Dillard’s Earnings Hurt by Headwinds in Apparel Retail

Total Q4 FY16 revenue fell to $1.93 billion versus $2.07 billion in the year-ago same period

Apparel retailer Dillard’s Inc. (NYSE: DDS) announced its Q4 FY16 and full-year FY16 financial results on February 21st, 2017.

The Little Rock, Arkansas-based Company is among the largest fashion apparel, cosmetics, and home furnishings retailers with annual sales exceeding $6.5 billion. It operates through two segments: Retail Operations and Construction.

The Company’s stores offer a selection of merchandise, including fashion apparel for women, men, and children; accessories; cosmetics; home furnishings; and other consumer goods. Its branded merchandise includes Antonio Melani, Gianni Bini, GB, Roundtree & Yorke, and Daniel Cremieux, which it also sells online through its website, dillards.com. In addition, it operates a general contracting construction Company, CDI Contractors LLC (CDI), which engages in constructing and remodeling stores for the Company.

As of January 28th, 2017, the Company operated 268 Dillard’s stores, including 25 clearance centers in 29 states, and an Internet store. Read more about Dillard’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Dillard’s reported dismal results, with both sales and earnings lagging behind estimates and plunging Y-o-Y, hurt by the persistent challenging trends in the apparel retail segment. Dillard’s Q4 FY16 total revenue fell to $1.93 billion versus $2.07 billion in the year ago same period. Total merchandise sales (which exclude CDI) during the reporting quarter fell 6% to $1.89 billion versus $2.02 billion in Q4 FY15. Sales in comparable stores for the period also decreased 6%.

Although all sales categories declined during the quarter, better performing categories relative to the total trend were ladies’ apparel and men’s apparel and accessories. Weakest performing categories were home and furniture and shoes. Sales were strongest in the Eastern region followed by the Western and Central regions, respectively.

Gross margin from retail operations (which excludes CDI) improved 8 basis points of sales versus the year earlier comparable period, while inventory increased 2%. Consolidated gross margin improved 24 basis points of sales compared to the prior year’s fourth quarter. Selling, general, and administrative expenses were $451.6 million (23.3% of sales) versus $449.4 million (21.7% of sales) in the year-ago same period, wherein higher selling payroll and services purchased expenses was partially offset by savings in several expense categories.

Amidst weaker-than-expected sales at existing locations, Dillard’s reported net income plunged to $56.9 million, or $1.72 per share, compared to net income of $84.0 million, or $2.31 per share, for the prior year’s corresponding period. Included in net income for Q4 FY15 was an after-tax gain of $2.0 million ($0.06 per share) related to the sale of a store location.

FY16 financial highlights

During FY16, Dillard’s net sales fell to $6.25 billion versus $6.59 billion in the prior year. Gross margin from retail operations declined 73 basis points of sales during the year. Consolidated gross margin declined 62 basis points of sales compared to the prior year.

During the year, operating expenses declined $14.3 million to $1.65 billion (26.5% of sales) from $1.67 billion (25.3% of sales) in the previous year. During FY16, savings in several expense categories, notably advertising, utilities and supplies, were partially offset by increased payroll and employee-related insurance expense. Resonating with the general trend in apparel retailing industry at large, including that of Gap Inc. (NYSE: GPS), net income plunged to $169.2 million, or $4.93 per diluted share, from $269.4 million, or $6.91 per diluted share, in the prior year. Included in the FY16 net income is an after-tax asset impairment of $4.2 million ($0.12 per share) on a cost method investment.

Other highlights

Store update: As of January 28th, 2017, the Company operated 268 Dillard’s locations and 25 clearance centers spanning 29 states and an Internet store at www.dillards.com. Total square footage as of January 28th, 2017 was 49.2 million.

Dividends and stock repurchase: During Q4 FY16, Dillard’s purchased $80.6 million of Class A Common Stock (1.3 million shares) under its $500 million share repurchase program. During FY16, the Company purchased $246.2 million (3.8 million shares) of Class A Common Stock. Total shares outstanding (Class A and Class B Common Stock) as of January 28th, 2017, was at 32.2 million. As of January 28th, 2017, an authorization of $253.8 million remained under the share purchase plan.

The Board of Directors declared a cash dividend of $0.07 per share on the Class A and Class B Common Stock of the Company payable May 01st, 2017 to shareholders of record as of March 31st, 2017.

Cash position: Dillard’s ended FY16 with cash and cash equivalents of $347 million, long-term debt and capital leases (excluding current portions) of $530.1 million and total shareholders’ equity of $1,717.4 million. Inventory improved 2.3% Y-o-Y to $1.40 billion. In FY16, the Company generated net cash flow from operations of $517.2 million.

Guidance for full year FY17

Based on current industry trends, Dillard’s projects depreciation and amortization of $240 million for FY17. The Company also projects rentals of $25 million, interest and net debt expense of $63 million, and capital expenditures of $125 million for the year.

Stock Performance

Dillard’s stock ended the day at $54.52, slipping 2.83%, at the close on Tuesday, February 28th, 2017, having vacillated between an intraday high of $56.25 and a low of $53.77 during the session. The stock’s trading volume was at 1,460,262 for the day. The Company’s market cap was at $1.75 billion as of Tuesday’s close.

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