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DDS > SEC Filings for DDS > Form 10-Q on 28-Nov-2012All Recent SEC Filings

Show all filings for DILLARDS INC

Form 10-Q for DILLARDS INC


28-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended January 28, 2012.

EXECUTIVE OVERVIEW

Increased sales continued to headline our quarterly operating performance as comparable store sales were up for our ninth consecutive quarter. Gross margin from retail operations also showed improvement while operating spending was down. Net income for the quarter was $48.5 million, or $1.01 per share, and operating cash flow for the first nine months of the year improved 62.2% over the same prior year period.

Included in net income for the quarter ended October 27, 2012 are:

a $1.1 million pretax gain ($0.7 million after tax or $0.01 per share) related to the sale of two former retail store locations and

a $1.7 million tax benefit ($0.04 per share) due to a reversal of a valuation allowance related to a deferred tax asset consisting of a capital loss carryforward.

Included in net income of $228.2 million ($4.31 per share) for the quarter ended October 29, 2011 are:

a $201.6 million tax benefit ($3.81 per share) due to a reversal of a valuation allowance related to the amount of the capital loss carryforward used to offset the capital gain income recognized on the taxable transfer of properties to our REIT and

a $1.3 million pretax gain ($0.9 million after tax or $0.02 per share) related to the sale of two former retail store locations.

Highlights of the quarter ended October 27, 2012 included:

          a 5% increase in comparable store sales,

          gross margin from retail operations improvement of 40 basis points of
sales,

          advertising, selling, administrative and general expenses improvement
of 140 basis points of sales,

          net income of $48.5 million, or $1.01 per share, and

          cash flow from operations improvement of $84.3 million for the nine
months ended October 27, 2012, a 62.2% increase over the comparable prior year
period.

As of October 27, 2012, we had working capital of $807.1 million, cash and cash equivalents of $124.8 million and $842.0 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $219.9 million for the nine months ended October 27, 2012. We operated 302 total stores, including 18 clearance centers, and one internet store as of October 27, 2012, a decrease of two stores from the comparable period last year.


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Key Performance Indicators



We use a number of key indicators of financial condition and operating
performance to evaluate our business, including the following:



                                                 Three Months Ended*
                                             October 27,      October 29,
                                                2012             2011
Net sales (in millions)                     $     1,449.6    $     1,382.6
Net sales trend                                         5 %              3 %
Gross profit (in millions)                  $       530.0    $       501.5
Gross profit as a percentage of net sales            36.6 %           36.3 %
Cash flow from operations (in millions)     $       219.9    $       135.6
Total retail store count at end of period             302              304
Retail sales per square foot                $          27    $          26
Retail store sales trend                                4 %              4 %
Comparable retail store sales trend                     5 %              5 %
Comparable retail store inventory trend                (1 )%             4 %
Retail merchandise inventory turnover                 2.5              2.4


*Cash flow from operations data is for the nine months ended October 27, 2012 and October 29, 2011.

Net sales. Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC ("CDI"), the Company's general contracting construction company. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Comparable store sales exclude the change in the allowance for sales returns. Non-comparable store sales include: sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns.

Service charges and other income. Service charges and other income include income generated through the long-term marketing and servicing alliance ("Alliance") with GE Consumer Finance ("GE"), which owns and manages the Dillard's branded proprietary credit cards. Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.

Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific margin maintenance allowances and direct payroll for salon personnel. Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.

Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

Depreciation and amortization. Depreciation and amortization expense includes depreciation and amortization on property and equipment.

Rentals. Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.

Interest and debt expense, net. Interest and debt expense includes interest, net of interest income, relating to the Company's unsecured notes, mortgage note, term note, subordinated debentures and borrowings under the Company's credit facility. Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on capital lease obligations.


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Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an interest in a mall joint venture, if any.

Asset impairment and store closing charges. Asset impairment and store closing charges consist of write-downs to fair value of under-performing or held for sale properties and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

Income on and equity in losses of joint ventures. Income on and equity in losses of joint ventures includes the Company's portion of the income or loss of the Company's unconsolidated joint ventures as well as a distribution of excess cash from one of the Company's mall joint ventures.

Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results during the periods presented; however, our business could be affected by such in the future.

