Why Dillard's (DDS) Crashed 17.5% Despite Q1 Earnings Beat

Shares of Dillard's Inc. DDS plunged 17.5% yesterday, following the company’s first-quarter fiscal 2017 results, wherein both top and bottom lines declined year over year. While earnings surpassed estimates this time, it wasn’t enough to appease investors who have long been troubled by the company’s murky past performance. Evidently, Dillard’s earnings lagged the Zacks Consensus Estimate in five out of the past six quarters.

Consequently, this Zacks Rank #4 (Sell) stock has tumbled 19.8% in the past one year, underperforming the Zacks categorized Retail–Regional Department Stores industry that dropped 1.7%. Will Dillard’s first-quarter performance raise investors’ apprehensions?

The company posted earnings of $2.12 per share, which came ahead of the Zacks Consensus Estimate of $1.98, while it fell nearly 2.3% from $2.17 in the year-ago quarter primarily due to soft sales.

Dillard's, Inc. Price, Consensus and EPS Surprise

 

Dillard's, Inc. Price, Consensus and EPS Surprise | Dillard's, Inc. Quote

Dillard's total revenue (including service charges and other income) of $1,452.9 million dropped 5.6% from the year-ago quarter and surpassed the Zacks Consensus Estimate of $1,450 million.

Dillard's net sales (including CDI Contractors LLC or CDI) declined 5.7% year over year to $1,418.1 million in the reported quarter. Merchandise sales, excluding CDI, fell 4.3% to roughly $1,386 million. Merchandise comparable-store sales for the 13-week period ended Apr 29, 2017 were down 4% from the year-ago period.

While ladies’ apparel category displayed strongest performance in the quarter, followed by juniors and children’s apparel category, Dillard’s performance remained soft across cosmetics, home and furniture, and ladies’ accessories and lingerie. The Western region was the best performer, trailed by the Eastern and Central regions, respectively.

Consolidated gross margin expanded 108 basis points (bps), while gross margin from retail operations (excluding CDI) rose 65 bps.

Dillard's SG&A expenses (as a percentage of sales) escalated 160 bps to 28.1%. In dollar terms, SG&A expenses remained nearly flat at $398.5 million.

Financial Details

Dillard’s ended the quarter with cash and cash equivalents of $301.5 million, long-term debt and capital leases (excluding current portions) of $529.9 million and total shareholders’ equity of $1,690.4 million. Inventory improved 4% year over year to $1,713.9 million.

During the quarter, the company generated net cash flow from operations of $77.4 million and incurred $93 million on dividends and share buybacks. It bought back 1.7 million shares for $91.1 million in the fiscal first quarter. With this, the company has authorization worth $162.7 million remaining as of Apr 29, 2017, under its $500 million share repurchase plan announced in Feb 2016.

Store Update

During the quarter, Dillard’s opened its new 180,000 square feet replacement store in Nashville, TN. Also, it purchased 2 stores – including a former Macy’s, Inc. M store in Utah, and a store in Texas. Both these stores are anticipated to open in fall 2017.

As of Apr 29, 2017, Dillard’s had about 268 namesake outlets and 25 clearance centers operating in 29 states, as well as an online store at www.dillards.com. Dillard’s total square footage, as of the end of fiscal 2016, was 49.2 million.

Fiscal 2017 Outlook

For fiscal 2017, Dillard’s now expects rentals of approximately $28 million, compared with $25 million projected earlier. In fiscal 2016, the company’s rentals amounted to $26 million.

Management retained its other forecasts. Net interest and debt expenses are anticipated to be nearly $63 million, flat with fiscal 2016 level. Further, the company projects capital expenditures of about $125 million for fiscal 2017 compared with $105 million in fiscal 2016. Depreciation and amortization expenses for fiscal 2017 are expected at $240 million compared with $244 million in the prior year.
 
Key Picks in the Retail Space

Better-ranked stocks in the retail sector include The Children’s Place Inc. PLCE, sporting a Zacks Rank #1 (Strong Buy) and Big Lots, Inc. BIG carrying a Zacks Rank #2 (Buy).

Children’s Place, with a long-term earnings growth rate of 8%, has an average earnings surprise of 39% over the trailing four quarters.

Big Lots has outperformed our earnings estimate by an average of 83.1% in the last four quarters. Moreover, it has a long-term earnings growth rate of 13.5%.

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Children's Place, Inc. (The) (PLCE): Free Stock Analysis Report
 
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Dillard's, Inc. (DDS): Free Stock Analysis Report
 
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