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Dillards Bounces Back Smartly

Strong Margins and Lower Costs Boost First-quarter Profits

Snapping a long string of weak results and climbing back on track, Dillard's pushed its first-quarter profits up by almost two-thirds, on a slender sales gain of 2.0%, helped by stronger margins, lower costs and a deep cut in interest expense.

But acting as if it wanted no one to notice all the good news, the retailer put out its earnings release on a Saturday — a time when public companies usually try to bury bad news.

In this case, the news was unusually good for the Southern department-store retailer, with a big earnings jump capping a recent rebound. Following a third-quarter loss last year, and a drop of more than 9.0% during the all-important Christmas quarter, profits shot up by 61.3% in the opening quarter, to $61.3 million from $38.0 million last year. Sales edged up by 1.9%, to $1.8 billion, and same-store sales increased by 2.0%.

Putting a modest cap on sales, four stores in the Gulf Coast area which were damaged by Hurricanes Katrina and Rita were still closed at the end of April.

Fueling the big improvement was a potent mix of stronger margins and lower overhead. Average gross margin improved by 70 basis points, or seven-tenths of a percentage point, to 35.8% from 35.1% during the same period a year ago. Combined with rising sales, that provided a boost in gross margin dollars of $25.4 million. The retailer said the strong margin performance stemmed from positive customer response to its merchandise mix “and lower levels of markdowns partially offset by lower markups.”

Operating costs declined in lock-step by 70 basis points, or seven-tenths of a percentage point, to 26.9% of sales, yielding a savings of $2.7 million.

In another lift to the bottom line, interest costs were pared by 9.9%, to $23.6 million from $26.2 million, as the company hacked away at its debt levels. Long-term debt and capital leases was slashed by 17.9% from year-before levels, to $1.1 billion from $1.3 billion. As of the April 29 close of the quarter, letters of credit totaling $71.4 million were outstanding under the company's $1.2 billion revolving credit facility.

In a further prop to the bottom line, the retailer kept a tight grip on merchandise stockpiles, which declined by 1.0%, to $2.05 billion from $2.07 billion a year ago, generating a cash savings of $21 million.

Dillard's Inc.

Qtr. 4/29 (x000) 2006 2005 % change
a. Results include $11.6 million from rentals, compared to $10.5 million last year. Prior-year results include $400,000 in asset impairment and store closing charges.
Sales $1,837,500 $1,803,000 1.9
Oper. income (EBIT) 205,000 171,100 19.8
Net income 61,300a 38,000a 61.3
Per share (diluted) 0.77 0.46 67.4
Average gross margin 35.8% 35.1%
SG&A expenses 26.9% 27.6%


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