Why Is Dillard's (DDS) Down 23.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Dillard's (DDS). Shares have lost about 23.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Dillard's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Dillard's Q4 Earnings and Revenues Lag Estimates

Dillard's reported lower-than-expected earnings and sales in fourth-quarter fiscal 2019. Moreover, its comparable store sales (comps) declined, while retail gross margin remained flat. However, lower inventory levels aided results.

Q4 Numbers

Dillard's reported adjusted earnings of $2.75 per share, which missed the Zacks Consensus Estimate of $3.01. Moreover, the bottom line declined 14.6% from the year-ago quarter’s earnings of $3.22 per share. The earnings decline in the quarter was mainly due to the soft top line.

Net sales of $1,967.5 million declined 4.3% from the year-ago quarter. Excluding services and other income, sales fell 4.4% to $1,922.9 million. Merchandise sales (excluding CDI Contractors, LLC) dipped 4.1% to $1,879 million. The Zacks Consensus Estimate for sales was $2,000 million.

Comparable store sales (comps) for the 13 weeks (ended Feb 1, 2020) were down 3%. Notably, the eastern and western regions performed exceedingly well, while the central region remained weak. By category, the company’s comps benefited from strength in ladies' apparel and cosmetics, more than offset by soft performances in ladies' accessories and lingerie as well as home and furniture.

Both consolidated gross margin and gross margin from retail operations remained flat in the fiscal fourth quarter.

Dillard's SG&A expenses (as a percentage of sales) rose 100 bps from the prior-year quarter to 23.8%. In dollar terms, SG&A expenses (operating expenses) rose 0.1% to $458.6 million. Meanwhile, retail operating expenses (as a percentage of sales) for the quarter under review increased 110 bps to 24.3%. In dollar terms, retail operating expenses increased 0.4% to $456.7 million.

Financial Details

The company ended fiscal 2019 with cash and cash equivalents of $277.1 million, long-term debt and finance leases of $366.4 million, and total shareholders’ equity of $1,623.3 million. As of Feb 1, 2020, merchandise inventories declined 4.2% to $1,465 million.

In fiscal 2019, the company generated operating cash flow of $365.1 million. Moreover, it remained committed to rewarding shareholders with dividends and buybacks.

During the fiscal fourth quarter, the company bought back 0.5 million shares for $36.7 million under its $500-million repurchase program announced in March 2018. In fiscal 2019, it repurchased 2.2 million shares for 138.3 million. Further, the company repurchased 0.8 million shares for $52.8 million in the period between Feb 1 and Feb 24. As of Feb 24, 2020, it had share buyback authorization worth $215.9 million remaining under its program.

Store Update

As of Feb 1, 2020, Dillard’s had about 257 namesake outlets and 28 clearance centers, operating in 29 states, alongside an online store at www.dillards.com. The company’s total square footage as of Feb 1 was 48.4 million.

Further, it announced plans to open a store in the third quarter of fiscal 2020 at Mesa Mall in Grand Junction, CO. It also plans to open a store in the spring of 2021 at University Place in Orem, UT. These stores will replace closed peer stores in these locations.

Fiscal 2020 View

For fiscal 2020, Dillard’s expects rentals of $24 million, whereas it reported $26 million in fiscal 2019. It anticipates net interest and debt expenses of $43 million, suggesting a decline from $46 million reported in fiscal 2019. Furthermore, the company projects capital expenditure of $130 million for fiscal 2020, whereas it reported $103 million in fiscal 2019.

For fiscal 2020, it projects depreciation and amortization expenses of $220 million, suggesting a decline from $222 million incurred in fiscal 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -72.22% due to these changes.

VGM Scores

Currently, Dillard's has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Dillard's has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.