Dillard's Remains Industry Valedictorian

While some of the old-guard department stores have suffered in recent years due to intense business model disruption and changes in consumer preference, one of the quieter players treks on strong as ever. Dillard's (NYSE: DDS  ) , though not carrying the name recognition or imprint of peers such as Macy's (NYSE: M  ) or J.C. Penney, has thus far successfully navigated the changing tides of the big-box retail industry. In its just-ended quarter, the company beat analyst estimates on the bottom line and came in on target at the top. The latest round of record earnings were driven by same-store sales increases and cost-control measures, in addition to the company's ongoing buyback. Even with its 3,100% gain over the past five years, Dillard's may still be one of the best bets in the business.

Earnings recap
Hauling in $4.67 billion in sales and a record $1.13 in earnings per share, Dillard's showed continued growth year over year, including a chunky 18% gain in net income. Same-store sales ticked up 1% -- which created most of the earnings growth -- but a 60-basis-point contraction in gross margin limited gains. Operating expenses decreased 40 basis points.

Investors should note that Dillard's owns a construction business that it groups with its retail results. The company, CDI Contractors, accounted for roughly $30 million worth of sales in the most recent quarter. CDI excluded, the company grew sales by about 1% year over year, right in line with the comparable-store sales.

Dillard's results come on the heels of the industry bellwether, Macy's, which surprised analysts and investors with a 31% gain in net income and a huge 3.5% bump in same-store sales. After the second quarter's widespread underperformance and tepid guidance, both Macy's and Dillard's suggest that the retail environment is rebounding faster than expected -- a great sign for weary investors.

Why Dillard's is a winner
The department store had recently traded at a slight premium to its peers, and for good reason. Some big-box retailers have adjusted to the industry disruption with intense discounting or by rapidly jumping into new strategies with very little testing. Others (Sears, to be specific) have seemingly shifted away from the retailing model, choosing to leverage the value of their large store imprint on the retail landscape.

Dillard's, which also has a compelling real estate element to its intrinsic value calculation, has instead focused on profitability and a steady-as-she-goes top-line strategy. In the July quarter, the company saw its sales decline by about 1%, followed by this quarter's 1% gain. From 2011, when the company earned $6.258 billion in revenue, sales have grown a little less than $500 million, or roughly 7.9%. In the same period, net income from operations nearly doubled.

The company's management is made up of capital-allocation pros who are incredibly effective at working from within the income statement to drive growth. It's likely the reason that Dillard's was trading at a premium to its peers throughout the past couple of years. Now, Macy's and Kohl's have seen their forward earnings ratios fall roughly in line with Dillard's as sales figures improved. This may indicate further upside potential for Dillard's shareholders, given that a minor increase in sales can drive the bottom line substantially higher. Simply put, Dillard's is an overachiever in an industry that desperately needs one. 

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