Why Dillard’s Second Quarter Is A Hopeful Sign For All Retailers

The first retail company to report sales and earnings for the second quarter of 2020 is Dillard’s. The company reported, for the 13 weeks ended August 1, 2020, a net loss of $8.6 Million or ($0.37) a share compared to a net loss of $40.7 Million or ($1.59) a share in the prior year. (In 2019, the company had very heavy mark-downs that caused an erosion of gross margin.) The company reminded us that in that year Dillard’s had a pretax gain of $4.9 Million (or $3.8 Million after tax) or $0.15 a share. This gain was related to the sale of a store property.

The company did not report comparable store sales for the second quarter due to the temporary closure of brick and mortar locations caused by the COVID-19 pandemic. That ended on June 2, 2020 when all stores were reopened. Most stores (except one) are now operating on a reduced store hour basis. However, sales since reopening have run at about 72% of prior year’s same day levels according to management.

Retail sales for the 13 week period ended August 1, 2020 were $893 Million, a 47% drop over the $1,378.2 Million reported in the prior year. The net sales include the company’s construction business, CDI Construction LLC.

Management reported that inventory was down 20%.

In the earnings release, the company indicated it owns 90% of its retail stores and 100% of both its headquarters and distribution and fulfillment centers. With this operating structure, management feels it is well positioned to weather the COVID-19 pandemic. Its rent obligations are small compared to the industry, its long-term debt is low, and the next payment of $45 Million is only due in January, 2023. The company has an amended credit facility of $800 Million with no financing covenants as long as the availability exceeds $100 Million.

Today, the company operates 251 Dillard’s department stores and 31 clearance centers in 29 states. Total square footage was 48.0 Million square feet as of August 1. Management noted that the company’s El Centro, California location has been temporarily closed again under local government mandate. In the second quarter, the company permanently closed other three store locations in Clovis, NM, Lawton, O and Waterloo, IO.

What does this mean for the retail industry?

Certainly, the reduction of inventory was necessary; such actions can be expected for the rest of the year as restrictions for shopping under the COVID-19 pandemic will continue to discourage shoppers to visit retail stores. Well aware of that, growing numbers of retailers have abandoned Thanksgiving Day as a business day this year and will reopen early Friday morning – a.k.a. Black Friday.

 Most sages suggest that a vaccine will materialize in late Spring, and it is likely that retailers will wait until then to aggressively restock their shelves. It could be that restocking in late Spring will place a heavy demand on suppliers who may not have the production capabilities to fulfill all orders. There may be some scrambling for goods and increases in prices unless retailers plan their orders early. Competition for fresh goods will add more pressure as retailers try to recover after the damage caused by the COVID-19 pandemic in 2020.

Dillard’s unique situation of owning 90% of its stores and having a low rent obligation puts them in a favorable position that few retailers enjoy these days. In contrast, we see Macy’s is trying to sell their high-profile locations in order to continue in business.

Many retailers will report earnings this week and next. I will look especially carefully at their inventory levels and selling costs to see how they are managing their business during this pandemic. We need reassurance that the industry is conservative now and preserving their big comeback plans until the appropriate time next year.