Dillard's turnaround suffers setback

LITTLE ROCK, AR — After showing signs of staging a comeback earlier in the year — after the earlier buyout of Mercantile Stores forced the company off the tracks — department store retailer Dillard's Inc. stumbled and fell during the all important Christmas quarter. It was tripped up by lower sales, thinning margins, higher expenses and the cost of shutting down unproductive stores.

Fourth-quarter profits plunged by 28.8 percent, to $72.3 million from $101.5 million last year, hit in part by a pre-tax charge of $53.1 million to cover store closing and asset impairment charges.

Sales in the critical period fell by 5.8 percent, to $2.4 billion from $2.5 billion last year, hitting the wall as consumers across the nation shunned full-price department stores in a notably rocky retail environment. Same-store sales declined by 5.0 percent.

Putting earnings under heavy pressure — in addition to store closing costs — average gross margin contracted by 140 basis points, or 1.4 percentage points, to 31.4 percent from 32.8 percent the preceding year. The retailer blamed the margin erosion on its "efforts to aggressively markdown merchandise due to heightened competitive pressures in a notably lackluster retail sales environment." The weakness stands in sharp contrast to strength earlier in the year. And even given the quarter's softness, margins for all of last year widened by 110 basis points, to 33.6 percent from 32.5 percent in 2001.

Compounding the squeeze on profits, operating costs climbed higher by 140 basis points, or 1.4 percentage points, to 24.0 percent of sales from 22.6 percent a year ago. Dillard's said its "successful efforts to maintain control of most operating expense categories during the fourth quarter were offset by increases in bad debt expense and property taxes, which increased $8.1 million and $4.8 million respectively."

For all of last year, Dillard's more than doubled its profits before one-time items, pushing earnings up by 107.1 percent, to $136.3 million from $65.8 million the previous year. But throwing into the pot the $52.2 million in store closing costs, as well as a $530.3 million one-time, non-cash charge stemming from a change in accounting, the retailer put up an overall loss for the year of $398.4 million vs. a year-before profit of $71.8 million.

Hobbled by the fourth-quarter shortfall, sales for all of last year fell by 3.0 percent, to $7.9 billion to $8.2 billion. Same-store sales eased off by 3.0 percent.