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Dillard's (DDS) Stock Down 5% as Q1 Earnings Lag Estimates

Dillard's Inc. DDS reported first-quarter fiscal 2016 earnings of $2.17 per share that missed the Zacks Consensus Estimate of $2.57 and plunged 18.4% on a year-over-year basis. Earnings lagged primarily due to soft sales and gross margin contraction that stemmed from higher markdowns, offset slightly by flat inventories.

In response, shares of this department store chain were down 5.2% in yesterday’s after-hours session.

Dillard's total revenue (including service charges and other income) of $1,538.8 million slipped 4.6% from the year-ago quarter but was ahead of the Zacks Consensus Estimate of $1,502 million.

Dillard's net sales (including CDI Contractors LLC or CDI) declined 4.5% year over year to $1,503.2 million in the reported quarter. Merchandise sales, excluding CDI, also fell 4.5% to roughly $1,449 million. Merchandise comparable-store sales for the 13-week period ended Apr 30, 2016 declined 5% from the comparable period ended May 2, 2015.

During the reported quarter, the outperforming category was shoes, in contrast to home and furniture, ladies’ accessories and lingerie which remained quite weak. The best performing region was Eastern, trailed by the Central and Western areas, in that order.

Consolidated gross margin contracted 140 basis points (bps), while gross margin from retail operations (excluding CDI) contracted 145 bps. The fall in retail gross margin is mainly attributed to higher markdowns in the quarter. Inventory, on a percentage basis, remained flat year over year.

Dillard's selling, general and administrative (SG&A) expenses (as a percentage of sales) escalated 90 bps to 26.5%. In dollar terms, however, consolidated SG&A expenses declined 1.3% to $398.4 million. SG&A expense (as a percentage of sales) for retail operations expanded 89 bps to 27.4%, while in dollar terms it declined 1.4% to $396.8 million. Lower expenses were backed by a fall in advertising, services purchased, utilities and supplies, offset by higher insurance expense.

Financial Details

Dillard’s ended the quarter with cash and cash equivalents of $150.3 million, long-term debt and capital leases standing (excluding current portions) at $620.1 million, and total shareholders’ equity of $1,812 million.

During the fiscal first quarter, the company generated net cash flow from operations of $20.1 million. The company bought back 721,000 shares for $58.4 million in the reported quarter. With this, the company has authorization worth $441.6 million remaining under its $500 million share repurchase plan announced in Feb 2016.

Store Update

As previously announced, the company recently shut down its 105,000-square-foot store in the Aiken Mall in Aiken, SC.

As of Apr 30, 2016, Dillard’s had about 272 namesake outlets and 24 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 the fiscal first quarter, was 49.8 million.

Fiscal 2016 Outlook

For fiscal 2016, Dillard’s expects rentals of approximately $27 million, while net interest and debt expenses are anticipated to be nearly $61 million, both flat with the fiscal 2015 levels.

The company projects capital expenditures of about $150 million for fiscal 2016 compared with $166 million in fiscal 2015. Depreciation and amortization expenses for fiscal 2016 are expected to remain unchanged year over year at $250 million.

Zacks Rank

Currently, Dillard’s carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the retail sector include The Kroger Co. KR, Abercrombie & Fitch Co. ANF and Shoe Carnival Inc. SCVL, each with a Zacks Rank #2 (Buy).

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