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Dillards 3Q hurt by markdowns

LITTLE ROCK, AR -Clearing outdated goods off of its shelves and working down bloated stockpiles in a straitened retail environment, department store retailer Dillard's Inc. said third-quarter profits tumbled by 82.9 percent, to $6 million from $35 million last year, crushed by markdown pressures.

Sales declined by 4.5 percent, to $2.0 billion from $2.1 billion last year, partly the result of a slowing retail environment but also due to weakening consumer response to unspecified lines of branded merchandise (see related story below). Same-store sales declined by 5.0 percent, pressured in part by softening sales of home goods, one of the retailer's weakest merchandise categories, which declined by almost 7 percent on a comparable basis (see accompanying table).

Most of the damage to the bottom line stemmed from the double-whammy of lower sales and eroding margins as the company aggressively cleaned its shelves to bring inventories into line. Under heavy markdown pressure, average gross margin thinned by 290 basis points, to 30.5 percent from 33.4 percent the prior year. Gross margin dollars declined by 12.6 percent, to $604 million from $691 million.

Addressing the margin and profit issue, ceo William Dillard II said the retailer is willing to absorb the short-term pain as it acts more aggressively to shorten merchandise cycles and mark down slow-moving merchandise. "During the third quarter, we began implementation of a significant change in our approach to the business with regard to markdowns," he said. "We have greatly accelerated our markdown of merchandise as we continue to actively respond to changing consumer demand. Although this change in strategy is costly in the short term, we are confident that this decisive action improves our posture in the competitive retail environment. As we continue to implement these changes, we will continue to commit our free cash flow to a balanced approach of reinvesting in debt repayment and share repurchases."

On the plus side, Dillard's continues to strengthen its balance sheet, reducing interest expense, debt and inventories. Interest expense was whittled down by 7.1 percent in the third quarter, to $52 million from $56 million last year. And long-term debt and capital leases were worked down by 12.4 percent, to $2.6 billion from $3.0 billion last year. Inventories were reduced by 11.5 percent form year-ago levels, to $2.6 billion from $2.9 billion.

Dillard's Sales by Merchandise Category (for third quarter ended 10/28)


Category Total % change Comparable % change

Cosmetics

-1.4

-1.5

Men's clothing and accessories

-2.6

-3.4

Shoes, accessories and lingerie

-4.0

-4.3

Children's clothing

-4.5

-5.0

Home

-6.2

-6.9

Women's and junior's clothing

-6.4

-7.1


Source: Dillard's Inc

DILLARD'S INC.


Qtr. 10/28 (x000) 2000 1999 %CHG

Sales

$1,979,000

$2,072,000

(4.5)

Oper. income (EBIT)

37,000

112,000

(67.0)

Net income

6,000a

35,000

(82.9)

Per share (diluted)

0.07

0.33

-

Average gross margin

30.5%

33.4%

-

SG & A expenses

27.4%

26.2%

-

NINE MONTHS

2000

1999

%CHG

Sales

5,905,000

6,082,000

(2.9)

Oper. income (EBIT)

243,000

398,000

(38.9)

Net income

66,000

138,000

(52.2)

Per share (diluted)

0.71

1.29

(45.0)

Average gross margin

32.7%

34.3%

-

SG & A expenses

27.1%

26.3%

-


( ): Denotes loss

a-Earnings in the third-quarter include an income-tax benefit of $6 million and a $15 million gain on the retirement of debt. Excluding the gain on retirement of debt, the company posted a net loss of $9 million, compared to a prior-year profit of $35 million. Nine-month results include a $20 million gain on the retirement of debt. Excluding the one-time item, the company recorded net income of $46 million, down 66.7 percent from the preceding year.

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