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Here’s What Gave Dillard’s a Boost in Q3

Dillard’s Inc. had a better-than-expected third quarter thanks to strong margin performance.

In a Nutshell: Reduced markdown boosted quarterly margins at Dillard’s, which received a net tax benefit from the CARES Act that took effect earlier this year. Both gave the department store retailer  a healthy third quarter earnings per share of $1.43 for the quarter ended Oct. 31, versus the 22 cents it posted in the year-ago quarter.

“A key takeaway from Dillard’s [third quarter, fiscal year 2020] result is that when the operating environment becomes increasingly challenged, more rigorous management around expenses and inventories kick in to bolster cash flow and future, more profitable performance,” Dana Telsey, chief investment officer at Telsey Advisory Group, said. She noted that the company’s second quarter also showed gross margin improvement while those at its peers “remained under pressure.”

The company previously said it would be closing its 200,000-square-foot Paradise Valley Mall location in Phoenix, Ariz., by the end of the current fiscal year, which is expected to end on Jan. 30.

Net Sales: Total revenues fell 26.1 percent to $1.05 billion from $1.43 billion, which included a 26.2 percent decrease in net sales to $1.02 billion from $1.39 billion. The company said net sales include the operations of Dillard’s construction business CDI Contractors LLC. Retail sales, excluding CDI figures, were down 25.5 percent to $994.6 million from $1.33 billion, with comparable store sales declining 24 percent.

“Sales of home and furniture significantly outperformed the other categories followed by ladies’ accessories and lingerie and cosmetics. Sales of ladies’ apparel were significantly below trend. Sales in the Eastern region moderately outperformed the Central and Western regions, respectively,” it said.

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Gross margin for the quarter improved to 35.7 percent from 33.2 percent a year ago, while retail gross margin was 36.6 percent, up from 34.5 percent due to fewer markdowns. Inventory at the end of the quarter was down 22 percent from a year ago.

“All in, Dillard’s reported a consolidated operating margin of 1.6 percent versus 1.2 percent in the prior year, above our 1.4 percent forecast. The decline of 22 percent [year-over-year] in inventory at quarter-end was greater than our expectation of down 12 percent and follows the 20 percent decrease reported in [the second quarter of fiscal year 2020],” Telsey said.

For the six months, total revenues dropped 35.6 percent to $2.82 billion from $4.38 billion, which included a 36.2 percent decline in net sales to $2.73 billion from $4.28 billion.

Earnings: The retailer reported net income of $31.9 million, or $1.43 a diluted share, versus $5.5 million in net income or 22 cents, in the year-ago quarter.

Included in the net income report is a pretax loss of $2.2 million primarily related to the sale of a store property. The company said it expects to be in a net operating loss for the fiscal year, which it is allowed as a carryback, under the CARES Act, to years in which the federal tax rate was 35 percent. For comparison purposes, the year-ago quarter included a pretax loss of $300,000 stemming from the sale of a store property and $2.8 million in tax benefits related to amended state tax return filings.

For the six months, the net loss was $138.7 million, or $6.05 a diluted share, versus net income of $43.4 million, or $1.69, in the comparable year-ago period.

CEO’s Take: “We have worked hard on inventory and expense control in unpredictable conditions throughout the pandemic. We achieved a 249 basis point gross margin improvement for the third quarter with ending inventory down 22%. Additionally, we cut expenses $100 million,” CEO William T. Dillard, II said. “As we enter this holiday season, one thing we can predict is the dedication of our associates and their exceptional service to our customers.”