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Dillard's Inc. (DDS - Analyst Report), leading fashion apparel, cosmetics and home furnishings retailer, reported strong third-quarter earnings that benefited from positive comparable store sales combined with prudent cost control measures and increased share buybacks.

Third-quarter adjusted earnings per share of $1.13 grew 17.7% from 96 cents reported in the prior-year quarter and surpassed the Zacks Consensus Estimate of $1.00.

Sales & Comps

Dillard's net sales (including CDI Contractors LLC or CDI) increased 1.3% to $1,468.6 million in the quarter compared to the year-ago quarter. Merchandise sales, excluding CDI, came in at $1,437 million compared with $1,425 million in the year-ago quarter.

The company’s total revenue (including service charges and other income) of $1,506.9 million reflected a marginal increase of 1.4% from $1,486.3 million reported in the year-ago quarter and was above the Zacks Consensus Estimate of $1,497 million.

Merchandise comparable store sales (comps) for the quarter were up 1% compared to the third quarter of 2012.

During the quarter, ladies’ accessories and lingerie as well as shoes and ladies’ apparel were the outperforming categories, offset by lowest sales at the home and furniture categories. The best performing region was Central, followed by the East and West.

Operating Results

In the first quarter, gross margin from retail operations (excluding CDI) contracted 30 basis points to 36.8%, while consolidated gross margin (including CDI) declined 40 basis points to 36.2%.

Dillard's operating expenses for the quarter marginally waned to $404.4 million from $404.6 million in the prior-year quarter, driven by a decline in advertising expenses and taxes partially offset by an increase in selling payroll expenses. Operating expenses as a percentage of sales contracted 40 basis points to 27.5% in the quarter.

Other Financial Details

Dillard’s ended the quarter with cash and cash equivalents of $111.0 million compared with $124.8 million last year. Other short-term borrowings were $170.0 million as of the quarter-end compared with $27.0 million at the end of the prior year comparable quarter. As of Nov 2, 2013, the company’s long-term debt and capital leases improved marginally to $621.7 million from $622.5 million as of Oct 27, 2012.

In the third quarter, the company’s net cash flow from operations dipped 21.3% to $173.0 million from $219.9 million in the year-ago quarter.

During the quarter, Dillard’s bought back 2.4 million shares worth about $186.9 million, at a price of $77.80 per share. Currently, the company has about $40.4 million remaining under its ongoing share repurchase authorization.

Store Update

In the third quarter, Dillard’s shut down its 10,000 square feet clearance store at Euclid Square Mall in Euclid, Ohio. Further, the company announced plans to close its 64,000 square feet store at University Mall in Chapel Hill, N. C. and its 195,000 square feet store at Collin Creek in Plano, Texas. These closures are expected to be completed by the end of the fourth quarter of 2013.

As of Nov 2, 2013, Dillard’s had about 282 namesake outlets and 17 clearance centers operating in 29 states and an Internet store at www.dillards.com. Total square footage as of Nov 2, 2013 was 50.8 million.

Fiscal 2013 Outlook

Dillard’s expects fiscal 2013 depreciation and amortization expenses to be about $261 million, while rentals are projected at approximately $27 million. Net interest and debt expenses are expected to be nearly $65 million.

Moreover, the company expects to spend about $100 million toward capital expenditure in fiscal 2013, compared with $137 million spent in fiscal 2012. The company anticipates having no short term borrowings at fiscal year-end 2013.

Conclusion

Our forward outlook on Dillard’s remains positive based on its strong performance over the last several quarters. We expect it to continue posting earnings and revenue growth in the upcoming quarters. The company currently holds a Zacks Rank #3 (Hold).

Other retailers currently performing well include Best Buy Co. Inc. (BBY - Analyst Report), DSW Inc. (DSW - Snapshot Report) and Finish Line Inc. (FINL - Snapshot Report). Of these, Best Buy has a Zacks Rank #1 (Strong Buy) and DSW and Finish Line carry a Zacks Rank #2 (Buy).

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