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Dillard's (DDS) Up 24.3% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Dillard's (DDS - Free Report) . Shares have added about 24.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dillard's due for a pullback? 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 catalysts.

Dillard's Reports Narrower-Than-Expected Q2 Loss

Dillard's reported narrower-than-expected loss per share in second-quarter fiscal 2020. Notably, all of the company’s stores reopened and were operational as of Jun 2, except for one. All the reopened stores operated at reduced hours. Moreover, the company has been witnessing improved sales trends at the reopened stores, generating about 72% of the prior-year quarter’s sales between Jun 2 and Aug 1. This primarily aided its results in the fiscal second quarter.

Q2 Numbers

Dillard's reported a loss per share of 37 cents per share, narrower than the Zacks Consensus Estimate of a loss of $4.54. Moreover, the bottom line compared favorably with an adjusted loss per share of $1.74 in the year-ago quarter.

Net sales of $919 million declined 35.6% from the prior-year quarter. Excluding services and other income, sales fell 35.2% to $945.1 million. Total retail sales (excluding CDI Contractors, LLC) fell 35.2% to $893.2 million. The Zacks Consensus Estimate for sales was $965.1 million.

However, the company did not report comparable store sales (comps) data for the reported quarter as most of its brick-and-mortar stores remained closed and in-store and online sales are interdependent due to the coronavirus pandemic.

Driven by the reduced demand due to the coronavirus pandemic and store closures enforced by the government, the company adopted aggressive measures to lower excess inventory, which continued in the fiscal second quarter. Consequently, it continued to significantly reduce total merchandise purchases, resulting in a decline of 62% in the second quarter. This resulted in lower markdowns during the quarter, which boosted gross margin.

Notably, retail gross margin improved 239 basis points (bps) compared with the year-ago quarter primarily due to lower markdowns. On a consolidated basis, gross margin expanded 271 bps year over year to 67.7%.

Dillard's retail SG&A expenses (as a percentage of sales) rose 20 bps from the prior-year quarter to 29.8%. In dollar terms, however, SG&A expenses (operating expenses) declined 34.8% to $265.8 million.

Consolidated operating expenses of $267.1 million declined 34.7% year over year, owing to a 41% decline in payroll expenses during the quarter as well as significant cost savings realized in all expense categories. Meanwhile, as a percentage of sales, it deleveraged 40 bps to 29.1%.

Looking at fiscal 2020, the company expects to witness a net operating loss.

Store Update

In the fiscal second quarter, it permanently closed stores in Waterloo, IA; Clovis, NM; and Lawton, OK. Consequently, the company operated 251 Dillard’s locations and 31 clearance centers, spanning 29 states, as of Aug 1, 2020.

Further, the company temporarily closed its store in El Centro, CA, due to government mandate.

Financial Details & Liquidity

It ended second-quarter fiscal 2020 with cash and cash equivalents of $82.9 million, long-term debt and finance leases of $366.1 million, and total shareholders’ equity of $1,371.3 million.

In the first six months of fiscal 2020, the company’s cash used for operating activities was $299.7 million. However, it remained committed to rewarding shareholders with share buybacks.

During the fiscal second quarter, the company bought back 0.6 million shares for $14.3 million under its $500-million repurchase program announced in March 2018. As of Aug 1, it had $192.6 million authorization remaining to be bought back under the aforementioned program.

The company believes that it has a strong balance sheet and liquidity, which positions it well to weather the uncertainties arising out of the pandemic. Some highlights of its financial status include smaller rent obligations compared with the industry. This is because the company owns 90% of its retail store square footage, and 100% of its corporate headquarters, distribution and fulfillment facilities.

Moreover, it has low long-term debt obligations, with its next payment of $45 million due in January 2023. The amended $800-million credit facility provides for no financial covenants as long as availability exceeds $100 million and no event of default occurs and is continuing. Further, the company notes that its e-commerce site continues to provide cash flow, even though stores remain closed through the ship-from-store capability.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted -57.09% due to these changes.

VGM Scores

Currently, Dillard's has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Dillard's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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