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DDS > SEC Filings for DDS > Form 10-Q on 4-Dec-2013All Recent SEC Filings

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Form 10-Q for DILLARDS INC


4-Dec-2013

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 February 2, 2013.

EXECUTIVE OVERVIEW

During the third quarter of fiscal 2013, Dillard's improved its bottom line over last year's third quarter performance. Comparable store sales were up (for the thirteenth consecutive quarter), and selling, general and administrative expenses improved 40 basis points of sales. Despite a 30 basis point decline in gross margin from retail operations, net income increased to $50.9 million from $48.5 million. This improvement in net income aided by $186.9 million of share repurchases during the current year third quarter helped raise earnings per share to $1.13 per share from $1.01 per share for the third quarter of last year.

Included in net income for the prior year third 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.

Highlights of the quarter ended November 2, 2013 as compared to the quarter ended October 27, 2012 included:

a 1% increase in comparable store sales,

a decrease in selling, general and administrative expenses of 40 basis points of sales,

the repurchase of $186.9 million (2.4 million shares) of our Class A Common Stock and

an increase in earnings per share to $1.13 per share from $1.01 per share.

As of November 2, 2013, we had working capital of $739.1 million, cash and cash equivalents of $111.0 million and $984.8 million of total debt outstanding, excluding capital lease obligations. Cash flows from operating activities were $173.0 million for the nine months ended November 2, 2013. We operated 299 total stores, including 17 clearance centers, and one internet store as of November 2, 2013, a decrease of three stores from the same period last year.

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
                                                         November 2,         October 27,
                                                             2013               2012
Net sales (in millions)                                $      1,468.6     $      1,449.6
Retail stores sales trend                                           1 %                4  %
Comparable retail stores sales trend                                1 %                5  %
Gross profit (in millions)                             $        531.2     $        530.0
Gross profit as a percentage of net sales                        36.2 %             36.6  %
Retail gross profit as a percentage of net sales                 36.8 %             37.1  %
Selling, general and administrative expenses as a
percentage of net sales                                          27.5 %             27.9  %
Cash flow from operations (in millions)*               $        173.0     $        219.9
Total retail store count at end of period                         299                302
Retail sales per square foot                           $           29     $           28
Comparable retail store inventory trend                             6 %               (1 )%
Retail merchandise inventory turnover                             2.4                2.5



*Cash flow from operations data is for the nine months ended November 2, 2013 and October 27, 2012.


Table of Contents

General

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 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 and non-specific margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, 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.

Selling, general and administrative expenses. Selling, general and administrative 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 expenses include 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.

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 investment.

Asset impairment and store closing charges. Asset impairment and store closing charges consist of (a) write-downs to fair value of under-performing or held for sale properties and of cost method investments and (b) 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.

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.


Table of Contents

RESULTS OF OPERATIONS

The following table sets forth the results of operations as a percentage of net
sales for the periods indicated (percentages may not foot due to rounding):
                                              Three Months Ended              Nine Months Ended
                                         November 2,      October 27,    November 2,     October 27,
                                             2013            2012            2013           2012
Net sales                                   100.0  %        100.0  %        100.0  %       100.0  %
Service charges and other income              2.6             2.5             2.6            2.5

                                            102.6           102.5           102.6          102.5

Cost of sales                                63.8            63.4            63.4           63.8
Selling, general and administrative
expenses                                     27.5            27.9            26.5           26.7
Depreciation and amortization                 4.4             4.5             4.3            4.3
Rentals                                       0.4             0.5             0.4            0.5
Interest and debt expense, net                1.1             1.2             1.1            1.2
Gain on disposal of assets                      -            (0.1 )          (0.3 )            -
Asset impairment and store closing
charges                                         -               -             0.1              -

Income before income taxes and income
on and equity in losses of joint
ventures                                      5.3             5.0             7.0            6.0
Income taxes                                  1.9             1.7             2.5            2.1
Income on and equity in losses of
joint ventures                                  -               -               -              -

