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Dillard’s Manages Slighter Loss

NEW YORK — Weak sales kept Dillard’s Inc.’s third-quarter results in the red, but margin improvement allowed it to reduce its quarterly loss.<br><br>Net losses narrowed to $5.1 million, or 6 cents a share, from $40.1 million, or 48...

NEW YORK — Weak sales kept Dillard’s Inc.’s third-quarter results in the red, but margin improvement allowed it to reduce its quarterly loss.

Net losses narrowed to $5.1 million, or 6 cents a share, from $40.1 million, or 48 cents, a year ago. The most recent quarter’s results include an aftertax gain of $1.1 million, or 1 cent a diluted share, for the early extinguishment of debt. Without this, losses totaled $6.2 million, or 7 cents a share, 1 cent deeper than the 6-cent loss that Wall Street had penciled in. Losses for the quarter also included a gain of 5 cents a diluted share for an accounting change. Last year’s third quarter was nominally inflated by an aftertax gain of $100,000.

The Little Rock, Ark.–based department store company said revenues for the period ended Nov. 2 dipped 3.9 percent to $1.86 billion from $1.93 billion a year ago. Comparable-store sales were off 4 percent.

Investors traded down shares of the firm 76 cents, or 4.2 percent, to close Thursday at $17.19 on the New York Stock Exchange.

Women’s and junior apparel produced 31.7 percent of Dillard’s overall sales for the quarter; while shoes, accessories and lingerie made up 20.9 percent, and men’s apparel and accessories accounted for 17.9 percent. Cosmetics grabbed 14.1 percent of the total; home, 8 percent, and children’s apparel, 7.4 percent.

A lack of sales leverage kept gross margin improvement of more than 370 basis points from making a substantial contribution to the bottom line. Additionally, advertising, selling, administrative and general expenses rose by 120 basis points as a percent of sales.

As was the case in its second quarter, Dillard’s attributed the gross margin improvement to increased development and penetration of private labels, application of improved buying policies, control of inventory levels and the currency of merchandise mix.

James Freeman, senior vice president and chief financial officer, on a conference call, did not provide specifics about the firm’s private label penetration, though he did admit that the stores are “still in the crawling stage.” In the second quarter, Dillard’s said 15.7 percent of the merchandise it sold was under its own labels, an increase from 12.7 percent in the period a year earlier, as reported.

This story first appeared in the November 22, 2002 issue of WWD.  Subscribe Today.

In response to an analyst’s question about increased volatility as private label penetration rose at other retailers, Freeman noted: “A lot of this supposed protection you have in the branded merchandise, particularly when you’re talking about replacing nonperforming vendors anyway — at the end of the day, that protection’s not there.” Additionally, the vertical retailer has the cushion of what would have been the outside vendor’s profit margin.

J.P. Morgan Chase & Co. analyst Shari Schwartzman Eberts, in a research note, described the quarter as “quite disappointing, making Dillard’s the only major department store chain to lose money in the third quarter this year.”

While the gross margin gain was “impressive,” she added: “It did little more than offset the 365–basis [point] margin decline of the third quarter 2000, which was when the company switched over to its new markdown management policies.”

In anticipation of decelerating earnings, A.G. Edwards & Sons analyst Robert Buchanan lowered his rating on the firm to “hold” from “buy,” although he, too, gave the firm credit for the recent margin improvement, which he attributed to Dillard’s willingness to take markdowns earlier and control inventories better.

After dramatic improvement in the past nine months, Buchanan is looking for just 6 percent growth in earnings per share over the next nine months.

For the nine months, including a large accounting change and other extraordinary items, losses widened to $470.6 million, or $5.51 a diluted share, from $29.8 million, or 35 cents, a year ago.

Excluding special items, earnings for the 39 weeks mounted to $64.1 million, or 75 cents a diluted share. This compared with year-ago losses of $35 million, or 41 cents. Sales for the year-to-date period slumped 1.5 percent to $5.72 billion from $5.8 billion a year ago.