RESULTS OF OPERATIONS



The following table sets forth the results of operations as a percentage of net
sales for the periods indicated.



                                        Three Months Ended            Nine Months Ended
                                    October 27,    October 29,    October 27,    October 29,
                                       2012           2011           2012           2011
Net sales                                 100.0 %        100.0 %        100.0 %        100.0 %
Service charges and other income            2.5            2.6            2.5            2.3
                                          102.5          102.6          102.5          102.3
Cost of sales                              63.4           63.7           63.8           63.9
Advertising, selling,
administrative and general
expenses                                   27.9           29.3           26.7           27.7
Depreciation and amortization               4.5            4.7            4.3            4.5
Rentals                                     0.5            0.8            0.5            0.8
Interest and debt expense, net              1.2            1.3            1.2            1.3
Gain on disposal of assets                  0.0           (0.1 )          0.0           (0.1 )
Asset impairment and store
closing charges                             0.0            0.0            0.0            0.0
Income before income taxes and
income on and equity in losses
of joint ventures                           5.0            2.9            6.0            4.2
Income taxes (benefit)                      1.7          (13.6 )          2.1           (3.2 )
Income on and equity in losses
of joint ventures                           0.0            0.0            0.0            0.1
Net income                                  3.3 %         16.5 %          3.9 %          7.5 %


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Net Sales - Three Month Comparison



                                Three Months Ended
                            October 27,    October 29,
(in thousands of dollars)       2012           2011       $ Change
Net sales:
Retail operations segment   $  1,424,722   $  1,366,362   $  58,360
Construction segment              24,901         16,250       8,651
Total net sales             $  1,449,623   $  1,382,612   $  67,011

The percent change by category in the Company's retail operations segment sales for the three months ended October 27, 2012 compared to the three months ended October 29, 2011 as well as the percentage by segment and category to total net sales for the three months ended October 27, 2012 is as follows:

                                       Three Months
                                   % Change      % of
                                   2012-2011   Net Sales
Retail operations segment
Cosmetics                                2.7 %        15 %
Ladies' apparel                          2.1          22
Ladies' accessories and lingerie         7.3          13
Juniors' and children's apparel          5.3           9
Men's apparel and accessories            8.1          17
Shoes                                    5.4          17
Home and furniture                      (6.1 )         5
                                                      98
Construction segment                    53.2           2
Total                                                100 %

Net sales from the retail operations segment increased 4% during the three months ended October 27, 2012 compared to the three months ended October 29, 2011 while sales in comparable stores increased 5% between the same periods. Sales of men's apparel and accessories, ladies' accessories and lingerie, shoes and juniors' and children's apparel increased significantly over the prior year period while sales of ladies' apparel and cosmetics increased moderately. Home and furniture sales decreased significantly between the periods.

The number of sales transactions increased 1% for the three months ended October 27, 2012 over the comparable prior year period while the average dollars per sales transaction increased 4%. We recorded an allowance for sales returns of $7.0 million and $7.7 million as of October 27, 2012 and October 29, 2011, respectively.

We believe that we may continue to see some sales growth in the retail operations segment during fiscal 2012; however, there is no guarantee of improved sales performance.

Net sales from the construction segment increased $8.7 million or 53% during the three months ended October 27, 2012 compared to the three months ended October 29, 2011 due to an increase in new construction projects. We believe that we will continue to see some sales growth in the construction segment during fiscal 2012; however, there is no guarantee of improved sales performance. The backlog of awarded construction contracts at October 27, 2012 totaled $184.7 million.


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Net Sales - Nine Month Comparison



                                 Nine Months Ended
                            October 27,    October 29,
(in thousands of dollars)       2012           2011       $ Change
Net sales:
Retail operations segment   $  4,402,721   $  4,247,462   $ 155,259
Construction segment              84,146         46,095      38,051
Total net sales             $  4,486,867   $  4,293,557   $ 193,310

The percent change by category in the Company's retail operations segment sales for the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 as well as the percentage by segment and category to total net sales for the nine months ended October 27, 2012 is as follows:

                                        Nine Months
                                   % Change      % of
                                   2012-2011   Net Sales
Retail operations segment
Cosmetics                                3.8 %        15 %
Ladies' apparel                          2.0          23
Ladies' accessories and lingerie         7.3          14
Juniors' and children's apparel          2.0           9
Men's apparel and accessories            4.4          17
Shoes                                    5.0          15
Home and furniture                      (2.8 )         5
                                                      98
Construction segment                    82.5           2
Total                                                100 %

Net sales from the retail operations segment increased 4% in both total and comparable stores during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011. Sales of shoes and ladies' accessories and lingerie increased significantly over the prior year period while sales of cosmetics, men's apparel and accessories, juniors' and children's apparel and ladies' apparel increased moderately. Home and furniture sales decreased moderately between the periods.

