Dillard's Earnings Fall Short of Expectations.

Dillard's Inc. fell far short of analysts' expectations last week when it reported what even the company-referred to as disappointing second-quarter earnings.

Fort he quarter ended July 29, the Little Rock department store chain said it earned $9.4 million -- excluding a one-time $4.4 million gain -- compared to $36.2 million a year ago. That's a74 percent drop.

Excluding the extraordinary gain, earnings per share came in at 10 cents a share, 9 cents below the consensus analysts' estimate compiled by Boston-based First Call Corp., and 24 cents under last year.

"We're clearly disappointed in our performance," James Freeman, the company's chief financial officer, told analysts during a conference call.

Net sales for the quarter were $1.84 billion, down 2 percent from $1.89 billion last year. Same-store sales -- an important industry benchmark that looks at sales from stores open a year or longer -- were off 3 percent.

Slow consumer demand throughout the retail industry was at least partially responsible for the company's poor performance. Dillard's apparel sales were down virtually across the board, especially in branded children's lines, which were off 5 percent. Cosmetics, however, were up 2 percent.

But Dillard's problems stem from a combination of slow consumer demand and the company's effort to get rid of nonperforming assets, including price markdowns implemented as a way to reduce inventory.

Thomas H. Tashjian, an analyst for Banc of America Securities, said the company's efforts to manage inventory were hampered by the weak retail environment.

"I don't think they expected it to be this much of a problem," Tashjian said of the company's inventory management. But with the softer consumer environment, it slows everything down."

Although there has been continued speculation that Dillard's is still suffering from its 1998 acquisition of Mercantile stores, company CEO William Dillard II repeatedly told analysts that Mercantile stores weren't a drag on the company's profitability.

"The Mercantile numbers weren't a problem," Dillard said. "We're doing bad because our core Dillard's stores have not performed adequately."

Dillard blamed at least some of the problem on merchandising mistakes made by the company, although he said those can be corrected.

On May 22, Dillard's announced authorization to buy back .up to $200 million shares of company stock. During the second quarter, the company bought only about $22.4 million in company stock under the plan.

Instead, the company is refocusing the use of some of its excess cash to pay down debt as away to protect its debt ratings, which have recently been lowered by Moody's and Standard & Poor's. During the quarter, Dillard's bought back $65.3 million of its outstanding unsecured notes, which resulted in an after-tax gain of $4.4 million.

Dillard's also said it has closed its Louisville, Ky., buying office, consolidating those operations into its St. Louis office. The move should eventually save the company about $9 million annually it said.