What happened
Shares of department-store chain Dillard's (DDS 1.84%) were climbing higher on Friday, after the company reported earnings for the first quarter of 2020. As 2:40 p.m. EDT, the stock was up 15%.
Don't misunderstand today's stock move; the numbers for Dillard's are quite ugly. Total quarterly retail sales fell a whopping 47% year over year.
About half of Dillard's locations remain closed. Image source: Getty Images.
So what
Dillard's has 285 store locations, and they were all closed by April 9 because of the coronavirus. Because of this, the company discounted merchandise to accelerate e-commerce sales. As a result, inventory is down 14% from last year -- which is good. After all, it only gets harder to move outdated merchandise the longer it sits there. But this inventory reduction came at a cost.
Cost of sales as a percentage of revenue was 88% for the quarter. In other words, for every $100 in merchandise Dillard's sold, it cost them $88 before accounting for other expenses. In the first quarter of 2019, cost of sales was much better, at 63% of revenue.
This disparity reflects the aggressive discounting employed by Dillard's. And it hit profitability hard. The company reported a net loss of $162 million, or $6.94 per share.
Even after today's gain, Dillard's stock still sits sharply down from 52-week highs.
Now what
There's really nothing in the Q1 report that would explain the rise in Dillard's stock today, other than investors hoping for a turnaround in coming quarters. Since May 5, the company has started reopening. It has reopened 149 locations with limited hours, and plans to reopen 116 additional stores soon.
As far as hoping for a turnaround, Dillard's is in a better position than many retail stock peers. It owns the majority of its real estate, has $70 million in cash on the balance sheet, and doesn't have long-term debt coming due until 2023. From a financial perspective, it's positioned to survive the COVID-19 pandemic shutdown.
That said, shareholders should be anxiously looking forward to a fully reopened Dillard's. It can't continue piling up losses by reducing inventory the way it did in Q1.
