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Private Label Pumps Up Dillard’s Earnings in Second Quarter

NEW YORK — A marked move away from brands and toward its own private labels helped Dillard’s Inc. bounce back from year-ago losses in the second quarter.<br><br>In fact, the regional department store chain went to great pains to credit its...

NEW YORK — A marked move away from brands and toward its own private labels helped Dillard’s Inc. bounce back from year-ago losses in the second quarter.

In fact, the regional department store chain went to great pains to credit its private label push for its return to profitability and warn its suppliers that it’s now taking a profit-or-perish approach to national brands.

On a conference call, James Freeman, senior vice president and chief financial officer, asserted: “We expect to remain a predominately branded store for the foreseeable future, but there are a lot of opportunities where there are branded vendors that are not providing the kind of value that our customers want, expect and deserve and aren’t providing us the gross margins we need to operate our business.”Despite the improvement in the bottom line, sluggish sales and gross margin improvement below some Wall Street expectations disappointed investors. Shares of Dillard’s withered $3.15, or 11.7 percent, to close Thursday at $23.79 on the New York Stock Exchange. The stock is up 49.2 percent so far this year, partly because of speculation that the Dillard’s family would sell the firm after the death of founder William Dillard Sr. on Feb. 8. In the last 52 weeks, shares of the firm have traded as high as $31.20 and as low as $12.06.David Lamer, an analyst with Ferris, Baker Watts attributed the plunge to an “irrational Wall Street.” He described the firm’s results as “very, very strong” and speculated that “a large institutional investor just wanted to liquidate its position in Dillard’s,” perhaps because the firm’s margins weren’t as strong as some expected.Women’s and juniors, though, have been bright spots for the 334-unit regional department store chain, which spans 29 states.Net income totaled $6.7 million, or 8 cents a share, for the quarter ended Aug. 3. This compared with losses of $18.6 million, or 22 cents, a year ago.Exclusive of an extraordinary loss in the most recent period and a year-ago gain, both from the early extinguishment of debt, profits of $12.5 million, or 15 cents a diluted share, compared with losses of $20.6 million, or 24 cents, a year earlier.Revenues waned 0.2 percent to $1.886 billion from $1.889 billion a year ago. Comparable-store sales were flat on an 8 percent drop in inventories.Sales of women’s and junior apparel, which accounted for 33.9 percent of the overall pie, rose 3 percent on a total and comparable basis. Men’s clothing and accessories, accounting for 17.9 percent of the total take, saw sales drop 5 percent, or 4 percent on comp basis.Gross margins during the quarter expanded 190 basis points to 34.1 percent of sales. As was the case with sales, margins for women’s ready-to-wear and junior merchandise outperformed the company average. On the call, Freeman described the firm’s private label program as “very beneficial to us” and margins.Overall, 15.7 percent of the merchandise sold by Dillard’s was under its own labels, an increase from 12.7 percent a year ago. The number advanced further to 18.4 percent, from 14.9 percent, when viewing the penetration of private brands only in merchandise categories that carry them.Private labels have not only helped margins by reducing costs, but, as Freeman noted: “The merchandise that’s being replaced had very bad margins.”He also noted: “There’s just an enormous amount of opportunity there that we plan to continue to expand into as rapidly as we’re able to do so in a rational manner.” The men’s area has “been the most difficult in the store,” Freeman said, and is one where Dillard’s hopes to boost private labels. The firm is dealing with men’s wear’s weakness “by trying to reduce our investment in it and therefore our exposure to it.” How far department stores can delve into private label is a matter of debate. Marie Menendez, a fixed-income analyst with Moody’s Investors Service, noted: “The perfect mix is one that differentiates the department store from its competition and gives it a distinct image, but still gives consumers what they want when they walk in the door.”While gross margins improved, advertising, selling, general and administrative expenses fared worse, rising 20 basis points to 70.8 percent of sales during the quarter. Freeman attributed this to bad debt driven by higher bankruptcies and “anything that had anything to do with insurance.” On an absolute basis, SG&A plus advertising expenses fell 1.3 percent to $531 million.During the quarter, Dillard’s retired $210.1 million of long-term debt ahead of its scheduled maturity.Summing up, A.G. Edwards & Sons equity analyst Robert Buchanan, noted: “This remains an early-stage financial turnaround rooted in a commendable and growing private label program, along with reductions in inventories, expense and debt levels.”Seeing no fundamental shifts at Dillard’s, Buchanan maintained his “strong buy” rating on the firm’s stock. Gross margins, though, missed the analysts’ expectations by nearly 130 basis points as the firm had to “take more markdowns than they would have liked in the month of July — especially the back half of the month, we fathom — as an appreciable decline in mall traffic forced most retailers to cut prices in a major way in an effort to drive the top line.”For the half, losses swelled to $465.5 million, or $5.45 a diluted share. This compared with earnings of $10.4 million, or 12 cents, a year ago.Before special items, including a $530.3 million non-cash goodwill impairment charge retroactively levied on the first quarter for a change in accounting, income for the half mounted to $70.3 million, or 82 cents a diluted share. This compared with year-ago earnings of $5.3 million, or 6 cents.Revenues during the six months totaled $3.86 billion, off 0.2 percent from $3.87 billion a year ago. Comps dipped 1 percent.While the Little Rock, Ark.-based firm has shied away from predicting future results, Freeman said: “There’s an opportunity there to make a lot more money than we are making.” He added that the firm has made headway and managed to post profits in the second quarter, which is the most difficult quarter for Dillard’s.“If we don’t make money in the third quarter, then there’s something really wrong,” said Freeman.

This story first appeared in the August 30, 2002 issue of WWD.  Subscribe Today.