Net income                                    3.5  %          3.3  %          4.5  %         3.9  %


Table of Contents

Net Sales (Three-Month Comparison)

                                 Three Months Ended
                             November 2,     October 27,
(in thousands of dollars)       2013            2012         $ Change
Net sales:
Retail operations segment   $  1,437,492    $  1,424,722    $  12,770
Construction segment              31,120          24,901        6,219
Total net sales             $  1,468,612    $  1,449,623    $  18,989

The percent change in the Company's sales by segment and product category for the three months ended November 2, 2013 compared to the three months ended October 27, 2012 as well as the sales percentage by segment and product category to total net sales for the three months ended November 2, 2013 are as follows:

                                         Three Months
                                    % Change       % of
                                   2013-2012     Net Sales
Retail operations segment
Cosmetics                             (1.0 )%        15 %
Ladies' apparel                        1.5           22
Ladies' accessories and lingerie       4.5           14
Juniors' and children's apparel       (0.6 )          9
Men's apparel and accessories          0.9           17
Shoes                                  1.7           17
Home and furniture                    (6.0 )          4
                                                     98
Construction segment                  25.0            2
Total                                               100 %

Net sales from the retail operations segment increased $12.8 million or 1% during the three months ended November 2, 2013 compared to the three months ended October 27, 2012. Sales in comparable stores also increased 1% between the same periods. Sales of ladies' accessories and lingerie increased significantly over the prior year period, and sales of shoes and ladies' apparel increased moderately. Sales of men's apparel and accessories increased slightly over the prior year period while sales of cosmetics and juniors' and children's apparel decreased slightly. Sales of home and furniture decreased significantly between the periods.

We believe that we may continue to see some sales growth in the retail operations segment during fiscal 2013 as compared to fiscal 2012; however, there is no guarantee of improved sales performance.

The number of sales transactions decreased 2% for the three months ended November 2, 2013 compared to the three months ended October 27, 2012 while the average dollars per sales transaction increased 2%. We recorded an allowance for sales returns of $6.6 million and $7.0 million as of November 2, 2013 and October 27, 2012, respectively.

During the three months ended November 2, 2013, net sales from the construction segment increased $6.2 million or 25% compared to the three months ended October 27, 2012 due to a shift in the timing of certain construction projects. We believe that sales in the construction segment for fiscal 2013 will be similar to fiscal 2012; however, there is no guarantee of this sales performance. The backlog of awarded construction contracts at November 2, 2013 totaled $158.0 million.


Table of Contents

Net Sales (Nine-Month Comparison)

                                  Nine Months Ended
                             November 2,     October 27,
(in thousands of dollars)       2013            2012         $ Change
Net sales:
Retail operations segment   $  4,426,270    $  4,402,721    $ 23,549
Construction segment              71,330          84,146     (12,816 )
Total net sales             $  4,497,600    $  4,486,867    $ 10,733

The percent change in the Company's sales by segment and product category for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012 as well as the sales percentage by segment and product category to total net sales for the nine months ended November 2, 2013 are as follows:

                                         Nine Months
                                    % Change       % of
                                   2013-2012     Net Sales
Retail operations segment
Cosmetics                             (0.9 )%        15 %
Ladies' apparel                       (1.3 )         23
Ladies' accessories and lingerie       6.9           15
Juniors' and children's apparel        1.6            9
Men's apparel and accessories         (0.3 )         17
Shoes                                  1.4           15
Home and furniture                    (6.3 )          4
                                                     98
Construction segment                 (15.2 )          2
Total                                               100 %

Net sales from the retail operations segment increased $23.5 million or 1% during the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012. Sales in comparable stores also increased 1% between the same periods. Sales of ladies' accessories and lingerie increased significantly over the prior year period, sales of juniors' and children's apparel increased moderately, and sales of shoes increased slightly. Sales of men's apparel and accessories remained essentially flat over the prior year period while sales of cosmetics and ladies' apparel decreased slightly. Sales of home and furniture declined significantly over the prior year period.

