Dillard's (DDS) Posts Bleak Q2 Earnings, Reiterates Guidance

Zacks

Leading fashion apparel, cosmetics and home furnishings retailer, Dillard's Inc. (DDS) reported lower-than-anticipated second-quarter fiscal 2014 results, wherein adjusted earnings of 80 cents per share missed the Zacks Consensus Estimate of 90 cents per share while it increased 1.3% year over year.

Sales & Comps

Dillard's net sales (including CDI Contractors LLC or CDI) decreased 3.4% year over year to $1,474.5 million in the quarter, improving marginally from the earlier-year figure of $1,479.9 million. Merchandise sales, excluding CDI, came in at $1,461 million almost flat compared with $1,459 million last year.

The company’s total revenue (including service charges and other income) of $1,512.9 million reflected a marginal decline from the year-ago quarter revenue of $1,516.8 million and was lower than the Zacks Consensus Estimate of $1,538 million.

Merchandise comparable store sales (comps) for the thirteen-week period ended Aug 2, 2014 were up 1% from the thirteen-week period ended Aug 3, 2013.

During the quarter, the outperforming categories were juniors’ and children’s apparel. This was followed by strong performance at the men's apparel and accessories category. However, the home and furniture categories recorded the lowest sales in the quarter. The best performing region was Central, followed by the Eastern and Western regions, respectively.

Operating Results

In the quarter, consolidated gross margin declined 20 basis points (bps) to 33.8%, while gross margin from retail operations (excluding CDI) contracted 33 bps. The year-over-year contraction in retail gross margin was primarily due to higher markdowns.

Dillard's selling, general and administrative (SG&A) expenses for the quarter increased 0.6% to $400.5 million from $398.2 million in the prior year, primarily due to higher payroll costs offset by reduced insurance and advertising expenses. SG&A as a percentage of sales contracted 30 bps to 27.2% in the quarter.

Operating income for the quarter was $53.1 million, down 4.8% from $55.8 million in the prior year. Moreover, as a percentage of sales, it contracted 20 bps to 3.6%. The decline was driven by higher SG&A expenses and rentals, offset by lower depreciation and amortization expenses.

Other Financial Details

Dillard’s ended the quarter with cash and cash equivalents of $235.3 million compared with $113.7 million at the end of second-quarter last year. As of Aug 2, 2014, the company’s long-term debt and capital leases improved marginally to $621.1 million from $621.9 million as of Aug 3, 2013.

For the six months of fiscal 2014, the company’s net cash flow from operations was $133.8 million compared with $131.7 million in the prior-year period.

Store Update

As of Aug 2, 2014, Dillard’s had about 278 namesake outlets and 18 clearance centers operating in 29 states and an online store at www.dillards.com. Dillard’s total square footage as of Aug 2, 2014 was 50.5 million.

Fiscal 2014 Outlook

Dillard’s reiterated its forecast for fiscal 2014. The company continues to expect fiscal 2014 depreciation and amortization expenses to be about $255 million, flat from fiscal 2013 level. Moreover, it projects rentals of approximately $26 million compared with $27 million reported for fiscal 2013. Net interest and debt expenses for the year are expected to be nearly $61 million compared with $65 million in fiscal 2013.

Moreover, the company intends to spend about $150 million toward capital expenditure in fiscal 2014, compared with $95 million spent in fiscal 2013.

Other Stocks to Consider

Currently, Dillard’s holds a Zacks Rank #4 (Sell). Better-ranked stocks in the retail industry include Citi Trends Inc. (CTRN), The Men’s Wearhouse Inc. (MW) and Buckle Inc. (BKE). Of these, Citi Trends and Men’s Wearhouse carry a Zacks Rank #1 (Strong Buy) while Buckle has a Zacks Rank #2 (Buy).

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