On February 26, Dillards (NYSE:DDS) reported another great rise in earnings per share for its fourth quarter. For the fifth straight quarter, these earnings per share outpaced market expectations and the shares rose. At $61, they now stand a shade under their all time high of around $62.09. Shareholders have had an incredible ride, particularly over the last three years.
For the fourth quarter, its earnings per share were $2.21 (excluding the $44.5 million JDA lawsuit settlement). This is an increase of 26% on the same period last year, when earnings per share were $1.75. In the third quarter, earnings per share rose by 127% on a year earlier. In the second quarter, earnings per share rose by 220% from a year earlier. In the first quarter, they rose by 92% from the previous year.
The company has stated that it is pleased how they have managed costs. Costs of advertising, selling, and administrative expenses decreased by 40 basis points of sales. However, cost of sales actually rose as a percentage of net sales, by 10 basis points, and a far bigger impact to the bottom line.
In actual fact, taking all into consideration, and excluding the one off receipt of $44.5 million, income before taxes rose to $172.7 million from $162.6 million. This is a less impressive headline figure of an increase in income of 6.2%.
Income taxes rose dramatically in the fourth quarter, to $76.1 million from $51.4 million. Net income for the period for the company, excluding the special one off, now comes in at $97 million, or a decline of 11.4% year on year. A less than impressive result. Yet shares continue to rise, to an all time high, and now above market analysts mean 12-month target of $59.50.
Dillard’s has been aggressively repurchasing its shares for some time. Last year it bought 11.4 million shares at an average cost of $43 per share, and a total cost of $491 million. In other words, it bought back 18% of its ordinary shares.
It has announced that it has authorization to repurchase a further $250 million of shares in the market. I expect it will follow this up with another $250 million later in the year.
It is the repurchase scheme that is driving shares higher. Group sales at the top line are increasing far less impressively, rising by 2.3% in 2011 compared to 2010. Benefiting the company in 2011 versus 2010 also was a tax benefit of $62.5 million – I expect this won’t be repeated in 2012, and neither will the lawsuit payment of $44.5 million.
Stripping all these extra incomes and benefits away, the company made a net income of $338.9 million. With tax to be paid in 2012, rather than a massive payment to it, Dillard’s results may not live up to recent history going forward.
The rise in the share price, and the comparable earnings per share numbers, has been driven more by Dillard’s aggressive share repurchase plans than its actual business growth. Some would argue that this is adding value for shareholders, as shown by the increasing share price. Others would say that it shows a lack of vision by management and a reticence to grow the company.
With the share price riding high, the impact of plowing earnings back into share repurchases will be less. Tax benefits and one off lawsuit payments will drop out of the equation in 2012. While share repurchases will continue to make the results look better than they really are, at some point this trend will reverse. Having seen shares rise almost 25 fold from their low of $2.50 in November 2008, now is the time to say thank you. I recommending selling Dillards now.
About the author:
I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.