The number of sales transactions decreased 2% for the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 while the average dollars per sales transaction increased 5%.

Net sales from the construction segment increased $38.1 million or 83% during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 due to an increase in new construction contracts.


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Service Charges and Other Income



                                                                                                  Three         Nine
                                     Three Months Ended              Nine Months Ended           Months        Months
                                October 27,     October 29,     October 27,     October 29,     $ Change      $ Change
(in thousands of dollars)           2012           2011            2012            2011         2012-2011     2012-2011
Service charges and other
income:
Retail operations segment
Leased department income        $      2,358   $       2,372   $       7,216   $       7,106   $       (14 ) $       110
Income from GE marketing and
servicing alliance                    27,301          25,297          78,731          70,515         2,004         8,216
Shipping and handling income           3,965           4,012          12,671          12,538           (47 )         133
Other                                  3,094           3,197          11,996           9,820          (103 )       2,176
                                      36,718          34,878         110,614          99,979         1,840        10,635
Construction segment                       4             130              58             156          (126 )         (98 )
Total                           $     36,722   $      35,008   $     110,672   $     100,135   $     1,714   $    10,537

Service charges and other income is composed primarily of income from the Alliance with GE. Income from the Alliance increased during the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011 primarily due to increases in finance charge and late charge fee income and decreased credit losses.

Gross Profit



                            October 27,    October 29,
(in thousands of dollars)       2012           2011       $ Change    % Change
Gross profit:
Three months ended
Retail operations segment   $    528,971   $    501,058   $  27,913        5.6 %
Construction segment               1,029            475         554      116.6
Total gross profit          $    530,000   $    501,533   $  28,467        5.7 %

Nine months ended
Retail operations segment   $  1,618,751   $  1,548,591   $  70,160        4.5 %
Construction segment               3,778            339       3,439    1,014.5
Total gross profit          $  1,622,529   $  1,548,930   $  73,599        4.8 %




                                        Three Months Ended            Nine Months Ended
                                    October 27,    October 29,    October 27,    October 29,
                                       2012           2011           2012           2011
Gross profit as a percentage of
segment net sales:
Retail operations segment                  37.1 %         36.7 %         36.8 %         36.5 %
Construction segment                        4.1            2.9            4.5            0.7
Total gross profit as a
percentage of net sales                    36.6           36.3           36.2           36.1

Gross profit improved 30 basis points of sales and 10 basis points of sales during the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011, respectively.

During the three months ended October 27, 2012 compared to the three months ended October 29, 2011, gross profit from retail operations improved 40 basis points of sales primarily as a result of decreased markdowns. Gross margin improved moderately in men's apparel and accessories and ladies' accessories and lingerie. Gross margin was essentially flat in most other product categories with the exception of home and furniture which experienced a significant decline.

During the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011, gross profit from retail operations improved 30 basis points of sales as a result of increased markups. Gross margin increased


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slightly in ladies' accessories and lingerie. Gross margin was essentially flat in most other product categories with the exception of home and furniture which experienced a moderate decline.

Inventory decreased 1% in comparable stores as of October 27, 2012 compared to October 29, 2011. A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $6 million for the three and nine months ended October 27, 2012, respectively.

We believe that gross margin from retail operations will improve slightly during fiscal 2012; however, there is no guarantee of improved gross margin performance.

Gross profit from the construction segment improved by $0.6 million (120 basis points of sales) and $3.4 million (380 basis points of sales) during the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011, respectively. The improvement in both periods was due to increased revenue and improved fee percentages on new contracts. The nine-month improvement was also attributable to a $1.2 million loss that was recorded during the first quarter of fiscal 2011 on an electrical contract that was completed in 2011.

