Dillard’s shares plunge 18% as 3Q earnings fall short of Wall Street views

Shares in Dillard’s Inc. fell more than 18% in trading on Thursday (Nov. 15) as the Little Rock upscale retailer’s third quarter results fell well short of Wall Street expectations, sliding nearly 50% below year ago results with the holidays just ahead.

For the reporting period ended Nov. 3, Dillard’s posted net income of $7.4 million, or 27 cents per share, down 49% compared to net income of $14.5 million, or 50 cents per share in the same period a year ago. Those third quarter results included ongoing benefits and federal tax credits from the omnibus corporate income tax approved by Congress in December 2017.

Net sales, which included the operations of Dillard’s construction subsidiary, CDI Contractors LLLC, rose 4.4% to $1.41 billion, compared to $1.35 billion in the same period a year ago. Wall Street had expected the Little Rock department store chain to report third quarter earnings of 56 cents per share on revenue of $1.4 billion, according to Thomson Reuters.

“While we are encouraged by our 3% comparable sales performance, this was a disappointing quarter as markdowns weighed heavily on gross margin, particularly in the first month,” said Dillard’s CEO William Dillard. “However, operating performance improved as the quarter progressed and sales turned positive. We also invested $54 million in share repurchases during the quarter.”

Still, those disappointing third quarter results led to a sell-off in Dillard’s shares (NYSE: DDS). After the dust settled following market close, Dillard’s shares had fallen 14.8%, or down $10.94 at $62.85 per share. Over the year, Dillard’s shares have traded in the range of $52.20 and $98.75.

In Thursday’s volatile session on Wall Street, Dillard’s shares were among the worst performers. In the late session ahead of the closing bell, the Arkansas department store operator’s stock fell more than 18.2% as some 3.3 million shares traded hands, six times the normal volume.

MARKDOWN BLUES
As noted by the company’s namesake chief executive, Dillard’s suffered from huge markdowns as traditional brick-and-mortar and mall-anchored department stores struggle to keep pace with online competitors. During the quarter, Dillard’s total merchandise sales increased 2% for the 13-week period, while same stores sales rose by 3%. Dillard’s said sales were strongest in the Western region followed by the Eastern and Central regions, respectively.

In relation to key sales movements, Dillard’s said it saw “above trend” sales in ladies’ accessories and lingerie followed by juniors’ and children’s apparel. Sales were slightly above neutral in men’s apparel and accessories and home and furniture, while shoe sales were flat. On the other hand, cosmetics sales came in below trend and ladies’ apparel markdowns were only slightly better.

Year-over-year gross margins from retail operations, which exclude CDI’s business, declined 87 basis points on sales for the 13 weeks ended Nov. 3, primarily due to increased department store markdowns. Consolidated gross margins for the quarter declined a whopping 160 basis points of sales compared to year ago, while inventory rose 4% with only seven weeks left before Christmas.

Operationally, Dillard’s said selling, general and administrative expenses were 28.4% of sales at $1.23 million, compared to 28.7% and $1.2 million a year ago. Company officials said the $9.6 million spike in operating expenses was largely due to higher payroll expenses.

SHARE BUYBACK
In the third quarter, Dillard’s said it bought back 700,000 shares of the Class A Common Stock at a price of $54 million. Under the retailer’s $500 million stock buyback program initiated in March, Dillard’s has $442.9 million remaining to repurchase company shares. The Little Rock publicly traded concern’s total shares outstanding of its Class A and B common stock now stand at 26.9 million and 28.7 million, respectively.

Dillard’s is now four years adrift of its fight with San Francisco-based Mercato Capital Management LP, which urged the Arkansas-based department store chain to spin off its mall assets into a real estate investment trust. Although Dillard’s then rebuffed the West Coast venture capital group, Mercato’s shareholder appeal led to Dillard’s adopting an earlier $500 million stock buyback program to prop up the retailer’s ailing stock price.

Entering the fourth quarter, Dillard’s now operates Dillard’s retail locations and 27 clearance centers spanning 29 states with a total square footage of 49.1 million square feet. On Wednesday, Dillard’s opened its expanded location at The Oaks Mall in Gainesville, Fla., adding 90,000 square feet.

The Arkansas retailer has announced the upcoming closures of the 115,000 square foot West Town Center in Cincinnati, Ohio, in the fourth quarter, and the 70,000 square foot Arrowhead Mall in Muskogee, Okla., in early 2009.