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Driven by a robust sales performance, gross margin improvement as well as prudent cost control measures, the upscale departmental store chain retailer, Dillard’s Inc. (DDS - Analyst Report) reported an outstanding third-quarter 2012 on Thursday. The results exceeded the Zacks Consensus Estimates for the fourth straight quarter.

The company’s adjusted earnings of 96 cents per share doubled the prior-year quarter’s earnings of 48 cents and significantly outpaced the Zacks Consensus Estimate of 75 cents. On a reported basis (including one-time items) Dillard’s earnings came in at $1.01 per share compared with $4.31 in the year-ago period.

The strong quarterly performance boosted investor’s sentiments, which reflected on the company’s share price, which closed 3.89% higher at $8.953 on November 08, 2012, from the previous day’s closing price of $80.81. Moreover, this set a new 52-week high of $86.71 on the same day, beating its previous 52-week high of $82.99.

Recently, Dillard’s peer Macy’s Inc. (M - Analyst Report) also reported a robust third quarter of fiscal 2012. The quarterly earnings of 36 cents a share beat the Zacks Consensus Estimate of 29 cents, and surged 12.5% from 32 cents earned in the comparable prior-year quarter.

Quarter in Detail

Dillard's top line (including CDI Contractors LLC or CDI) increased 4.8% to $1.450 billion from $1.383 billion in the year-ago quarter. Merchandise sales, excluding CDI, came in at $1.425 billion compared with $1.366 billion in the year-ago quarter. The company’s total revenue (including other income) of $1.486 billion surpassed the Zacks Consensus Estimate of $1.442 billion. Comparable store sales (comps) for the quarter were up 5%.

Men’s apparel and accessories were the outperforming categories, followed by women’s accessories, lingerie and shoes. The category that witnessed the lowest sales was home and furniture. The best performing region was Central, followed by West and East.

Dillard’s gross margin from retail operations (excluding CDI) expanded 40 basis points (bps) to 37.1%, while consolidated gross margin (including CDI) augmented 30 bps to 36.6%.

As a result of restructuring initiatives and inventory reduction efforts, the company’s operating expenses remained flat on a year-over-year basis at $404.6 million, while operating expenses as a percentage of sales contracted 140 bps to 27.9%.

Other Financial Details

Dillard’s ended the third quarter with cash and cash equivalents of $124.8 million compared with $106.4 million in the year-ago period. As of October 27, 2012, the company’s long-term debt and capital leases (including current portion) slipped to $624.9 million from $704.0 million as of October 29, 2011. For the nine months ended October 27, 2012, the company generated net cash flow from operations of $219.9 million compared with the year-ago period of 135.6 million.

Store Update

In the third quarter, Dillard’s closed 1 store in Southpark Mall in Colonial Heights, Virginia. As of October 27, 2012, Dillard’s had about 284 Dillard's locations as well as 18 clearance centers operating in 29 states. At quarter-end, the company had a total square footage of 52.3 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 $145 million toward capital expenditure in fiscal 2012, compared with $116 million spent in fiscal 2011.

Our Recommendation

Currently, Dillard’s maintains a Zacks Rank of #2, implying a short-term Buy rating. Moreover, our long-term Outperform recommendation on the stock remains intact, since the company posted stronger-than-expected third quarter 2012 results and continues to focus on cost containment initiatives to boost profitability.

Headquartered in Little Rock, Arkansas, Dillard's is a large department store chain, featuring fashion apparel and home furnishings. The company’s primary product categories are: women’s and junior’s apparel; shoes; accessories and lingerie; men’s clothing and accessories; cosmetics; home; and children’s clothing. Its merchandise mix consists of both branded and private-label items.

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