Noting a “challenging sales environment … with particular weakness beginning in September,” Dillard’s on Thursday reported that Q3 retail sales fell 6% to $1.4 billion. Total net sales (including the company’s construction business) fell 4.4% to $1.5 billion.
Store comps also fell 6%. Cosmetics was the strongest category followed by home and furniture, while juniors and children’s apparel was the weakest, according to a company press release. Inventory edged down 1% year over year.
Retail gross margin contracted somewhat to 45.3% from 45.7% last year. Net income fell 17.3%, according to a company press release. During the period Dillard’s permanently closed its 240,000-square foot anchor at the MacArthur Center Mall in Norfolk, Virginia.
The tough sales environment that has bedeviled most department stores finally got to Dillard’s in the third quarter, starting in September. Monthly retail sales in the segment have declined every month since April, according to numbers from the U.S. Commerce Department.
“As there has been no material change in the quality of Dillard’s execution over the period, the decline in sales is mostly down to the external environment,” GlobalData Managing Director Neil Saunders said by email. “Dillard’s core customers were defying gravity in terms of spending during a cost of living crisis, but financial realities now seem to have caught up with them.”
The retailer earned a ratings bump from S&P Global Ratings earlier this year, based on its profit improvements, strong inventory management and limited discounting. In a statement, Dillard’s CEO William Dillard noted bottom line strength despite the challenges, calling out the company’s 45.3% gross margin, 1% inventory drop and $893 million of cash and short-term investments.
Moreover, compared to pre-pandemic 2019, sales rose 6.4%, according to GlobalData research. “So it is still one of the medium-term winners in the department store space,” Saunders said.
Zachary Warring, equity analyst at CFRA Research, sees the retailer holding on to its strength for the foreseeable future.
“Our belief is that [Dillard’s] has found its operating sweet spot with fewer stores and employees in the right locations,” Warring said in an a Thursday client note. “We believe [it] will continue to operate more efficiently than pre-pandemic levels, has a fortress balance sheet, and will continue to return significant capital to shareholders.”
How things go in the next several months for Dillard’s, and department stores in general, depends on what consumers have in them, amid financial pressures on lower- and middle-income households and preferences for spending on experiences over goods.
“Dillard’s is up against a softer prior year number for the final quarter, so it will hope that, that, combined with a bit more oomph from the consumer over the holiday period, will produce better growth,” Saunders said. “But, it’s also clear that things are now getting more difficult.”
UBS analysts led by Jay Sole this month said that 2022 will likely be the high-water mark for Dillard’s earnings and predicted that next year it will lose share to retailers with a better value proposition and face sales declines and margin contraction.
Dillard’s predicament is not a great sign for the segment more broadly, Saunders warned. Still, as a relatively better performer, Dillard’s has farther to fall, while Kohl’s and Macy’s will be comparing their numbers to weaker past results, he said.
“In terms of other department stores, this does not bode well,” he said. “Most department stores are very focused on discretionary purchases and are very reliant on impulse purchasing to drive their trade. Dillard’s is sending a signal that these dynamics might be becoming more depressed.”