The number of sales transactions decreased 2% for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012 while the average dollars per sales transaction increased 3%.

During the nine months ended November 2, 2013, net sales from the construction segment decreased $12.8 million or 15% compared to the nine months ended October 27, 2012 due to a shift in the timing of certain construction projects.


Table of Contents

Service Charges and Other Income

                                                                                                    Three           Nine
                                     Three Months Ended                 Nine Months Ended           Months         Months
                                                    October 27,    November 2,    October 27,      $ Change       $ Change
(in thousands of dollars)     November 2, 2013         2012            2013           2012        2013-2012      2013-2012
Service charges and other
income:
Retail operations segment
Leased department income    $            1,990     $     2,358     $    6,394     $    7,216     $     (368 )   $     (822 )
Income from GE marketing
and servicing alliance                  29,281          27,301         84,317         78,731          1,980          5,586
Shipping and handling
income                                   4,262           3,965         13,720         12,671            297          1,049
Other                                    2,766           3,094         11,045         11,996           (328 )         (951 )
                                        38,299          36,718        115,476        110,614          1,581          4,862
Construction segment                        14               4             26             58             10            (32 )
Total service charges and
other income                $           38,313     $    36,722     $  115,502     $  110,672     $    1,591     $    4,830

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 November 2, 2013 primarily due to increases in finance charge income.

Gross Profit

(in thousands of dollars)    November 2, 2013      October 27, 2012      $ Change    % Change
Gross profit:
Three months ended
Retail operations segment   $          529,453    $          528,971    $     482        0.1 %
Construction segment                     1,752                 1,029          723       70.3
Total gross profit          $          531,205    $          530,000    $   1,205        0.2 %

Nine months ended
Retail operations segment   $        1,640,759    $        1,618,751    $  22,008        1.4 %
Construction segment                     4,827                 3,778        1,049       27.8
Total gross profit          $        1,645,586    $        1,622,529    $  23,057        1.4 %


                                             Three Months Ended                         Nine Months Ended
                                    November 2, 2013     October 27, 2012     November 2, 2013     October 27, 2012
Gross profit as a percentage of
segment net sales:
Retail operations segment                   36.8 %                 37.1 %             37.1 %                 36.8 %
Construction segment                         5.6                    4.1                6.8                    4.5
Total gross profit as a
percentage of net sales                     36.2                   36.6               36.6                   36.2

Gross profit declined 40 basis points of sales during the three months ended November 2, 2013 compared to the three months ended October 27, 2012, and gross profit improved 40 basis points during the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012.

During the three months ended November 2, 2013 compared to the three months ended October 27, 2012, gross profit from retail operations declined 30 basis points of sales as a result of increased markdowns partially offset by increased markups. Gross margin declined moderately in shoes and men's apparel and accessories and declined slightly in juniors' and children's apparel. Gross margin was essentially flat in cosmetics and ladies' apparel. Gross margin improved moderately in ladies' accessories and lingerie and improved significantly in home and furniture.


Table of Contents

During the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012, gross profit from retail operations improved 30 basis points of sales primarily as a result of decreased markdowns. Gross margin improved moderately in home and furniture and improved slightly in ladies' accessories and lingerie and men's apparel and accessories. Gross margin was essentially flat in cosmetics, ladies' apparel and juniors' and children's apparel, and gross margin declined slightly in shoes.

Inventory in total and comparable stores increased 6% as of November 2, 2013 compared to October 27, 2012. 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 November 2, 2013, respectively.

We believe that gross profit from retail operations may improve slightly during fiscal 2013 as compared to fiscal 2012; however, there is no guarantee of improved gross profit performance.

