E Dillard's - Is The Worst Over Yet?

Departmental stores have started reported their earnings for the quarter ended March 2020. While no one was expecting anything meaningful out of the results, given the store closures observed across the country beginning March amid the widespread transmission of coronavirus wreaking havoc globally. However, the results reported from Dillard's (DDS) were direful, to say the least, with Q2 bringing more pain in the offing is prescient.

Q1 2020 Results

The company reported sales of $787mn, down 47% YoY compared to the corresponding period in-line with most estimates expecting a 50% dent. While the payroll expenses declined 35% YoY due to furloughing measures implemented by the company to boost its operating cash flows, payroll expenses as % of sales spiked up almost 4 percentage points from 17.5% to 21.4% in the current quarter highlighting the massive decline in sales proves the measures to be skimpy. The company began aggressively discounting the merchandise products leading the retail gross margins to tumble 2500 bps to just 12.8% and post a much wider than anticipated loss, even beating down the most pessimist analyst estimate by a wide margin with an adjusted loss per share of $6.94 compared to a profit of $2.99 in the previous period.

Is Everything Abominable?

There were several silver linings in the quarterly release from the company. First and most importantly was the update on the store reopenings which led the stock rally up to 12%. DDS has already reopened 149 stores and expects to reopen the remaining stores in the coming week, a benefit for DDS to be a Southern-focused retailer. Also, given most of the stores are fully owned by the company, there are very little rental expenses to put through. It also significantly reduced the inventory decreasing 14% and have also significantly reduced merchandise purchases, down 33% YoY in a bid to conserve cash. It also repaid the $779m borrowed under the previous credit facility and has no borrowings in the current credit facility of $800m. With the only maturity of $45m coming in Jan 2023, the company's default risk is technically nil.

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Comments

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Edward Simon 1 month ago Member's comment

It will be interesting to see what happens to retail department stores. The common wisdom is that they will fail. But as people leave their screens and help to re-open the economy some stores may find "new" traffic.

Michele Grant 1 month ago Member's comment

I think it will be a long time before we see pre-pandemic levels of foot traffic at retail stores. Just because people CAN go out, doesn't mean all will. Many will still be too afraid to shop anywhere but online.

Alpha Stockman 1 month ago Member's comment

Sounds like #DIllards wouldn't have done great even had we been spared the pandemic.

PennyWiser 1 month ago Author's comment

I reckon the department store industry was struggling from competition with online channels like Amazon as well as discount retailers. The pandemic just aggravated the situation to a grinding halt. It would, in a way, be quite helpful for the industry I believe. As the industry would be looking to make several changes, with #Macy's closing several non-profitable stores and so on.

Angry Old Lady 1 month ago Member's comment

Wait a minute, you think the pandemic was good for the retail industry? #Macy's ($M) can close non-profitable stores when there's no pandemic going on.

PennyWiser 1 month ago Author's comment

That was not the context out of it. The pandemic has brought the world on their heels as well as the department stores who has been one of the hardest hit and the pandemic has claimed several casualties in terms of JC Penney and J Crew. I believe a somewhat silver lining every crisis gives is an opportunity to structurally change and just think the ones that will come out of the storm would be much leaner and hopefully more fitter to compete in the space. But that goes without saying that it has wreaked absolute havoc on the people, economy and the department store industry in general.