Dillard's (DDS) Stock Topples As Q3 Earnings Miss Estimates

Shares of Dillard's Inc. (NYSE:DDS) have declined 14.8% after bottom-line results for third-quarter fiscal 2018 lagged estimates. Results were primarily hurt by higher markdowns, particularly in the first month, which significantly impacted margins. However, the company’s performance improved as the quarter progressed and sales improved. Notably, the top line improved year over year and beat estimates.

Taking a longer view, Dillard’s shares declined 15.7% in the last three months, reflecting soft results in the second-quarter fiscal 2018 as well as weak cash flows. Notably, this Zacks Rank #3 (Hold) stock has underperformed the industry’s decline of 4.5%.

Nonetheless, the company’s constant efforts to capitalize on growth opportunities in its brick-and-mortar stores and e-commerce business remain encouraging. Its focus on increasing productivity, enhancing domestic operations and developing omni-channel platform is also likely to strengthen the customer base.

Q3 Numbers

Dillard's reported earnings per share of 27 cents, down 34.1% from adjusted earnings of 41 cents earned in the prior-year quarter. The bottom line also missed the Zacks Consensus Estimate of 56 cents.

Total revenues (including service charges and other income) were $1,455 million, which improved 4.2% from the year-ago quarter and exceeded the Zacks Consensus Estimate of $1,384 million.

Dillard's net sales (including CDI Contractors LLC or CDI) rose 4.7% year over year to $1,419.2 million in the reported quarter. Merchandise sales, excluding CDI, increased 2.2% to $1,342 million. Sales in comparable stores for the 13-week period (ended Nov 3, 2018) increased 3% from the year-ago period.

During the fiscal third quarter, ladies' accessories and lingerie, and juniors' and children's apparel categories displayed above-average performances. This was followed by slight improvements in men's apparel and accessories, and home and furniture. While the shoes category performed consistently well, ladies' apparel and cosmetics garnered below average performances. Notably, the western region performed exceedingly well, followed by the eastern and central regions, respectively.

Consolidated gross margin decreased 160 basis points (bps), which marked a greater decline compared with retail operations as volume increased for CDI, which is a lower margin business. Gross margin from retail operations (excluding CDI) contracted 87 bps, mainly due to higher markdowns, particularly in the first month. Nonetheless, the company witnessed an improvement as the reported quarter progressed and sales turned positive.

Dillard's SG&A expenses (as a percentage of sales) were down 70 bps from last year to 29.5%. In dollar terms, the SG&A expenses increased 2.3% to $418.9 million, driven by higher selling payroll expenses.

Financial Details

Dillard’s ended the fiscal third quarter with cash and cash equivalents of $78.2 million, long-term debt and capital leases of $367.5 million, and total shareholders’ equity of $1,625.3 million. As of Nov 3, 2018, merchandise inventories improved 4.4% year over year to $2,043.7 million.

In the first nine months of fiscal 2018, the company generated cash from operating activities of $69.7 million. Further, it remained committed to rewarding shareholders with dividends and buybacks. The company paid $8.4 million in cash dividends in the first nine months of fiscal 2018.

Concurrent with the earnings release, the company declared a cash dividend of 10 cents per share, payable on Feb 4, 2018, to shareholders with record as of Dec 31, 2018.

During the fiscal third quarter, the company bought back roughly 0.7 million shares for $54 million under its $500-million repurchased program announced in March 2018. As of Nov 3, 2018, the company had $442.9 million worth of share buyback authorization remaining under its March 2018 program.

Store Update

As of Nov 3, 2018, Dillard’s had about 265 namesake outlets and 27 clearance centers, operating in 29 states alongside an online store at www.dillards.com. Its total square footage as of Nov 3 was 49.1 million.

After the end of the fiscal third quarter, the company opened its expanded store at The Oaks Mall in Gainesville, FL, on Nov 14 with additional 90,000 square feet of space. Further, the company announced that it plans to close stores in West Town Center in Cincinnati, OH, in the fiscal fourth quarter and in Arrowhead Mall in Muskogee, OK, in spring 2019. These stores enclose an area of 115,000 and 70,000 square feet, respectively.

Fiscal 2018 View

Dillard’s reiterated its guidance for fiscal 2018. The company expects rentals of approximately $29 million compared with $28 million in fiscal 2017. Net interest and debt expenses are anticipated to be $54 million versus $63 million in fiscal 2017. Furthermore, it continues to project capital expenditure of about $140 million for fiscal 2018 compared with $130 million spent last year.

For fiscal 2018, depreciation and amortization expenses are projected to be $225 million compared with $232 million in fiscal 2017.

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