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

(in thousands of dollars)    November 2, 2013      October 27, 2012      $ Change    % Change
SG&A:
Three months ended
Retail operations segment   $          403,101    $          403,605    $   (504 )     (0.1 )%
Construction segment                     1,305                 1,032         273       26.5
Total SG&A                  $          404,406    $          404,637    $   (231 )     (0.1 )%

Nine months ended
Retail operations segment   $        1,189,320    $        1,193,205    $ (3,885 )     (0.3 )%
Construction segment                     3,500                 3,458          42        1.2
Total SG&A                  $        1,192,820    $        1,196,663    $ (3,843 )     (0.3 )%


                                             Three Months Ended                         Nine Months Ended
                                    November 2, 2013     October 27, 2012     November 2, 2013     October 27, 2012
SG&A as a percentage of segment
net sales:
Retail operations segment                   28.0 %                 28.3 %             26.9 %                 27.1 %
Construction segment                         4.2                    4.1                4.9                    4.1
Total SG&A as a percentage of
net sales                                   27.5                   27.9               26.5                   26.7

SG&A decreased $0.2 million or 40 basis points of sales during the three months ended November 2, 2013 compared to the three months ended October 27, 2012. This decrease was primarily due to a decrease in advertising expenses ($2.3 million) and taxes other than income taxes ($1.0 million) partially offset by an increase in payroll ($2.9 million), primarily of selling payroll.

SG&A decreased $3.8 million or 20 basis points of sales during the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012. This decrease was most noted in advertising expense ($7.5 million), insurance ($1.6 million) and taxes other than income taxes ($1.2 million) partially offset by an increase in payroll ($8.9 million), primarily of selling payroll. During the nine months ended November 2, 2013, the Company also recorded a $1.5 million pretax credit to pension expense for a gain from a pension plan curtailment.

We believe that SG&A will improve slightly as a percentage of sales during fiscal 2013 as compared to fiscal 2012; however, there is no guarantee of improved SG&A performance.


Table of Contents

Rentals

(in thousands of dollars)    November 2, 2013      October 27, 2012      $ Change    % Change
Rentals:
Three months ended
Retail operations segment   $            5,933    $            7,611    $ (1,678 )    (22.0 )%
Construction segment                        13                    13           -          -
Total rentals               $            5,946    $            7,624    $ (1,678 )    (22.0 )%

Nine months ended
Retail operations segment   $           17,015    $           24,492    $ (7,477 )    (30.5 )%
Construction segment                        34                    38          (4 )    (10.5 )
Total rentals               $           17,049    $           24,530    $ (7,481 )    (30.5 )%

The decrease in rental expense for the three and nine months ended November 2, 2013 compared to the three and nine months ended October 27, 2012 was primarily due to a reduction in the amount of equipment leased by the Company.

We believe that rental expense will decline during fiscal 2013, with a current projected reduction of $8 million from fiscal 2012, primarily as a result of the expiration of certain equipment leases.

Interest and Debt Expense, Net

(in thousands of dollars)           November 2, 2013     October 27, 2012      $ Change        % Change
Interest and debt expense
(income), net:
Three months ended
Retail operations segment          $        15,806      $        17,042      $    (1,236 )         (7.3 )%
Construction segment                           (17 )                (31 )             14          (45.2 )
Total interest and debt expense,
net                                $        15,789      $        17,011      $    (1,222 )         (7.2 )%

Nine months ended
Retail operations segment          $        48,398      $        52,241      $    (3,843 )         (7.4 )%
Construction segment                           (53 )               (102 )             49          (48.0 )
Total interest and debt expense,
net                                $        48,345      $        52,139      $    (3,794 )         (7.3 )%

The decrease in net interest and debt expense for the three months ended November 2, 2013 compared to the three months ended October 27, 2012 was primarily attributable to lower average debt levels and lower average credit facility fees partially offset by lower investment income. Total weighted average debt decreased approximately $21.2 million for the three months ended November 2, 2013 compared to the three months ended October 27, 2012, which includes an increase in weighted average short-term debt under the credit facility.

The decrease in net interest and debt expense for the nine months ended November 2, 2013 compared to the nine months ended October 27, 2012 was primarily attributable to lower average debt levels partially offset by lower investment income. Total weighted average debt decreased approximately $48.3 million for the nine months ended November 2, 2013 compared to the nine months ended October . . .

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