Department stores mounted a remarkable recovery from the COVID-19 pandemic last year. Most companies in the industry saw strong improvement in sales and profitability. Many reported record earnings results.
However, no other department store operator came close to the results Dillard's (DDS 0.80%) posted. On Tuesday, the regional department store chain reported its fourth consecutive record quarterly profit. That brought its full-year adjusted earnings per share (EPS) to $40.05 -- more than five times the previous record of $7.70. Let's see what the company's latest earnings beat means for investors.
Another massive profit
Dillard's revenue momentum continued last quarter, as comparable retail sales jumped 12% relative to the fourth quarter of fiscal 2019. Net sales reached $2.11 billion, up from $1.92 billion two years earlier. For the full fiscal year, comp sales grew 8% over 2019.
Meanwhile, gross margin continued to expand rapidly. Retail gross margin (which excludes the company's construction subsidiary) reached 41.4% in the fourth quarter, up from just 30.2% in Q4 2019. That marked the third consecutive quarter that retail gross margin increased by more than 10 percentage points compared to 2019. Dillard's attributed the huge gross margin improvement to "continued strong consumer demand and better inventory management leading to decreased markdowns."
Dillard's also continued to hold operating expenses below 2019 levels, largely due to labor cost savings from shorter operating hours and reduced staffing in its stores.
The net result was that EPS surged to $16.61, including a $0.93 tax benefit related to the company's recent special dividend of $15 per share. This crushed the analyst consensus of $11.43. For comparison, Dillard's posted adjusted EPS of $2.40 for the fourth quarter of fiscal 2019.
As noted above, these stellar Q4 results gave Dillard's a full-year profit of more than $40 per share. The company also generated over $1 billion of free cash flow, returning most of that to shareholders through share buybacks and the big special dividend.
Making the most of disruption
Interestingly, Dillard's revenue momentum hasn't come from selling more stuff. Compared to 2019, cost of sales decreased nearly 8% in the fourth quarter and nearly 12% for the full year.
Instead, the department store chain has grown the top line by raising prices and dramatically cutting back on discounts. That's also why gross margin has expanded so rapidly.
Normally, cutting back on discounts would have cost Dillard's a lot of sales. However, supply chain disruptions have made it hard for retailers to acquire inventory in recent quarters, particularly on short notice. That gave rivals no incentive to try to undercut Dillard's prices, as they would have struggled to buy extra inventory to support big market share gains. Additionally, high savings rates during the pandemic and federal stimulus payments may have made consumers less price sensitive than usual.
What comes next?
In short, Dillard's capitalized on the favorable industry environment during 2021 better than any of its peers. But the demand tailwind from stimulus payments is already starting to fade. And while the supply chain crisis has continued into 2022, it won't last forever.
Thus, before too long, Dillard's will have to reckon with more robust competition and reduced discretionary spending budgets. The company also can't expect to maintain its sales with limited store hours and lower staffing while rivals return to business as usual.
This represents a recipe for margin contraction. In fiscal 2021, Dillard's adjusted pre-tax margin surpassed 16%, compared to its 2019 adjusted pre-tax margin of 1.9%. Its profit margin may not fall all the way back to pre-pandemic levels, as poor inventory management was weighing heavily on earnings at that time. However, the company's long-term margin profile is likely to be a lot closer to its 2019 performance than its 2021 results.
With Dillard's earnings likely to fall dramatically over the next few years -- just how far is anyone's guess -- long-term investors should probably pass on Dillard's stock for now.