Dillard's's (NYSE:DDS) Q2 Sales Top Estimates

Petr Huřťák /
2023/08/10 9:21 am EDT

Department store chain Dillard’s (NYSE:DDS) reported results ahead of analysts' expectations in Q2 FY2023, with revenue down 1.27% year on year to $1.6 billion. Dillard's made a GAAP profit of $131.5 million, down from its profit of $163.4 million in the same quarter last year.

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Dillard's (DDS) Q2 FY2023 Highlights:

  • Revenue: $1.6 billion vs analyst estimates of $1.54 billion (3.93% beat)
  • EPS: $7.98 vs analyst estimates of $3.70 (116% beat)
  • Free Cash Flow of $85.5 million is up from -$120 million in the same quarter last year
  • Gross Margin (GAAP): 40%, down from 41.8% in the same quarter last year
  • Same-Store Sales were down 3% year on year
  • Store Locations: 274 at quarter end, increasing by 24 over the last 12 months

Dillard’s Chief Executive Officer William T. Dillard, II stated, “The cautious consumer we noted in the first quarter continued in the first few weeks of the second, leading to a sales decline of 3%. We exited the quarter with inventory flat year over year while maintaining a strong retail gross margin of 40.4%. We repurchased $103 million of stock and ended the quarter with $924 million in cash and short-term investments.”

With stores located largely in the Southern and Western US, Dillard’s (NYSE:DDS) is a department store chain that sells clothing, cosmetics, accessories, and home goods.

Department stores emerged in the 19th century to provide customers with a wide variety of merchandise under one roof, offering a convenient and luxurious shopping experience. They played an important role in the history of American retail and urbanization, and prior to department stores, retailers tended to sell narrow specialty and niche items. But what was once new is now old, and department stores are somewhat considered a relic of the past. They are being attacked from multiple angles–stagnant foot traffic at malls where they’ve served as anchors; more nimble off-price and fast-fashion retailers; and e-commerce-first competitors not burdened by large physical footprints.

Sales Growth

Dillard's is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's annualized revenue growth rate of 1.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was weak as its store footprint has remained relatively unchanged, implying that growth was driven by more sales at existing, established stores.

Dillard's Total Revenue

This quarter, Dillard's revenue fell 1.27% year on year to $1.6 billion but beat Wall Street's estimates by 3.93%. Looking ahead, the Wall Street analysts covering the company expect revenue to remain relatively flat over the next 12 months.

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Number of Stores

When a retailer like Dillard's keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. Since last year, Dillard's store count increased by 24 locations, or 9.6%, to 274 total retail locations in the most recently reported quarter.

Dillard's Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.

Dillard's demand has outpaced the broader consumer retail sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 15.5% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online. Nevertheless, Dillard's is likely optimizing its operations for improved efficiency and profitability before expanding its physical footprint.

Dillard's Year On Year Same Store Sales Growth

In the latest quarter, Dillard's same-store sales fell 3% year on year. This decline was a reversal from the 10% year-on-year increase it had posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from Dillard's Q2 Results

With a market capitalization of $5.54 billion, Dillard's is among smaller companies, but its $924.5 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We liked seeming the company beat on revenue, gross margin, and EPS. That the company continues to repurchase shares should also please shareholders. On the other hand, same store sales missed (although again, revenue beat) and the company called out a "cautious consumer" in the press release. The stock is up 3.23% after reporting and currently trades at $347.03 per share.

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The author has no position in any of the stocks mentioned in this report.