Advertising, Selling, Administrative and General Expenses ("SG&A")

                            October 27,    October 29,
(in thousands of dollars)       2012           2011        $ Change    % Change
SG&A:
Three months ended
Retail operations segment   $    403,605   $    403,658   $      (53 )      0.0 %
Construction segment               1,032          1,108          (76 )     (6.9 )
Total SG&A                  $    404,637   $    404,766   $     (129 )      0.0 %

Nine months ended
Retail operations segment   $  1,193,205   $  1,186,492   $    6,713        0.6 %
Construction segment               3,458          3,578         (120 )     (3.4 )
Total SG&A                  $  1,196,663   $  1,190,070   $    6,593        0.6 %




                                        Three Months Ended            Nine Months Ended
                                    October 27,    October 29,    October 27,    October 29,
                                       2012           2011           2012           2011
SG&A as a percentage of segment
net sales:
Retail operations segment                  28.3 %         29.5 %         27.1 %         27.9 %
Construction segment                        4.1            6.8            4.1            7.8
Total SG&A as a percentage of
net sales                                  27.9           29.3           26.7           27.7

SG&A improved 140 basis points of sales during the three months ended October 27, 2012 compared to the three months ended October 29, 2011. The improvement was most noted in advertising ($6.1 million) and utilities ($1.5 million) mostly offset by increases in payroll and payroll related taxes ($4.6 million) and services purchased ($2.2 million).

SG&A improved 100 basis points of sales during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011 while total SG&A dollars increased $6.6 million. The dollar increase was most noted in payroll and payroll related taxes ($10.3 million), services purchased ($8.4 million) and insurance ($5.3 million) partially offset by savings in advertising ($15.4 million) and utilities ($6.2 million).

We believe that SG&A for fiscal 2012 will improve slightly as a percentage of sales compared to fiscal 2011; however, there is no guarantee of improved SG&A performance.


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Rentals



                             October 27,     October 29,
(in thousands of dollars)       2012            2011        $ Change    % Change
Rentals:
Three months ended
Retail operations segment   $       7,611   $      11,213   $  (3,602 )    (32.1 )%
Construction segment                   13              16          (3 )    (18.8 )
Total rentals               $       7,624   $      11,229   $  (3,605 )    (32.1 )%

Nine months ended
Retail operations segment   $      24,492   $      34,763   $ (10,271 )    (29.5 )%
Construction segment                   38              35           3        8.6
Total rentals               $      24,530   $      34,798   $ (10,268 )    (29.5 )%

The decrease in rental expense for the three and nine months ended October 27, 2012 compared to the three and nine months ended October 29, 2011 was primarily due to a reduction in the amount of equipment leased by the Company.

We believe that rental expense for fiscal 2012 will be significantly less than fiscal 2011, with a current projected reduction of $14 million from fiscal 2011, primarily as a result of the expiration of certain equipment leases.

Interest and Debt Expense, Net



                                    October 27,      October 29,
(in thousands of dollars)              2012             2011          $ Change      % Change
Interest and debt expense
(income), net:
Three months ended
Retail operations segment          $      17,042    $      17,791    $      (749 )       (4.2 )%
Construction segment                         (31 )            (41 )           10         24.4
Total interest and debt
expense, net                       $      17,011    $      17,750    $      (739 )       (4.2 )%

Nine months ended
Retail operations segment          $      52,241    $      54,567    $    (2,326 )       (4.3 )%
Construction segment                        (102 )           (120 )           18         15.0
Total interest and debt
expense, net                       $      52,139    $      54,447    $    (2,308 )       (4.2 )%

The decrease in net interest and debt expense for the three months ended October 27, 2012 is primarily attributable to lower average debt levels. Total weighted average debt decreased approximately $122.1 million during the three months ended October 27, 2012 compared to the three months ended October 29, 2011.

The decrease in net interest and debt expense for the nine months ended October 27, 2012 is primarily attributable to lower average debt levels partially offset by increased credit facility fees and lower investment income. Total weighted average debt decreased approximately $94.5 million during the nine months ended October 27, 2012 compared to the nine months ended October 29, 2011.


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Gain on Disposal of Assets


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