by Gwen Moritz
Posted 3/20/2008 11:26 am
Updated 11 months ago
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.
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."
"We simply did not achieve the level of sales necessary to produce more acceptable results. Moving forward, we will execute further improvements to our merchandise mix while working to effectively respond to potentially challenging macro-economic conditions," Dillard said. "We remain committed to strengthening our appeal to aspirational and contemporary shoppers to set Dillard's apart in the marketplace."
The earnings report comes a day after Barington Capital Group LP of New York, which has been trying with no luck to influence executives at Dillard's, said it plans to nominate four people for election to the 12-member board of directors at the company's annual stockholders meeting on May 17.
James A. Mitarotonda, Barington's chairman, president and chief executive officer, has said on numerous occasions he believes Dillard's vast value potential is not being realized and that he lacks confidence in the ability of Dillard's current board, which is composed of directors with an average tenure of almost 20 years, to improve shareholder value.
Dillard's, for the first time on Wednesday, referred questions about the communication from Barington to the New York office of Brunswick Group, an international corporate communications firm. Shortly after noon, Dillard's issued a statement confirming that it had received Barington's notice of intent to nominate directors and that the notice "will be forwarded to the Executive Committee of the Company's Board of Directors for review."
Also Thursday, another investor group disclosed its holdings in Dillard's, and said it wanted to work with the retailer to improve Dillard's governance and management.
The Associated Press reported that Southeastern Asset Management reported owning a 12.9 percent stake in Dillard's. The company said it has held discussions with Dillard's management and other third parties, including another shareholder, about opportunities to increase shareholder value.