing. Nine-month construction results also reflected a $2.2 million loss on certain electrical contracts, attributed to delays and underperformance.
Outlook, risks, and unusual items
- Management said modest economic improvement could support retail sales growth, but gave no specific sales or earnings guidance and cautioned that improved performance was not assured. It expected weak construction demand to continue through fiscal 2010 and into the first half of fiscal 2011.
- Fiscal 2010 capital expenditures were expected to be approximately $105 million. Management expected peak revolver borrowings, net of invested cash, to be minimal and anticipated funding capital needs from cash, operating cash flow, and the facility.
- Management estimated an effective tax rate of approximately 36% for the remainder of fiscal 2010. The quarter’s 2010 income included a $1.2 million tax benefit from a lower capital-loss valuation allowance; the prior-year quarter included a $10.6 million tax benefit, primarily from a state settlement and valuation-allowance reduction.
- Other items included a $1.1 million loss on a closed-store sale in the quarter and a $2.2 million property impairment charge year to date. The filing also reported a $4.0 million gain on a separate former-store sale during the nine-month period.
- Risks cited include consumer spending and confidence, economic and weather conditions, competition, credit availability and regulation, merchandise and transportation cost pressures, supply-chain disruption, and interest-rate and financing conditions. Management warned that rising labor, transportation, and cotton costs could pressure fiscal 2011 margins.
- One derivative lawsuit was dismissed, with appeal status uncertain; another was dismissed with prejudice and was on appeal. Management did not expect other routine legal matters to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Investor verification priorities
- Confirm the reporting period: the supplied filing is for Q3 2010, not Q3 2009.
- Track whether retail comparable-store growth and improved markdown control persist through the seasonally important fourth quarter.
- Assess the sustainability of operating cash flow given inventory investment and working-capital volatility.
- Review the impact of share repurchases on cash, liquidity, and equity, and the remaining authorization.
- Monitor construction demand, tax-rate assumptions, merchandise cost pressures, and the status of the appealed litigation.