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Dillard's Inc. (DDS - Analyst Report), leading fashion apparel, cosmetics and home furnishings retailer, posted solid second-quarter 2012 earnings on the back of a robust sales performance combined with gross margin improvement as well as prudent cost control measures. Earnings per share of 63 cents significantly outpaced the Zacks Consensus Estimate of 49 cents and more than doubled from the prior-year quarter earnings of 30 cents.

Sales & Comps

Dillard's top line (including CDI Contractors LLC or CDI) jumped 3.2% to $1,487.9 million from $1,441.7 million in the year-ago quarter. Merchandise sales, excluding CDI, came in at $1,456 million compared with $1,426 million in the year-ago quarter. The company’s total revenue (including other income) of $1,525.2 million surpassed the Zacks Consensus Estimate of $1,466 million. Comparable store sales (comps) for the quarter were up 3%.

During the quarter, ladies’ accessories and lingerie were the outperforming categories, followed by shoes and cosmetics. Categories that witnessed the lowest sales included home and furniture and juniors’ and children’s apparel. The best performing region was Central, followed by East and West.

Operating Results

In the second quarter, gross margin from retail operations (excluding CDI) expanded 70 basis points to 34.3%, while consolidated gross margin (including CDI) augmented 40 basis points to 33.6%.

Dillard's operating expenses for the quarter increased marginally (0.7%) to $398.8 million from $396.0 million in the prior-year quarter. However, operating expenses as a percentage of sales contracted 70 basis points to 26.8% in the quarter.

Other Financial Details

Dillard’s ended the second quarter with cash and cash equivalents of $162.5 million compared with $179.5 million in the prior fiscal year. As of July 28, 2012, the company’s long-term debt and capital leases (including current portion) slipped to $622.8 million from $706.5 million as of July 30, 2011. For the six months ended July 28, 2012, the company generated net cash flow from operations of $152.8 million.

During the quarter, it bought back nearly 2.1 million shares worth $134.6 million. At quarter-end, the company had nearly $115.4 million worth authorization remaining under its share repurchase program.

Store Update

In the second quarter, Dillard’s closed 1 store in the Hutchinson Mall in Hutchinson, Kansas. The company also announced the planned closure of its outlet in Southpark Mall in Colonial Heights, Virginia, slated for the third quarter of 2012.

As of July 28, 2012, Dillard’s had about 285 Dillard's locations as well as 18 clearance centers operating in 29 states and an Internet store at www.dillards.com. Total square footage as of the quarter-end was 52.4 million.

Looking into 2012

Dillard’s expects fiscal 2012 depreciation and amortization expenses to be about $258 million, while Rentals are projected at approximately $34 million. Moreover, the company expects to spend about $140 million toward capital expenditure in fiscal 2012, compared with $116 million spent in fiscal 2011.

Conclusion

Based on the company’s strong performance over the last seven consecutive quarters, we expect it to continue posting earnings as well as revenue growth in the coming quarters.

Headquartered in Little Rock, Arkansas, Dillard's Inc. is a large departmental store chain, featuring fashion apparel and home furnishings in the United States.

Dillard's, which competes with Kohl’s Corporation (KSS - Analyst Report) and Macy’s Inc. (M - Analyst Report), maintains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. Our long-term recommendation on the stock remains ‘Outperform’.

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