UPDATED: Dillard's Restates Earnings Due to 'Error' in CDI Accounting

by Gwen Moritz  on Thursday, Mar. 20, 2008 11:26 am  

Dillard's on Thursday restated past earnings, citing an "error" in accounting at CDI Contractors, the construction firm it partly owns. CEO William Dillard II is seen here.

In its fourth-quarter earnings report, Dillard's Inc. of Little Rock made a small restatement of past earnings, citing an "error" in accounting by CDI Contractors, the Little Rock general contracting company of which Dillard's is half owner.

Tension between Dillard's and CDI earlier this year was first documented by Arkansas Business in an article about the disappearance on Jan. 28 of CDI's longtime chief financial officer, John Glasgow. But the statement Dillard's released Wednesday evening gives the first insight into the nature and extent of the accounting conflict.

In the statement, Dillard's said its review of CDI books, as part of the contemplated redistribution of the 50 percent ownership held by the late Bill Clark, had revealed that CDI made more profit on building Dillard's stores than CDI had reported to Dillard's. Dillard's had apparently claimed half of this profit, in accordance with its equity accounting method, but costs associated with building a store could not properly be both an expense and a profit for Dillard's.

The statement doesn't say exactly how far back this accounting practice dated, but Dillard's chose to let most of the cumulative effect - $7.1 million on retained earnings - hit its books for fiscal year 2004, which ended in January 2005. In a letter drafted Jan. 25, Glasgow said CDI accounting had been done the same way since 1996 and that Dillard's "should have known" because all of the information had been available to the retailer's internal and external auditors.

Dillard's statement said it had chosen to back up the restatements to an earlier year because the "cumulative effect of this error would be material to operating results for 2007." Indeed, $7.1 million represents more than 13 percent of the $53.8 million net income Dillard's reported for fiscal 2007, which ended Feb. 2, 2008. But the 2007 results were reduced by a small amount to account for overstatement of CDI profits in fiscal years 2005 and 2006.

The company's net income in the 2004 fiscal year was $117.7 million, followed by $121.5 million for 2005 and $245.6 million in 2006.

Earnings Fall

As for its most recent fourth-quarter earnings, Dillard's reported that profit plummeted about 70 percent. Earnings fell to $47.3 million, or 63 cents per share, down from $155 million, or $1.90 per share, during the same quarter last year.

Analysts had expected earnings of about 75 cents per share.

Those fourth-quarter results included a pretax asset impairment and store closing charge of $16.1 million, or 13 cents per share, and a net income tax benefit of $10.3 million, or 14 cents per diluted share, primarily due to state administrative settlement, the company said.

Revenue, meanwhile, was down to about $2.2 billion from $2.4 billion last year. Total and same-store sales were down about 5 percent.

In its earnings report, Dillard's CEO William Dillard II called the company's performance "disappointing."



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