DILLARD’S TAKES NEW APPROACH

Byline: Jennifer Weitzman

NEW YORK — The first of a series of aggressive initiatives — including reducing inventory investment, taking markdowns quicker and deeper, store closures and cash reinvestment — paid off handily for Dillard Department Stores Inc. in its fourth-quarter financial results.
For the three months ended Feb. 3, the Little Rock, Ark.-based department store said it earned $59 million, or 69 cents a share, scorching past Wall Street’s consensus estimates of 43 cents. That compared with $26 million, or 26 cents, earned in the year-ago period. During the quarter, the company recorded pretax charges of $51 million for asset impairment and store closing costs.
Wall Street rewarded Dillard’s by sending shares of the company’s stock up $3.14, or 18.9 percent, to $19.75, and breaking a new 52-week high, a real feat on a day that sent the Dow Industrial Average into bear territory for a short while, losing 97.52 points, or 1 percent, to 9389.48. The company last hit an annual high on March 8 when shares reached $19.56.
Hampered by a weak retail environment, which sent Dillard’s comps down 2 percent for the quarter, sales improved 2.6 percent, to $2.66 billion, from $2.6 billion.
Early last year, the company dedicated itself to a new vision of how it would manage its merchandising and other elements of its business. Thursday brought the first signs that at least some of the changes were bearing fruit.
The company announced on a conference call Thursday a major change involving the way it would account for inventories under the retail inventory method. The company said it wants to get the best deals from vendors up front by locking in markdowns from the get-go and treating it as a purchase reduction or an initial discount on goods, so that it could enjoy the benefits of the cash flow sooner. This runs counter to the old method of paying full price for merchandise, receiving markdown allowances later and recording such allowances directly as a reduction to cost of sales.
The cumulative effect of the change reduced net income for the year by $130 million, or $1.42 a share.
“We are to buy more goods from people who do business the way we want to do business and less from people who don’t do business the way we do business,” William Dillard, chairman and chief executive, said on the call. He noted that the company did not make a lot of progress in this area last year, with only one vendor agreeing to its new terms.
James Freeman, chief financial officer, explained on the call that, because the company has believed there would be fewer markdown allowances provided by vendors, it decided to negotiate support from them up front, buying products on Dillard’s terms. Under this arrangement, Dillard’s buyers would work out a reduced rate upon purchasing a line, rather then paying full price at first and then going back for markdown money.
The company said that inventories decreased 21.1 percent, to $1.62 billion from $2.05 billion, and were down 13 percent on a comparable-store basis. It also said that it closed nine underperforming stores in the year, three in the fourth quarter.
Saying he was surprised at how quickly Dillard’s turned itself around, Fahnestock & Co.’s Bernard Sosnick said he is encouraged to see profitability growth following several down years. “Dillard’s positioned itself to run its business much more differently than in the past.”
Since the mid-Nineties, as Dillard’s has struggled with sales and margins, it’s often been at odds with its suppliers. The new approach “was a simple way to deal with a problem, since vendors could tell us what to do,” Dillard said at an analysts’ meeting held at the Chateau Elan Resort and Winery in Braselton, Ga.
For the year, including nonrecurring charges, Dillard’s lost $6 million, or 6 cents a share, against earnings of $164 million, or $1.55, a year ago. Sales fell 1.3 percent, to $8.57 billion from $8.68 billion, and comparable sales fell 3 percent.