Dillard's Inc., (DDS, Financial) is one of the leading fashion apparel, cosmetics and home furnishings retailer. The regional department stores chain competes with the likes of Macy’s (M, Financial), Kohl’s (KSS, Financial) and JC Penny (JCP, Financial) to name a few. The regional retailer posted lower-than-expected first-quarter fiscal 2015 results. Let’s take a look at the results and see what the company holds for long-term investor.
First quarter recap
Merchandise sales, excluding CDI, declined 1.4% year-over-year and came in at $1,518 million. The decline was as a result of merchandise comparable-store sales declining 1% year over year. As against this, comps at Kohl’s and JC Penny increased 1.4% and 3.4%, respectively, while Macy’s registered a decline of 0.7%.
Total revenue for the company, including service charges and other income registered 1.6% year-over-year growth to clock $1,613.4 million and marginally beating the consensus estimate. In the reported quarter, sales trends were strongest in the juniors' and children's apparel category followed by shoes and ladies' apparel, and notably weak in the home and furniture category. Regionally, sales momentum was the strongest is eastern region, followed by the central and western regions.
Gross margin at the retail operations, which excludes CDI, expanded 52 basis points, or bps, versus the same period in the prior year. However, consolidated gross margin contracted 50 bps as a result of CDI business being low margin operations.
As a result of higher payroll expenses, operating expenses as a percentage of sales from retail operations expanded 101 bps versus the year-ago quarter. The jump in operating expenses was partly offset by a lower advertising and insurance costs.
Net earnings grew 3.9% year-over-year to $2.66 per share. Consensus estimate was pegged higher at $2.80 per share. Earnings were below expectations due to lower merchandize sales during the quarter.
Dillard’s exited the first quarter fiscal 2015 with cash and cash equivalents of $457.6 million and long-term debt and capital leases of $620.5 million.
Growth drivers
Dillard’s has been spending on its online initiative, though it does not disclose online sales separately. However, the company is making a heavy push in ecommerce. Julie Bull, Director of Investor Relations at Dillard's, told TheStreet in an email:
“We are testing new ideas on a daily basis to optimize sales and conversion while constantly focusing on improving the customer experience. We are continually improving the appeal of dillards.com from the look and feel of the site to the efficiency of ordering and fulfillment.”
According to a report from Fitch:
“…industry growth rate of 2% could be achieved by relatively flat to modest comps growth at the store level and mid- to high-teens growth from online sales for retailers that currently generate 10% of their revenue from online. Online growth of 15%-20% would translate into a 150 bps-200 bps contribution to overall comps.”
To drive growth, Dillard’s will have to focus on omni-channel capabilities, as the traffic to stores is slowly dying down and peers are focusing aggressively on their omni-channel initiatves. Through the omni-channel capabilities, Dillard’s can quickly increase its addressable market size by targeting locations where it doesn’t even have a store.
Besides its online initiatives, the company will be expanding its store count to drive growth. The retailer has plans to open three new stores in fiscal 2015, one each at Fashion Place in Murray, UT; Fremaux Town Center in Slidell, LA; and Liberty Center in Cincinnati, OH.
Wrapping up
Despite the muted first-quarter fiscal 2015 results, the company has reiterated its fiscal 2015 projections. For the next five years, analysts expect compound annual growth rate of a shade below 10%. Trailing P/E of 15.02 and forward P/E of 12.90, signifies growth in earnings.
However, currently the stock is trading below the 20 day and 200 day SMA, indicating bearish sentiments. We don't have any clarity on the omni-channel initiatives of the company. So, it would be better to watch the stock from the sidelines as there could be more decline in the future.
