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Dillard's Inc. (DDS - Analyst Report), leading fashion apparel, cosmetics and home furnishings retailer, kick started fiscal 2013 with strong first-quarter earnings that benefited from a robust comparable store sales performance combined with gross-margin improvement and prudent cost control measures.

First-quarter earnings per share of $2.40 grew 27% from $1.89 reported in the prior-year quarter and surpassed the Zacks Consensus Estimate of $2.08.

Sales & Comps

Dillard's net sales (including CDI Contractors LLC or CDI) remained almost flat at $1,549.1 million in the first quarter compared to the year-ago quarter. Merchandise sales, excluding CDI, came in at $1,530 million compared with $1,522 million in the year-ago quarter. The company’s total revenue (including service charges and other income) of $1,589.4 million was marginally above $1,586.0 million reported in the year-ago quarter and in line with the Zacks Consensus Estimate.

Merchandise comparable store sales (comps) for the quarter were up 1% compared to a 5% increase in the first quarter of 2012.

During the quarter, ladies’ accessories and lingerie as well as juniors’ and children’s 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) expanded 110 basis points to 39.9%, while consolidated gross margin (including CDI) augmented 130 basis points to 39.5%.

Dillard's operating expenses for the quarter marginally waned to $390.2 million from $393.2 million in the prior-year quarter, driven by a decline in advertising expenses partially offset by an increase in selling payroll expenses. Operating expenses as a percentage of sales contracted 20 basis points to 25.2% in the quarter.

Other Financial Details

Dillard’s ended the quarter with cash and cash equivalents of $156.0 million compared with $250.7 million last year. As of May 4, 2013, the company’s long-term debt and capital leases slipped marginally to $622.1 million from $623.4 million as of Apr 28, 2012.

In the first quarter, the company’s net cash flow from operations increased 39% to $136.9 million from $98.5 million in the year-ago quarter.

During the quarter, Dillard’s bought back 1.4 million shares worth about $114.7 million, at a price of $79.12 per share.

During the quarter, the company divested its holdings in Fayetteville, Ark.-based e-Commerce company, Acumen Brands, for a pre-tax gain of $11.8 million. The gain is recorded in books as a gain on the disposal of assets.

Store Update

In the first quarter, Dillard’s shut down its 94,000 square feet store in the Cache Valley Mall in Logan, Utah. Further, the company announced plans to close its 60,000 square feet store in Randolph Mall in Asheboro, N.C. The closure is expected to be completed in the second quarter of 2013.

As of May 4, 2013, Dillard’s had about 283 namesake outlets and 18 clearance centers operating in 29 states and an Internet store at www.dillards.com. Total square footage as of May 4, 2013 was 50.9 million.

Looking into 2013

Dillard’s expects fiscal 2013 depreciation and amortization expenses to be about $261 million, while rentals are projected at approximately $27 million. Moreover, the company expects to spend about $175 million toward capital expenditure in fiscal 2013, compared with $137 million spent in fiscal 2012.

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 Build-A-Bear Workshop Inc. (BBW), Big 5 Sporting Goods Corp. (BGFV - Analyst Report) , both of which carry a Zacks Rank #1 (Strong Buy), and Gap Inc. (GPS - Analyst Report) , which has a Zacks Rank #2 (Buy).

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