Dillard's Inc. (NYSE: DDS) shares took a hit on Thursday, even after the retailer reported a second-quarter earnings beat that looked impressive at first glance. The catch? A big chunk of that profit came from tariff refunds, not from selling more dresses and handbags.
The company posted earnings of $6.25 per share, blowing past the analyst consensus of $4.27. Net income climbed to $97.7 million from $72.8 million a year earlier, and earnings per share rose from $4.66. But net sales of $1.508 billion came in just shy of the $1.522 billion analysts had expected, and slipped from $1.514 billion in the same quarter last year.
Strip out the construction business, and total retail sales actually rose 1% to $1.455 billion. Comparable-store sales also ticked up 1%, which suggests shoppers are still spending, even if they're being a bit more selective.
Tariff Refunds Give Earnings a Boost
Here's the fine print: the quarter included $37.2 million in refunds tied to tariffs imposed under the International Emergency Economic Powers Act. After taxes, those refunds added $28.4 million, or $1.82 per share, to the bottom line. That's a meaningful chunk of the earnings beat.
For context, the year-ago quarter had a $4.8 million pretax gain (or $3.7 million after taxes), mostly from selling three properties. This time around, the boost was much bigger, but it's also likely a one-time thing. Dillard's said it doesn't expect any further significant refunds.
The refunds also flattered the gross margin. Retail gross margin jumped to 40.9% from 38.1% a year earlier, with the tariff refunds contributing 260 basis points to that improvement. Without them, the underlying margin story is more modest: ladies' apparel improved moderately, cosmetics and home/furniture were slightly better, juniors' and children's apparel were flat, and men's apparel, accessories, and shoes slipped a bit. Ladies' accessories and lingerie saw a moderate decline.
CEO William T. Dillard II struck a cautiously optimistic tone. "Our 1% sales increase points to a somewhat resilient consumer," he said, adding that the stronger retail gross margin, helped by the tariff rebates, boosted cash flow and earnings.
Operating expenses crept up to $443.6 million, or 29.4% of sales, from $434.2 million, or 28.7% of sales, a year earlier. The company pointed to higher payroll and payroll-related costs as the main culprit. Consolidated gross margin, which includes the construction business, widened to 39.7% from 36.6%.
Accessories Drive Sales Growth
On the sales front, ladies' accessories and lingerie were the stars, posting significant growth, while home and furniture saw moderate gains. Shoes, men's apparel and accessories, and cosmetics all recorded slight increases. On the flip side, juniors' and children's apparel and ladies' apparel saw moderate declines.
Inventory at the end of the quarter was 5% higher than a year ago, which could be a sign that Dillard's is stocking up for the back-to-school and holiday seasons, or it could be a caution flag if sales don't keep pace.
Cash Flow Improves as Dillard's Pays Down Debt
Looking at the first half of fiscal 2026, cash flow from operations rose to $326.8 million from $319.4 million a year earlier. Capital expenditures totaled $39.5 million, and the company ended the quarter with $763.1 million in cash and cash equivalents plus $497.7 million in short-term investments, for a combined $1.26 billion.
Dillard's also made $96 million in principal payments on long-term debt during the first half, continuing its habit of keeping the balance sheet lean. For the full fiscal year, the company expects depreciation and amortization of about $175 million and capital expenditures of about $120 million.
Despite the earnings beat, investors focused on the one-time nature of the refunds and the slight sales miss. Dillard's shares were down 5.64% at $600.15 at the time of publication on Thursday.
