Dillard’s Earnings Plunge Amidst Lackluster Sales

Sales declined in all categories, especially in home and furniture

d1Apparel retailer Dillard’s Inc. (NYSE: DDS) announced its Q2 FY16 and H1 FY16 financial results on August 11th, 2016. 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 30th, 2016, the Company operated 297 Dillard’s stores, including 24 clearance centers, and an Internet store. Read more about Dillard’s financial results below.

Q2 FY16 financial highlights

Source: Company's Data
Source: Company’s Data

During Q2 FY16, Dillard’s total revenue, including that of its CDI business, fell 4% to $1.49 billion compared to $1.55 billion in the year-ago period. Moreover, total merchandise sales, which exclude sales from CDI, declined 4% to $1.4 billion during the reporting quarter. Sales declined in all categories, especially in home and furniture, but were stronger in men’s and ladies’ apparel and accessories. Dillard’s Q2 FY16 comparable store sales decreased 5%, more than the estimated fall of 4%, marking the fourth straight quarter of comp sales decline for the Company.

Sales trends were strongest in the Eastern region, followed by the Western and Central regions. Dillard’s reported a 1% Y-o-Y increase in merchandise inventories to $1.5 billion in Q2 FY16.

Dillard’s gross margins from retailing operations, excluding CDI, declined 92 basis points in Q2 FY16, while consolidated gross margins declined 99 basis points as compared to the prior year second quarter.

Moreover, Dillard’s Q2 FY16 operating expenses were $395.0 million, or 27.2% of net sales, versus $404.3 million, or 26.7% of net sales, for the year-ago period. Operating expenses from retailing operations declined $9.2 million during the reporting quarter to $393.8 million (28.1%) from $403.0 million (27.5%), but increased 60 basis points of sales due to lack of leverage. The lower expenses was due to decreases in supplies, advertising, services purchased, utilities and payroll expenses, partially offset by higher insurance expenses.

Amidst weaker-than-expected sales at existing locations, Dillard’s reported net income fell by more than 50% to $12.1 million, or $0.35 per share, compared to net income of $29.9 million, or $0.75 per share, for the prior year second quarter.

H1 FY16 financial highlights

For H1 FY16, Dillard’s net sales were lower at $2.95 billion versus $3.08 billion in the year-ago period. Total merchandise sales fell 4% to $2.85 billion versus $2.98 billion in the year-ago period. Comp sales in comparable stores for H1 FY16 decreased 5%. Consequently, Dillard’s reported net income for H1 FY16 plunged to $89.5 million, or $2.55 per share, compared to net income of $139.5 million, or $3.43 per share, for the prior year period.

Store update

d3In Q2 FY16, Dillard’s closed its clearance centers at South Towne Center in Sandy, Utah, and Plaza Central in Arlington, Texas. The Company has 272 Dillard’s stores and 22 clearance centers in 29 states. Dillard’s now operates a lower 49.6 million square feet of store space, versus 50.2 million square feet during the year-ago quarter.

Dividends and stock repurchase

Despite weak sales, Dillard’s returned $57 million to shareholders through stock repurchase and dividends. During Q2 FY16, the Company purchased $54.1 million (0.9 million shares) of Class A Common Stock under its $500 million share repurchase program. During H1 FY16, Dillard’s purchased $112.5 million (1.6 million shares) under the program. As of July 30th, 2016, Dillard’s had an authorization of $387.5 million remaining under the program.

Guidance for full year FY16

Based on current industry trends, Dillard’s expects depreciation and amortization of $245 million, rentals of $27 million, interest and debt expenses of $61million, and capital expenditures of $120 million for full year FY16.

Stock Performance

d4Dillard’s stock ended the day at $68.76, slipping 0.43%, at the close on Thursday, August 18th, 2016, having vacillated between an intraday high of $69.78 and a low of $68.49 during the session. The stock’s trading volume was at 462,850 for the day. The Company’s market cap was at $2.30 billion as of Thursday’s close.

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