Dillard’s Swings to Q3 Profit

Net income for the thirteen weeks ended October 31, 2009 was $8.0 million, or 11 cents per share, compared to a net loss for the thirteen weeks ended November 1, 2008 of $56.0 million, or 76 cents per share. Included in net income for the thirteen weeks ended October 31, 2009 is a $10.6 million income tax benefit, 14 cents per share, primarily related to state administrative settlement and a change to a capital loss valuation allowance.

Included in the net loss for the thirteen weeks ended November 1, 2008 are asset impairment and store closing charges of $9.3 million, $5.9 million after tax or $0.08 per share; hurricane-related expenses of $4.4 million, $2.8 million after tax or $0.04 per share and a $7.2 million pretax gain, $4.6 million after tax or $0.06 per share, related to the sale of a store.

Dillard’s Chief Executive Officer, William Dillard, II, stated, “We are pleased with the continued improvement in merchandise gross margin of 420 basis points during the third quarter as well as with our cost control, strong cash flow from operations and year-over-year debt reduction. We continued to benefit from our improvements in inventory management, where we have focused on more conservative purchasing combined with efforts to better match the timing of receipts with demand. Accordingly, even with the substantial inventory decline at the end of the quarter (22%), we believe we are well-positioned to meet anticipated fourth quarter holiday demand with a steady flow of compelling product receipts throughout the season.”

Highlights of the thirteen weeks ended October 31, 2009 reflect continued improvement in key metrics:

    * Improved merchandise gross margin performance of approximately 420 basis points of sales compared to prior year third quarter.
    * Operating expense savings of $88.6 million compared to the prior year third quarter.
    * Positive cash flow from operations of $261.4 million for the thirty-nine weeks ended October 31, 2009 compared to $41.1 million for the prior year thirty-nine week period.
    * No short term borrowings outstanding under the Company’s $1.2 billion revolving credit facility at October 31, 2009.
    * Inventory reduction of $490.6 million (22%) at October 31, 2009 compared to November 1, 2008. Inventory in comparable stores declined 23%.
    * Year over year debt reduction of $495.5 million.

Net Sales/ Total Revenue

Net sales for the thirteen weeks ended October 31, 2009 were $1.359 billion compared to net sales for the thirteen weeks ended November 1, 2008 of $1.508 billion. Net sales for the thirteen weeks ended October 31, 2009 include the operations of CDI Contractors, LLC (“CDI”), a former equity method joint venture investment. The Company purchased the remaining 50% interest of CDI on August 29, 2008.

Total merchandise sales were $1.316 billion, declining 11% during the thirteen-week period ended October 31, 2009 compared to the thirteen week period ended November 1, 2008. Merchandise sales in comparable stores declined 9%.

Gross Margin/Inventory

Gross margin from retail operations improved approximately 420 basis points of sales during the thirteen weeks ended October 31, 2009 compared to the thirteen weeks ended November 1, 2008 due to the Company’s focused inventory management efforts which resulted in lower inventory levels and decreased markdown activity. Inventory in total and comparable stores declined 22% and 23%, respectively, at October 31, 2009 compared to November 1, 2008.

Gross margin from retail operations excludes the results of CDI. Including the effect of CDI, gross margin improved 370 basis points of sales during the 2009 third quarter.

Advertising, Selling, Administrative and General Expenses

Advertising, selling, administrative and general expenses (“operating expenses”) declined $88.6 million, an improvement from 32.5% of sales during the thirteen weeks ended November 1, 2008 to 29.6% of sales during the thirteen weeks ended October 31, 2009. The improvement is primarily the result of the company's cost control measures combined with recent store closures. Notable areas of reduction during the third quarter of 2009 were payroll, advertising and services purchased. Management believes recent expense reduction initiatives combined with savings from store closures could produce an operating expense decline exceeding $275 million during the 2009 fiscal year.

Interest and Debt Expense

Net interest and debt expense declined $3.6 million for the thirteen weeks ended October 31, 2009 compared to the thirteen weeks ended November 1, 2008 primarily as a result of lower average debt. Interest and debt expense was $18.4 million and $22.0 million during the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively. During the thirteen weeks ended October 31, 2009, Dillard’s repurchased $3.4 million face amount of 9.125% notes maturing on August 1, 2011.

Credit Facility

As of October 31, 2009, there were no short-term borrowings outstanding under the Company’s $1.2 billion revolving credit facility. The credit agreement expires on December 12, 2012, and there are no financial covenants under this facility provided its availability exceeds $100 million. Letters of credit totaling $95.1 million were outstanding under the revolving credit facility as of October 31, 2009.